A federal law makes it easier to save—and save more—in your retirement plan. The SECURE Act 2.0, a follow-up to the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, brings good news.
“SECURE 2.0 will give millions of Americans a better chance for retirement success, and can help employers attract and retain talented employees,” said Janet Luxton, senior ERISA consultant at Vanguard. “Employees will be able to save more through increased catch-up contributions, receive matches on student loan repayments, and maximize retirement savings with increased Roth opportunities.”
The law includes both mandatory and voluntary provisions for employers. Most of the law’s provisions were not effective until January 1, 2024, or later. However, some optional provisions are effective immediately. Here are several highlights of the law and a few details about what they mean for you.
Mandatory provisions
Catch-up contributions must be Roth for certain workers
Automatic enrollment now mandatory for new tax-deferred retirement plans
The law requires employers to adopt automatic saving provisions in tax-deferred retirement plans, like 401(k)s or 403(b)s, that are established on or after December 29, 2022. Starting in 2025, employers offering new retirement plans must automatically enroll new hires at a saving rate of at least 3% of pay and automatically increase their saving rate by at least one percentage point every year up to at least 10%, but not more than 15%.
If you are a new hire, you will be automatically enrolled at a saving rate of at least 3%. However, you have the option to opt out or select a different contribution rate. Vanguard recommends saving at least 12% to 15% of your pay each year for retirement, including employer contributions.
Delayed required minimum distributions (RMDs)
Voluntary provisions
Employees can contribute even more in catch-up contributions
Employers can make matching contributions based on student loan payments
Matching and nonelective contributions can be Roth contributions
Previously, employers’ matching and nonelective contributions could only be pre-tax. Under SECURE 2.0, 401(k), 403(b), and government 457(b) plans can allow you to designate your employers’ matching or nonelective contributions as Roth contributions. Only matching contributions that would otherwise be 100% vested can be designated as Roth contributions.
Designating certain employer contributions as Roth can provide additional retirement savings flexibility and financial planning opportunities. If you are saving in a plan with this option, consider consulting an advisor to assess the potential benefit.
Auto-portability
Access to emergency savings
Some employees don’t have enough savings to cover an emergency. Beginning in 2024, SECURE 2.0 will give employers 2 ways to allow you to access your plan account money in an emergency.
- First, you may be offered an emergency savings withdrawal of up to $1,000 per year. This withdrawal is not subject to an early withdrawal penalty and may be repaid over 3 years. Note: If you take an emergency withdrawal, you can’t take another emergency withdrawal from the same plan for 3 calendar years unless you either repay the withdrawal or make contributions to the plan equal to the withdrawal amount that hasn’t been repaid.
- Second, in addition to—or instead of—the emergency savings withdrawal, you may be offered an emergency savings account in your retirement plan. This applies to anyone who is not a highly compensated employee (as defined by the IRS). You may voluntarily contribute to this emergency savings account or may be automatically enrolled at up to 3% of your annual pay (capped at $2,500). Contributions will be Roth and eligible for the employer match (if any). You may take a distribution from your emergency savings account at any time.
Other noteworthy changes
- Improvements to performance benchmarks for target-date investments. Current regulations require an investment’s performance to be compared with a market index benchmark. This does not account for target-date investments, which feature a mix of asset classes. Under SECURE 2.0, target-date investments will be compared with benchmarks that are more accurate and effective, allowing you to make more informed choices.
- Rolling over 529 plan assets to a Roth IRA. Starting in 2024, unused assets in a 529 can be rolled over to a Roth IRA for the beneficiary. However, there are several limitations. Among them:
- The 529 account must be at least 15 years old.
- Contributions made less than 5 years ago cannot be rolled over.
- Annual rollover amounts cannot exceed Roth IRA annual contribution limits.
- The lifetime rollover amount cannot exceed $35,000.
Nevertheless, this provision may offer flexibility and peace of mind to those investors who worry about overfunding a 529 plan.
The not-so-good news about 403(b)s and CITs
SECURE 2.0 does not include the necessary provisions to allow 403(b) plans to offer low-cost investments through collective investment trusts (CITs)—popular options in 401(k) plans. For now, if you’re in 403(b) plans, you can only invest in mutual funds and certain insurance products.
This article highlights only a few of the changes that SECURE Act 2.0 brings.
Notes:
Whenever you invest, there's a chance you could lose the money.
Collective trusts and separately managed accounts are special types of investments. They’re offered only in retirement plans. Before you invest in one, know its objective, risks, charges, and expenses. Consider these things carefully.