How “SECURE 2.0” Can Enhance Your Retirement Plans

SECURE 2.0 is signed into law at the end of 2022. Standing for “Preparing Every Community for Better Retirement,” the second edition of this bill is designed to continue building on improvements in the United States retirement system. Whether retirement is far away off or fast Here’s what you need to know about how SECURE 2.0 will affect your retirement planning.

Changes to minimum distributions required

Required minimum distributions (RMDs) are the amount of money that the IRS requires You must withdraw from your retirement account each year. SECURE 2.0 reduces the impact of RMD in several ways.

First, the age to start taking RMDs has risen to 73 in 2023 and will rise again to 75 in 2033. This gives savers an extra year to defer taxes (the previous age was 70.5 in 2022).

Previously, failure to take your RMD before the deadline would result in a 50% penalty. Under SECURE 2.0, the penalty for not taking an RMD has been reduced to 25% of the amount of the RMD. If the error is corrected in a reasonable and timely manner, the penalty can be reduced to 10%. Furthermore, if you can prove that your failure to obtain an RMD was the result of an understandable error, you may be able to waive the penalty entirely. And beginning in 2024, RMDs from Roth accounts will no longer be required in employer retirement plans. These relaxed rules are great news for many savers who may miss deadlines due to simple oversight.

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Changes to the size of catch-up contributions for older workers

Currently, if you’re at least 50 years old, the catch-up contribution rules let you add more money in your retirement savings accounts than Standard contribution limit for the year. By 2025, these compensation contributions will increase for 401(k), 403(b), government plans, and IRA account holders. This gives anyone else making retirement contributions (or who hasn’t started saving yet) the ability to “catch up” before they reach retirement age.

For traditional Roth IRAs, the catch-up contribution amount was previously stuck at $1,000. Starting in 2024, that $1,000 a year will be inflation-adjusted (like the base amount actually).

For 401(k) and other employer-sponsored plans, the maximum compensation contribution for 2022 for workers 50 and older was $6,500 and $7,500 for 2023. Under SECURE 2.0, most often the maximum contribution The catch-up special for workers 60 to 63 is greater than $10,000 or 150% of the “standard” contribution amount for 2024. The $10,000 amount will be inflation-adjusted each year starting in 2026.

Changes for younger workers, too

Even if retirement is far away, the provisions in SECURE 2.0 may affect how you maximize your long-term savings.

Automatic 401(k) enrollment

Starting in 2025, employers that offer a 401(k) plan will be required to automatically enroll their employees in the plan unless the employees opt out. The automatic enrollment rate will be between 3-10%.

Increased access to emergency savings

One of the most notable benefits of SECURE 2.0 is the ability for employees to withdraw up to $1,000 from their retirement account for emergency expenses without having to pay the 10% tax penalty typical for early withdrawal if they are under 59½. Companies can also allow workers to create an emergency savings account with automatic payroll deductions, up to a maximum of $2,500.

For a complete summary of all provisions included in SECURE 2.0, you can Read more information hhere. While this law obviously provides more flexibility and greater protection for savers, everyone’s retirement plan is different. Be sure to consult a financial advisor or tax professional to understand how the changes to SECURE 2.0 apply to you personally.