SECURE Act 2.0: Key Provisions and Changes

The SECURE Act 2.0, signed into law in late 2022, is a significant evolution in federal retirement legislation. It builds upon the 2019 SECURE Act, aiming to broaden access to retirement savings plans and enhance financial preparedness. The law introduces adjustments for modern financial challenges, from student debt to emergency savings, and adapts rules to better reflect longer lifespans and changing economic conditions.

Major Changes for Retirement Savers

A central update involves the age at which individuals must begin taking Required Minimum Distributions (RMDs). The act increases the RMD age to 73 for individuals who turn 72 in 2023 or later. This age is set to increase again to 75 for those who turn 74 in 2033 or later, allowing savings to grow tax-deferred for a longer period.

The law also lessens the financial repercussions for failing to take a timely RMD. The penalty, previously 50% of the amount that should have been withdrawn, is now 25%. It can be further reduced to 10% if the individual corrects the mistake in a timely manner. Another change is the elimination of the pre-death RMD requirement for Roth accounts in employer-sponsored plans like 401(k)s.

The rules for catch-up contributions, which allow older savers to contribute more, have been enhanced. For individuals aged 50 and over, the standard catch-up contribution limit for IRAs is now indexed to inflation. Effective in 2025, a higher catch-up limit is introduced for those aged 60 through 63 in workplace plans such as 401(k)s and 403(b)s. This group can contribute an additional amount equal to the greater of $10,000 or 150% of the regular catch-up amount for that year, with the $10,000 amount indexed for inflation.

A new rule will impact how high-income earners make these catch-up contributions. Starting in 2026, individuals with wages exceeding $145,000 in the prior calendar year must direct all their catch-up contributions to a Roth account within their workplace plan. This means contributions are made with after-tax dollars, and qualified distributions in retirement will be tax-free. The $145,000 amount will be indexed for inflation.

New Options for Employers and Employees

The SECURE Act 2.0 introduces a mandate for many newly established retirement plans to automatically enroll participants. Beginning in 2025, most new 401(k) and 403(b) plans must automatically enroll eligible employees with a default contribution rate set between 3% and 10% of their compensation. These plans must also feature an automatic escalation clause, which increases the contribution percentage annually until it reaches a specified cap.

This automatic enrollment requirement does not apply universally. Existing plans established before the act’s enactment are grandfathered in. Certain employers are also exempt, including small businesses with 10 or fewer employees, new businesses in operation for less than three years, and church and governmental plans.

A provision allows employers to help employees who are burdened by student loan debt. Employers can now choose to make matching contributions to an employee’s retirement account based on the employee’s qualified student loan payments. This means that even if an employee cannot contribute to their 401(k) because they are paying down student loans, they can still receive the employer match on those loan payments.

The legislation also provides new flexibility regarding the tax treatment of employer contributions. Employers are now permitted to offer employees the option to have their matching or nonelective contributions designated as Roth contributions. If an employee elects this option, the employer’s contribution is included in the employee’s gross income for that year and is subject to income tax. These contributions are immediately 100% vested.

Expanded Access to Retirement Funds

Pension-linked emergency savings accounts (PLESAs) can be added to defined contribution plans like 401(k)s. These accounts are for non-highly compensated employees and allow them to build a liquid savings buffer. Contributions are made on a Roth basis, and the total account balance is capped at $2,500, though employers can set a lower limit. Withdrawals from a PLESA are tax-free and penalty-free.

The act establishes several new circumstances under which individuals can withdraw funds from their retirement accounts before age 59½ without facing the 10% early withdrawal penalty. While the penalty is waived in these situations, the withdrawals are still subject to ordinary income tax. These provisions are targeted at providing financial relief during specific hardships.

Emergency Expenses

Savers can now take a penalty-free withdrawal of up to $1,000 per year to cover unforeseeable or immediate personal or family emergency expenses. The law also includes a provision allowing the individual to repay this withdrawal within a three-year period.

Domestic Abuse Victims

The law permits a penalty-free withdrawal for individuals who self-certify that they have been victims of domestic abuse. The withdrawal is limited to the lesser of $10,000, an amount indexed for future inflation, or 50% of the vested account balance.

Terminal Illness

Individuals who have been certified by a physician as having a terminal illness can now access their retirement funds without penalty. This allows those with a limited life expectancy to use their savings to cover medical costs or other needs.

Federally Declared Disasters

For those living in a federally declared disaster area, the act allows for penalty-free withdrawals of up to $22,000. This provision is designed to help individuals and families recover from major events by providing access to their retirement funds to cover costs related to loss or damage.

Modifications for Specialized Plans and Distributions

A new feature allows for rollovers from long-term 529 education savings plans to Roth IRAs. To be eligible, the 529 account must have been maintained for the beneficiary for at least 15 years. The amount rolled over is subject to the annual Roth IRA contribution limits and there is a lifetime maximum of $35,000 per beneficiary.

The law also brings updates to SIMPLE and SEP IRAs, common retirement plans for small businesses. For SIMPLE IRA plans, employers now have the option to make additional nonelective contributions to all eligible employees. A major change for both SIMPLE and SEP IRAs is that employers can now offer a Roth version of these plans, allowing for after-tax contributions.

Qualified Charitable Distributions (QCDs) have also been enhanced. The annual QCD limit, which allows individuals age 70½ and older to donate up to $100,000 directly from their IRA to a charity tax-free, will now be indexed for inflation. The act also introduces a one-time election, permitting an individual to use up to $50,000 of their QCD to fund a charitable gift annuity or a charitable remainder trust.