Consider these changes as you make adjustments to your retirement savings plans.
As people live longer, saving enough for a comfortable retirement continues to be an ongoing challenge. In late 2022, to help address this issue, the federal government enacted new legislation called the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act. Similar to the first SECURE Act that was passed in 2020, the new legislation aims to encourage Americans to save for retirement through a series of changes to retirement accounts.
“The new SECURE Act is good news for people saving for retirement because it increases and enhances retirement savings options,” says Angie O’Leary, head of Wealth Planning at RBC Wealth Management–U.S. “The act includes a little something for everyone at every stage of life.”
Here’s a look at some of the SECURE 2.0 Act provisions that might have the biggest effect on retirement planning, and how everyone—from younger Americans just starting their careers to those approaching retirement—could stand to benefit.
The SECURE 2.0 Act included changes to catch-up contributions, an annual limit that allows people age 50 and up to make additional contributions to their retirement savings accounts over the standard contribution limits. Starting in 2024, the legislation will require catch-up contribution limits to be automatically adjusted for inflation each year.
“This will be the first time that the IRA catch-up contribution amount of $1,000 will have increased since 2006,” says Roman Kozak, senior retirement planning consultant at RBC Wealth Management–U.S. “And though the adjustments will be modest each year, any additional savings opportunities are always welcomed.”
Starting in 2025, catch-up contributions can be even bigger for people between the ages of 60 and 63 with qualified employer-based retirement plans, such as a 401(k). For the first time, those in this age group will be allowed to make additional catch-up contributions equal to $10,000 or 150 percent of the standard catch-up amount permitted in 2024, whichever is greater. This will help more people who are nearing retirement build up their savings more quickly.
Additionally, after 2023, all catch-up contributions will be treated as Roth (after-tax) contributions for people earning more than $145,000 per year. While that means savers can’t delay paying taxes on the extra catch-up contributions, the earnings on those savings will be tax-free when they make withdrawals in retirement.
The original SECURE Act increased the age at which required minimum distributions (RMDs) must be taken from retirement plan accounts from 70 ½ to age 72, and the SECURE 2.0 Act increases this age to 73, with an additional increase to age 75 in 2033.
This will benefit people who may not need their RMDs right away, O’Leary explains, providing extra time for those accounts to grow.
“People who don’t need the distributions from their retirement accounts to live on will be able to defer taxes and invest longer,” she says. “This provision recognizes that people are working longer and living longer, so that’s a good thing.”
The SECURE 2.0 Act will also expand automatic enrollment in workplace retirement plans, which could be a particularly big boost to younger workers just getting started with saving for retirement. Beginning in 2025, companies will be required to automatically enroll eligible employees in new 401(k) and 403(b) plans.
Initially, the employee automatic contribution amount must be at least three percent, with a 90-day employee voluntary opt-out feature. Each year, the percentage amount is automatically increased until it reaches at least 10 percent but not more than 15 percent. Some employer plans are exempt from this automatic enrollment provision, including government and church plans, SIMPLE IRA plans, small business owners with 10 or fewer employees, and new employers that have been in existence less than three years.
Another part of the SECURE 2.0 Act that will impact younger Americans is the provision allowing for employers to make matching contributions on behalf of employees who make qualified student loan payments.
Previously, employees who were focused on repaying student loans rather than saving for retirement may have missed out on those matching contributions to their retirement account.
“This provision may finally enable employees, who may not otherwise be able to afford to save for retirement due to student loans and debt obligations, and who thus forgo receiving employer matching contributions, to receive employer matching contributions by way of repaying their qualified student loan payments, which are broadly defined as any sort of indebtedness incurred by a plan participant in order to pay off qualified higher education expenses,” Kozak explains.
That provision will go into effect after Dec. 31, 2023.
The SECURE 2.0 Act will also allow for tax- and penalty-free rollovers from 529 college savings accounts to Roth IRAs. This change will affect people who have completed their education but may still have leftover funds in their 529 college savings accounts. However, it comes with a number of “caveats, limitations and restrictions,” according to Kozak.
For example, if your child received a scholarship and didn’t need all the funds you had saved in their 529 account, there previously wasn’t much you could do with the leftover funds without taking a penalty. Now, the new SECURE Act allows owners of 529 accounts to roll over balances into Roth IRAs as long as the Roth IRA is owned by the beneficiary of the 529 plan—in other words, the student, not the parent. However, contributions made to the 529 plan in the past five years (and any resulting growth) are ineligible for the rollover.
Any funds rolled over from a 529 into a Roth IRA will be counted toward the annual IRA contribution limit of $6,500. And 529-to-Roth rollovers are capped at a lifetime maximum limit of $35,000.
“People who have completed their education and have funds remaining in their 529 accounts can now use those funds to seed their retirements with a Roth IRA, but they must adhere to these limitations,” O’Leary says.
That change to 529 plans, along with the other provisions of the SECURE 2.0 Act, has the potential to make a difference for Americans no matter where they may fall on their retirement planning journey.
“Overall, the new law offers a number of favorable changes that can make a positive impact on retirement savings,” Kozak says.
RBC Wealth Management does not provide tax or legal advice. All decisions regarding the tax or legal implications of your investments should be made in consultation with your independent tax or legal advisor.
RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC.
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