How does the SECURE Act 2.0 impact me?

Signed into law in 2019, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) increased access to tax-advantaged retirement plans, broadened the number of Americans eligible for these plans and helped older Americans build their assets by:

• Removing age limit for IRA contributions
• Allowing graduate students to use IRAs
• Permitting new parents to make penalty-free withdrawals
• Implementing tax credits for small business plans
• Reducing draw-down time for inherited IRAs for non-spouses

In late 2022, the SECURE Act 2.0 was signed into law, building on the initiatives already in place and further strengthening retirement options. The passage of the SECURE Act 2.0 update made additional improvements to retirement earning and planning for Americans.

We will discuss some of the key provisions included in the law, including:

• Notable changes to required minimum distributions (RMDs)
• Upcoming increases to catch-up contributions
• Qualified Charitable Distribution (QCD) changes
• Future auto-enrollment in retirement plans
• Additional exceptions for early retirement plan withdrawals
• 529 plan transfers to a Roth IRA
• Emergency savings accounts may be available through your employer
• The potential for employer match of student loan payments
• Retirement plan eligibility for part-time employees

The SECURE Act 2.0 changes the RMD start age using a sliding scale based on the year you were born.

If you were born:

• Between 1951 and 1959: Your RMD age is 73.
• In 1960 or later: Your RMD start age is 75.

The penalty for not taking your RMD in a taxable year is now reduced to 25% of the amount you fail to take (down from 50%).In certain cases, the 25% penalty may be further reduced to 10% if the taxpayer remedies the RMD failure with the IRS during the Correction Window.

A RMD is no longer required for Roth accounts in employer plans (Roth 401(k), Roth 403(b), Roth 457(b)) effective for taxable years beginning in 2024. This allows these assets to keep growing tax-free if you don’t need them at your RMD age.

IRS rules allow workers aged 50 and older to contribute an additional $7,500 per year to workplace retirement plans (like a 401(k( or 403(b)) compared with younger employees. SECURE 2.0 increases these “catch-up” contribution limits for individuals who have reached ages 60, 61, 62, and 63. For these individuals, the catch-up contribution limit is increased to the greater of $10,000 or 50% more than the regular catch-up amount, beginning in 2025.

If you are at least 70½, QCDs allow you to donate your RMD to a qualified charity. Your donation isn't limited to your RMD amount: You can donate up to $100,000 per year (which will be indexed for inflation beginning in 2024), and your donation counts toward your RMD requirement. Keep in mind that it's only allowed for traditional IRA RMDs, not 401(k)s, and the charity must be qualified by the IRS.

The Secure Act 2.0 now also makes it possible to give a one-time annual gift of up to $50,000:

• Gifts can go to a charitable remainder unitrust (CRUT), charitable remainder annuity trust (CRAT) or charitable gift annuity (CGA).
• For the gift to count, it must come from your IRA by Dec. 31.

The SECURE Act 2.0 update automatically enrolls new eligible employees in 401(k) or 403(b) plans starting in 2025, starting with a minimum pretax contribution equal to 3% of their wages. Contributions increase by 1% each year until the employee contributes at least 10%—though not exceeding 15%—of their earnings. Employees must opt out if they choose not to participate.

Church- and government-run plans, as well as new companies (less than three years old) and small businesses (under 10 employees) are excluded.

There always have been exceptions for penalties for early withdrawals (death, disability, first-time home purchase, unreimbursed medical expenses, etc.), and those still apply. Current rules have reduced the penalty for withdrawals taken from retirement accounts before age 59½ to 10%. With over 28% of employees withdrawing from their accounts to pay for expenses, this was a significant loss of savings. The SECURE Act 2.0 creates additional exceptions for early withdrawal in the following situations:

• Anyone diagnosed with a terminal illness or medical problem that could cause death within 84 months or less has no withdrawal penalty if they pass away in that time frame or repay within three years.
• After December 27, 2020, if the plan owner's residence is located in a federally declared disaster area and they experience disaster-related economic loss, they may withdraw up to $22,000 without penalty.
• Beginning January 1, 2024, individuals experiencing domestic abuse may make hardship withdrawals of $10,000 or 50% of their vested balance, whichever is less. The withdrawal must be made within one year of the abuse and all or part must be repaid within three years to avoid penalty.
• Beginning in 2026, it's possible to withdraw $2,500 per year without penalty for long-term care contract premiums.
• Workers under age 59½ may withdraw up to $1,000 per year without penalty for emergencies and can repay within three years.
• Firefighters, corrections officers and other similar workers do not have a 10% penalty for distributions if they retire in the year they turn 50 or after and have at least 25 years of service with the employer.
  

Beginning in 2024, plan beneficiaries will be allowed to make penalty- and tax-free rollovers of unused funds from their 529 plan to their Roth IRA, provided certain criteria is met. This is a great option to repurpose unused 529 plan funds to help the beneficiary with saving for retirement.

Criteria:

• The 529 beneficiary must be the IRA owner and will have to have earned income.
• Rollovers will be subject to the annual Roth IRA limits in the year they are rolled, less any contributions you've previously made for the year (for example, 2023 limits are $6,500 under age 50; $7,500 age 50 or older).
• The 529 plan must be at least 15 years old.
• Any contributions or earnings from the past five years are not eligible to be rolled into the Roth IRA.
• The lifetime maximum of funds rolled over is $35,000.

At Thrivent, we encourage clients to build up a “rainy day” fund that could cover three to six months’ worth of expenses. We know that may feel daunting, especially if you’re devoting resources to other priorities, too.

The SECURE Act update allows employers to create emergency savings accounts (separate from retirement savings) for non-highly compensated employees with employee contributions of up to $2,500. Employers can auto-enroll employees and place up to 3% of their pay into them.

Beginning in 2024, employers can match payments that plan participants make to their student loans by contributing to those workers' retirement plans—even if the worker does not contribute to the retirement plan themselves. This ensures that even if a worker cannot afford to contribute, they can begin to create a nest egg.

Part-time employees aged 21 and up who work at least 500 hours in each of two consecutive 12-month periods can participate in 401(k) and 403(b) plans. This option begins for plan years after December 31, 2024 and looks only at employment from that date forward to determine eligibility or vesting.

The SECURE Act 2.0 makes qualified retirement plans accessible for more Americans. However, it adds an additional layer of complexity to the already intricate rules governing these accounts. A local Thrivent financial advisor can help you create a retirement strategy that meets your unique financial needs and reduces your tax liability.