The major budget package enacted by Congress in December included a subdivision called “SECURE Act 2.0.” The 1.0 version of this package of legislative changes for qualified retirement plans was the “Setting Every Community Up for Retirement Enhancement Act of 2019.” That bill enjoyed strong bipartisan support, has been considered a success in practice, and so Congress tweaked this area of law again. The major players in the retirement field are, reportedly, pleased with the result.

We can help secure your legacy with a charitable trust.

Some of these changes will be phased in over time, but here are how the changes should be considered as you approach and, eventually, enter retirement:

Early in the career

Automatic enrollment. For 401(k) and 403(b) plans, employees will be automatically enrolled in the plan when they satisfy eligibility requirements, beginning in 2025. The initial contribution will be 3% of salary, increasing by 1% each year until it reaches 10%.

529 plan rollovers to Roth IRAs. Some families may have opted not to contribute to a 529 plan, given the uncertainty around whether the funds will be used. SECURE 2.0 provides that, subject to several limitations, up to $35,000 of unused 529 plan funds may be rolled into a Roth IRA for the plan beneficiary. The new rule takes effect in 2024.

Student loan repayments. Starting a career with a large amount of student debt can make contributions to an employer’s retirement plan difficult. Prioritizing debt payoff may mean years are lost before starting to save for retirement. In the future, SECURE 2.0 will allow employers to match not only contributions to the 401(k) directly, but also based upon repayment of student loans.

Modified saver’s credit. To encourage those with low and moderate incomes, an eligible individual who makes a qualified retirement savings contribution will get a matching contribution from the IRS. Starting in 2027, the government will provide 50% credit on savings up to $2,000 ($1,000 maximum credit). This credit will be available regardless of whether the taxpayer has an income tax liability.

Exemption from 10% Early Distribution Penalty for Withdrawals for Certain Emergency Expenses. In case of financial hardship, up to $1,000 may be withdrawn per year, penalty free, from a 401(k) or IRA. The employee has the option to repay the distribution within 3 years. No more distributions will be allowed during the repayment period unless the distribution is paid in full.

Emergency savings plans. Starting in 2024, employers will be able to add an emergency savings plan feature to their defined contribution plans, such as a 401(k) plan. The money in the emergency category will potentially be available free of taxes and penalties, and there will be a match available for these funds. The match will go directly into the 401(k) rather than the emergency savings portion.

There are many reasons individuals delay contributing to their retirement savings. SECURE 2.0 helps address some common concerns during the early career so the process is started earlier, and investments can compound longer, to help ensure individuals don’t run out of money during retirement.

Retiring soon

Expanded Roth plan choices. A Roth feature, already available for 401(k) plans, is now also allowed for SIMPLE plans and SEP IRAs. Employer contributions and employee elective deferrals (if permitted) can be designated as Roth.

Larger catch-up contributions. As taxpayers approach their retirement, when they are typically in higher earning years and with fewer expenses related to children and home buying, so-called “catch-up” contributions are permitted, in addition to regular contributions to IRAs and employer plans. For IRAs, the catch-up limit is $1,000 per year for those 50 and older. That limit has never been adjusted for inflation, but beginning in 2024 it will be. Beginning in 2025, the catch-up limit for employer plans go to $10,000 for those who are age 60 through 63. Note: For those whose income exceeds $145,000, the catch-up contributions will have to be in Roth account, that is, after income taxes are paid.

This is helpful because it’s likely to align with peak earning years, yet is also not a huge amount considering how much money will be needed for retirement. This should serve as an especially good wakeup call to create a larger game plan for retirement, including how much you are going to need based on what you wish to accomplish, and how you plan to get there.

Retirement Savings Lost and Found. As taxpayers move from job to job, they sometimes lose track of retirement savings from past employers. The Department of Labor will create a national online searchable lost and found database of retirement accounts.

In retirement

More deferral – The age at which Required Minimum Distributions (RMDs) from IRAs and employer plans must begin has been boosted to 73, effective this year. In 2033 the age goes to 75. Thus, retirees who do not need to draw on those sources for daily living expenses get an extra tax deferral. The RMDs will be larger when they do begin, which might push some retirees into higher tax brackets.

Less penalty. Failure to take an RMD has meant a 50% tax penalty on the amount that should have been distributed. Starting this year, the penalty drops to 25%, and to 10% if it’s corrected by the taxpayer in a timely manner.

No RMDs. One key feature of the Roth IRA is that the RMD rule does not apply, and the retiree may leave the money to grow tax-free as long as desired. Roth accounts in employer plans do not have this benefit – they do have required distributions. That changes in 2024, when the Roth features of IRAs and employer plans will be harmonized.

Increase in Qualified Longevity Annuity Contract (QLAC) Contributions. Up to $200,000 can be contributed into a qualified longevity annuity contract from a qualified retirement plan or an IRA. The prior 25% of income limit is eliminated.

Annuities in 401(k) Plans. Many retirees prefer the certainty of lifetime monthly payments—a pension, in other words—to the management of a large lump sum. The new law removes barriers to the use of annuities in qualified plans by exempting certain annuity features from actuarial tests that would otherwise prohibit their use.

Expand Qualified Charitable Distributions (QCD). A QCD is the direct transfer of funds from an IRA to a qualified charity. Such transfers are not included in taxable income, but they do qualify as Required Minimum Distributions.  The QCD is available to taxpayers over age 70 ½ (even though the RMD doesn’t take effect until age 73). The QCD rules have been expanded to allow for a one-time $50,000 distribution to a charity through a split-interest entity, including charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts. Beginning in 2024, the $100,000 annual limit on QCDs will be indexed for inflation.

What can we do?

First, get started, regardless of where you are in your wealth journey.

Financial planning for retirement is a core competency at Arvest Wealth Management. We can look more in-depth at how this bill could affect your unique situation. For example, we might notice that although pushing the RMDs out means a longer time for the funds to grow, it also means less years to take distributions and you might be pushed into a higher tax bracket. Or perhaps you’re just wondering how your retirement savings would fit in with your other goals, such as protecting your income or family should an accident occur.

The government is trying to reduce barriers to achieving a secure retirement, but the hard work of saving is up to you. Arvest Wealth Management Client Advisors can help you create a plan with the goal of building wealth for your retirement. They can analyze your unique situation and help you make informed decisions about the products and services available. Please contact one of our client advisors to learn more about how we may support you in your retirement planning journey.


This content has been prepared by The Merrill Anderson Company and is intended as a general guideline.