The Secure 2.0 Act of 2022 is a bipartisan piece of legislation that was signed into law by President Biden in December 2022, as part of a $1.7 trillion budget bill. The act builds upon the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 and aims to increase access to retirement savings plans and make it more attractive for Americans to invest for the future.
Let’s take a closer look at what this act does, who it affects, and how it can help you save more for retirement.
What Is the SECURE 2.0 Act and How Does It Build On the SECURE Act of 2019?
The aim of the SECURE Act of 2019 was to incentivize businesses to offer competitive retirement plans and make it easier for small business owners to set up more manageable (and less expensive) “safe harbor” accounts. Additionally, it provided an annual $500 tax credit for employers who set up automatic paycheck distributions into 401(k) or SIMPLE IRA retirement plans for their employees.
Further, the act allowed penalty-free withdrawals of $5,000 from 401(k) accounts to cover birth or adoption expenses and allowed 529 account funds to be put toward qualified student loan repayments (up to $10,000 annually).
The Secure 2.0 Act of 2022 makes several significant changes to existing retirement savings laws intended to encourage Americans to invest for retirement. While there were more than 90 provisions in the act that may affect your retirement accounts, here are a few of the highlights.
Increased RMD Age and Catch-Up Contributions
The government is raising the age at which investors must take required minimum distributions (RMDs) and increasing the amount of money older investors can contribute to 401(k)s and IRAs.
- Required minimum distributions: Increases the age at which investors must take RMDs from 72 to 73 beginning January 1, 2023, and in 2032, the age will increase to 75.
- Increased catch-up contributions: Boosts the amount Americans between the ages of 60 and 63 can contribute to 401(k)s and IRAs to the greater of $10,000 or 50% more than the normal catch-up amount beginning in 2025. After 2025, the amounts will be indexed for inflation.
Read more: What the 2023 IRA Contribution Limit Increase Means for You
529 Plan Rollover Provision
A 529 plan is a popular tax-advantaged account that can be used for future education expenses such as tuition, books, and room and board. This type of account is popular for parents who want to begin setting aside funds for their child’s future, especially since funds in a 529 plan grow tax-deferred. But what happens if your child chooses to take a different path? Can they access those funds?
Withdrawals from a 529 plan that are not used for qualified educational expenses may be subject to federal income tax, a 10% federal penalty, and, depending on where you live, state taxes on the earnings portion of the withdrawal.
However, the SECURE 2.0 Act creates a provision allowing 529 plan holders to roll over funds into another type of tax-advantaged account: a Roth IRA.
- 529 plan rollover: Allows 529 plan holders to roll over funds maintained for at least 15 years into a Roth IRA, provided all requirements are met. Rollovers would need to be within the annual contribution limit, with a $35,000 lifetime limit. So, for example, no more than $6,500 could be rolled over from a 529 plan to a Roth IRA in 2024, assuming that’s the annual IRA contribution limit in 2024.
Protections for Part-Time Employees
The original SECURE Act required employers to include long-term, part-time employees in 401(k) plans, assuming they had worked 500 hours each year for three consecutive years and were at least 21 years old. The SECURE 2.0 Act extends coverage by shortening the eligibility period and making the right to participate in an employer-sponsored retirement plan enforceable by law.
- Long-term, part-time employee protections: Shortens the eligibility period for long-term, part-time employees from three to two consecutive years of 500 hours of service annually and gives employees the enforceable right to participate in a retirement plan under ERISA.
The SECURE 2.0 Act impacts not only investors but also employers by implementing mandatory automatic enrollment in 401(k) or 403(b) plans and eliminating the 10% excise tax for employer contributions to certain eligible plans. These changes, like the others, aim to increase participants’ savings rates over time.
- Automatic enrollment: Beginning in 2025, employers will be required to automatically enroll employees in their 401(k) or 403(b) plans with a rate of between 3–10% of wages. There is an exception, however, for small businesses with 10 or fewer employees, businesses less than three years old, churches, and government plans. Employees can choose to opt out if they prefer.
- SEP IRA and SIMPLE 401(k) tax changes: Removes the 10% excise tax for employer contributions to a SEP IRA or SIMPLE 401(k) plan if they are only considered nondeductible because they are not in conjunction with a trade or business.
Read more: SEP IRAs vs. 401(k)s: Which Is Right for Your Small Business?
General Investing Changes
Finally, the SECURE 2.0 Act includes general investing changes, such as making the Saver’s Credit refundable and permitting penalty-free withdrawals for emergency expenses as long as the funds are repaid within three years.
- Saver’s match: Makes the Saver’s Credit refundable and includes a 50% federal matching contribution (formerly a tiered percentage system) for the first $2,000 contributed to eligible retirement accounts. Income limits apply. (Effective December 31, 2026.)
- Emergency withdrawals: Permits one $1,000 penalty-free withdrawal from retirement savings for an emergency expense and must be repaid within three years. You won’t be able to take another penalty-free withdrawal until you repay the distribution. (Effective December 31, 2023.)
- Domestic abuse survivor withdrawals: Starting in 2024, victims of domestic abuse can take out up to $10,000 (adjusted for inflation) or half of their account balance (whichever is lower) from their 401(k), 403(b), 457(b), or IRA without incurring a 10% penalty for early withdrawal. This can be done within one year of becoming a victim and can be repaid within three years.
How Can You Take Advantage of the SECURE 2.0 Act?
The SECURE 2.0 Act of 2022 is an important piece of legislation that provides additional protections for investors while also making it easier for them to put away more for their future goals. Employers should dive deeper into the new requirements and tax credits available through this act while individual investors should consider the ways in which they can maximize their investments before some of these provisions go into effect.
Even if you do not yet have an employer-sponsored plan, one way you can set yourself up for the future is by opening an individual retirement account (IRA). IRAs are available for anyone who has an income or retirement funds eligible for rollover, and two of the most popular options are traditional IRAs, which are tax-deferred, and Roth IRAs, which are tax-free.
Read more: Traditional vs. Roth IRAs: Which Is Better?
You can even allocate a portion of your IRA funds toward alternative investments with the potential for outsized returns—like real estate, startups, crypto, fine art, and more. Open an Alto IRA or Alto CryptoIRA® today to get started.
What the 2023 IRA Contribution Limit Increase Means for You
The 2023 IRA contribution limits have increased to $6,500. In this blog, we dive into what the increase, updated Roth income limits, and deduction limits mean for you.
SEP IRAs vs. 401(k)s: Which Is Right for Your Small Business?
Self-employed or small business owner seeking an alternative to the 401(k)? A SEP IRA may be right for you. In this post, we discuss the differences between SEP IRAs vs. 401(k)s.
What’s the Difference Between Roth & Traditional IRAs?
Debating whether a traditional vs. Roth IRA is right for you? We discuss the benefits of each, contribution limits and rules, and their role in a diversified portfolio.