SECURE 2.0 Act Enhancements Across the Retirement Continuum

Setting Every Community Up for Retirement Enhancement, the SECURE 2.0 Act expands on the 2019 SECURE Act to make it easier to have a successful retirement. The legislation tackled retirement savings throughout several points on the financial journey, with a provision to facilitate saving and investing for almost everyone. 

Whether you have student loans, need to catch up in the final years before retirement, are facing taking required minimum distributions during retirement, or want to enact a charitable giving strategy, these new rules create a smoother path. 

Combining all the various facets into one piece of comprehensive retirement legislation has proven an efficient way to achieve changes, but it’s also a healthy reminder that retirement is not a simple “one-and-done" act. 

It is a continuum in which you spend decades of your working years accumulating retirement savings, and then you flip to decumulation as soon as you retire. The two mindsets – of saving and spending – vastly differ. However, the planning you do within each stage of the journey impacts the stages to come. 

529 account funds may be transferred to a Roth IRA free of any tax, penalty, or applicable income limits

529 accounts lose their perception as the “kid’s college savings account" and are now recognized as a versatile tax-advantaged investment vehicle. Tax-free withdrawals of funds invested in a 529 account and their earnings can commence as early as kindergarten for the designated beneficiary’s tuition. After the account has been open for 15 years, if there are leftover funds that were not needed for education expenses, those funds can be rolled into a Roth IRA for the benefit of the child.

The Early Stages: Automatic Enrollment, Emergency Savings, and Student Loan Matching 

Automatic enrollment in a retirement plan allows you to build an invested savings strategy from the earliest years of a career, which results in the longest length of time to benefit from the power of compounding. Beginning in 2025, new employer-sponsored plans will be required to automatically enroll eligible employees, with a contribution rate of at least 3%. This is coupled with new rules around portability. These often lower-balance accounts will also be allowed to be automatically transferred to a new plan in the event of a job change. 

The 10% penalty on withdrawals from tax-deferred retirement plans often puts saving for retirement in opposition to building up an emergency fund. The SECURE Act 2.0 brings an end to this. Starting in 2024, plans are allowed to add designated Roth accounts for emergency savings for non-highly compensated employees. Contributions are limited to a maximum of $2,500 annually. The first four withdrawals in one year from the account will be penalty-free. You are considered non-highly compensated if you earn less than $150,000 in 2023. 

In earlier career stages, student loan payments account for a sizeable portion of one’s paycheck. Trying to pay off debt and contribute to retirement accounts is often out of reach. The new law mitigates this by permitting an employer to match student loan debt payoff amounts, ultimately allowing retirement savings to accrue. 

Late Career Catch-Up Contributions Are Increasing 

The catch-up contribution for those 50 and above is one of the best ways to increase your retirement savings in the later years of your career. For 2023, the catch-up amount is increasing to $7,500. Beginning in 2025, the catch-up for workers aged 60, 61, 62, or 63 will be even larger. These employees are allowed to contribute the greater of $10,000 or 150% percent of that year’s inflation-indexed catch-up amount. 

Take note, the tax treatment of catch-up contributions is changing. If prior-year earnings are more than $145,000, the age 50+ catch-up contributions must be made with after-tax dollars to a Roth account. 

The Decumulation Phase Gets More Flexible 

Tax-deferred contributions to retirement accounts lower taxable income in the years when you make them, but the IRS eventually wants to collect tax on these dollars. The age to begin required minimum distributions (RMDs) is moving from 72 to 73 in 2023, providing an extra year for retirees that want to take advantage of lower asset values by converting some other of their savings in tax-deferred accounts to a Roth IRA. The amounts converted will lower the value of the account, which will reduce the amount of the RMD.   

Looking ten years down the road, in 2033, the age for RMDs will move to 75. This expanded window can provide for significant tax-planning strategies, including the timing of asset sales and more time to convert additional funds to a Roth IRA for both income and tax planning.   

The Bottom Line 

Starting early and taking advantage of the tax benefits – and the power of compounding – are the key features of the years in which you are saving for retirement. The goal is to retire successfully and have enough to live the life you want. Saving is only one piece of this puzzle. Thinking strategically about retirement at every stage can keep your plans on track, utilize this new legislation to your benefit.  

Andrew Comstock, CFA