SECURE 2.0: The Biggest Retirement Legislation in Our Lifetimes

Last year’s combination of inflation, economic uncertainty, tanking stock, and bond markets threw a monkey wrench into millions of Americans’ retirement plans. 

Which is why we should all breathe a sigh of relief that one piece of the omnibus spending bill passed by Congress and signed by President Biden at the end of 2022 is a laundry list of more than 90 provisions bundled under the Securing a Strong Retirement Act of 2022, otherwise known as SECURE 2.0.

The new Act, an upgrade of the original SECURE Act of 2019, is going to revolutionize the way millions of Americans of all ages and income levels save and plan for retirement.

But savers aren’t the only ones who will benefit from this valuable package of incentives. If you’re retired, SECURE 2.0 also offers attractive features that may help you shield money you take out of your IRA and 401(k) plan accounts from taxes, both now and later on.

And, if you or your adult children are struggling to pay off student loans and build a retirement nest egg at the same time, these new retirement rules will help. There’s even one game-changing perk that will let some college graduates shift leftover money earmarked for education to their Roth IRA.

How will SECURE 2.0 change your life? That depends on many factors, and you may want to meet with a fee-only fiduciary financial advisor who’s up-to-speed on all these changes before you take advantage of them. 

For now, let’s take a closer look at a few key retirement-related situations you may be in right now where SECURE 2.0’s key features offer the biggest bang for the benefit buck.

You’re Playing Catch-Up With Your Retirement Savings 

According to research from Goldman Sachs, 49 percent of women said they weren’t saving enough for retirement, compared to 35 percent of men.

This makes sense, even if it’s not really fair. After all, many women took a break from their careers to take care of their children, particularly during COVID-19. During these lost years they missed out on making their own contributions, receiving employer matching and profit-sharing contributions, and the compounding benefits of a stock market that posted positive returns in 14 of the past 22 years–including 11 where returns exceeded 10 percent.

Fortunately, the IRS has raised maximum 401(k) and IRA contribution limits over the past few years. And SECURE 2.0 will let you save even more, especially if you’re over 50 and can afford to make big “catch-up” contributions.  

•  In 2023, you can make regular contributions of $22,500, plus up to $6,500 in additional catch-up contributions to your 401(k) plan. As long as inflation is an issue, the IRS should keep raising these limits every year.
• IRA investors can contribute up to $6,500 plus $1,000 more in catch-ups. But starting in 2024, IRA catch-ups, which haven’t changed since 2006, will now adjust annually for inflation.

But you’ll get the biggest catch-up benefits if you’re age 60, 61, 62 or 63 in 2025 and still making 401(k) contributions.

During those “super-saver” years you can turbo-charge your catch-up contributions, up to $10,000 or 150 percent of whatever the standard catch-up contribution limit was the year before—whichever is higher. 

If you’re highly paid, there’s a big catch.

Starting in 2024, if you’re making more than $145,000 per year, SECURE 2.0 will require all of your 401(k) catch-up contributions to be after-tax Roth contributions. (Note: These same rules apply to Roth accounts in 403(b) and 457(b) plans.)

The good news? This income threshold only applies to W-2 income you earn from your current employer. Any money you earn from freelance or gig work doesn’t count. 

Yes, you’re giving up the benefits of pre-tax contributions. But this new rule softens the blow by giving you a couple of good perks in return:

• All Roth 401(k) withdrawals are tax-free, even if you roll them over into a Roth IRA.
• Starting this year, you can choose to have some or all of your employer’s matching or profit-sharing contributions made as after-tax Roth contributions.
• Starting in 2024 you’ll never have to take Required Minimum Distribution (RMDs) from your Roth 401(k) accounts while you’re alive.

You—or Your Kids—Have Leftover 529 College Savings Plan Money

If you—or your children—are done with college and haven’t withdrawn all the money in your 529 College Savings Plan account, you may be able to roll over up to a lifetime total of $35,000 tax-and-penalty-free to a Roth IRA starting in 2024.

However, certain conditions must be met:

• The 529 plan must have been established for at least 15 years before the rollover can occur.
• You (or your children) must be the authorized beneficiary of the 529 plan you plan to roll over and the account owner of the Roth IRA.
• The amount you roll over each year counts toward your annual Roth IRA contribution and can’t exceed the annual limit for that year.
• You can’t roll over contributions you’ve made (or any earnings) over the five-year period preceding a rollover.

There are still many gray areas surrounding this provision, so it’s important to consult with a tax professional before you take advantage of this unique opportunity.

You Own a Business and Want to Attract and Retain Top-Notch Talent 

If you’re a small business owner and you’re struggling to attract and hold on to key employees, going forward, it will be easier and less expensive to offer the one critical benefit all workers should have these days: Access to a high-quality, flexible 401(k) or other defined contribution plan. 

Workers need and want these plans. According to research from Bankrate, one-third of all Americans have never had a retirement account. And less than one-third say that their retirement savings plan is on track. 

Furthermore, according to research from WTW, 44 percent of job seekers say that they’re more likely to join a company with a top-notch retirement plan over one that offers better pay.

Maybe you’ve been putting off offering a 401(k) plan to your employees because of costs and administrative burdens. If so, SECURE 2.0 has some great news for you if you’re starting a new plan:

• Starting this year, you could get a tax credit of up to 100 percent of qualified plan startup costs.
• You may also be eligible for an additional tax credit of up to $1,000 per employee based on the amount your company contributes to their accounts. 
• As a business owner, these new provisions will ease your administrative burdens and reduce paperwork.
• To help you encourage your employees to save, SECURE 2.0 will require any 401(k) plan you establish in 2025 or later to automatically enroll eligible employees with a starting contribution of 3 percent that will automatically go up each year. (They can choose to opt out any time).
• If your employees are struggling with college debt, starting in 2025 you can make additional contributions to their retirement accounts that match their monthly student loan payments.

If your business already offers a 401(k) plan, some of the “startup plan” provisions won’t apply. And you’ll need to update your plan to incorporate some of these new SECURE-enabled features. 

Your Retirement Plan is Already on Track

As we’ve seen, many of these provisions are fantastic for people trying to sock away more money. And if you’re confident in your own plan, that’s a big accomplishment. If you’re retired—or will be soon—and you’ve made more than enough money to live the way you want to during your golden years, what’s in it for you?

Your main concern may be to limit the tax impact of retirement withdrawals and keep more of your nest egg growing over time. Fortunately, for many seniors, SECURE 2.0 delivers. 

• If you’re turning 72 this year, you won’t have to start taking RMDs from your retirement accounts as you had to in previous years. Starting in 2023, the new rule raises this age to 73, which means you can wait until next year to take your first RMD
•  Late-stage boomers, Gen-Xers and beyond have an even better deal, since in 2033 the starting RMD age will go up to 75.

If you’re over age 59½ or need to start taking RMDs soon, you may want to take advantage of a couple strategies that could lower your taxable retirement income down the road, especially if the value of your retirement portfolio went down by 15 percent more last year: 

• Take some spendable money out of your retirement accounts right now to reduce future RMDs. Since the IRS raised the standard deduction and adjusted federal tax brackets for inflation for 2023, withdrawing the right amount could keep you in the “Goldilocks zone” for limiting their taxable impact.
• Roll over some money out of your 401(k) account directly into a Traditional IRA, then convert that money to a Roth IRA. You’ll pay taxes on the conversion, but then you’ll never have to take money out of your Roth. And if you do, your withdrawals will be tax free.
•  Use this same strategy—known as a backdoor Roth IRA conversion—to bypass income restrictions that might otherwise keep you from making Roth IRA contributions. Many thought SECURE 2.0 would close this loophole for wealthy investors, but the Act left it intact.
• If you’re over 70½ and charitably inclined, you can donate up to $100,000 each year from your IRA directly to qualified nonprofits. You can deduct these Qualified Charitable Deductions (QCDs) directly from the RMD amount you’d normally need to pay that year. And, starting this year, the annual QCD limit will rise with inflation.
• If you’re still working, consider diverting more or all of your 401(k) contributions to your Roth 401(k) account. That way, you’ll never have to pay taxes when you take out money from that account. Better yet, you won’t have to take out any money at all while you’re still alive.

Moving Forward, SECUREly

The many benefits from this legislation will be rolled out over the next few years. While some are pretty clear cut, many of them will be open to interpretation. 

Keep in mind, most of these benefits are not going to present one-size-fits-all solutions. With more options and choices comes analysis and new decision making. That’s why it’s smart to put these opportunities into context by talking with a qualified fee-only fiduciary financial advisor. Not all advisors have this expertise. Having an advisor who specializes in dynamic retirement income planning will help you understand which elements of SECURE 2.0 you should—or shouldn’t–take advantage of, either now or later, to secure the retirement you deserve. 

 Pam Krueger is the founder and CEO of Wealthramp, an advisor matching platform that connects consumers with vetted and qualified fee-only financial advisors. She is also the creator and co-host of the MoneyTrack investor education TV series seen on PBS and the popular Friends Talk Money podcast. If you’re ready to work with an advisor you can trust, visit www.wealthramp.com.