Secure Act 2.0 & your retirement plan: What savers should know

No matter your age, saving for retirement is foundational to providing the security to lead a fulfilling life in retirement. Thanks to the SECURE Act 2.0 passed in December 2022, it may be easier to achieve your financial goals while working toward the retirement you envision. Read on to learn about some Secure Act 2.0 retirement plan changes that may affect you.

Roth accounts can be incredibly powerful retirement savings tools. Contributions to these accounts are made with after-tax dollars and their earnings grow tax-free. When it's time to take distributions in retirement, you don't have to worry about owing more taxes since you’ve paid them upfront. Roth accounts are a smart way to work tax-efficiency into your financial strategy.

The SECURE Act 2.0 introduced four improvements that make Roth accounts even more attractive and available to investors.

It’s common for small business owners and their employees use SIMPLE or SEP IRAs for their retirement savings account because they are generally easy to administer and offer higher contribution limits than traditional or Roth IRAs. A major drawback, though, is that—until recently—SIMPLE and SEP IRAs didn't have Roth options. If an employer or employee wanted to work a tax-efficient Roth account into their retirement savings plan, they would need to rely on setting up their own Roth IRA outside of the employer.

The SECURE Act 2.0 changed the rules for these plans, and businesses are now allowed to offer Roth SIMPLE and SEP IRAs going forward. Check with your employer to see if they will offer a Roth version in the near future if you participate in a SIMPLE or SEP IRA.

The Secure Act 2.0 allows plan sponsors (employers) to now give their employees a choice to direct their matching contributions into after-tax Roth accounts. Previously, employer matches could only go into a tax-deferred account—even when the employee's own salary deferrals were directed to their Roth accounts.

Employees will have to include any Roth matching contributions in their taxable income when they are received. However, since Roth earnings grow tax-free, this has the potential to significantly increase the amount of tax-free savings you accumulate over your career.

One of the key benefits of Roth IRAs is that they are not subject to required minimum distribution (RMD) rules, however, designated Roth accounts within employer plans (like Roth 401(k)s) didn't previously have the same special treatment. But starting in 2024, the SECURE Act 2.0 will eliminate RMD requirements for these Roth employer plans.

This may affect how you choose to save as a younger worker and pre-retiree. Because qualified Roth distributions are tax-free, they can be especially helpful for reducing your tax liability in retirement.

Another change related to Roth accounts is the ability to transfer unused 529 plan money into a Roth IRA without taxes or penalties. There are a few stipulations to be aware of concerning this change that will take effect in 2024:

• 529 to Roth IRA transfers count against the annual contribution limit.
• The 529 must have been in place for at least 15 years.
• There is a lifetime 529 to Roth IRA rollover cap of $35,000.
• The Roth IRA owner must be the 529 beneficiary.
• Contributions made to the 529 plan in the last five years, including the associated earnings, are ineligible for a tax-free transfer.

Life happens, and there may be times where you need to withdraw money from a retirement account before you've turned 59½. However, you will owe a 10% early withdrawal penalty if you don’t meet one of the IRS penalty exceptions including: first-time home purchase, disability, death, or unreimbursed medical expenses.

The SECURE Act 2.0 created additional exceptions that will be exempt from early withdrawal penalties in the following situations:

• Withdrawals by people with a terminal illness that a physician has certified is likely to result in death within seven years.
• “Hardship” withdrawals by people experiencing domestic abuse of up to 50% of their retirement account or $10,000 (whichever is smaller), starting in 2024.
• Withdrawals of up to $1,000 for immediate personal or family emergency expenses (limited to one withdrawal per year).
• 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 2026, it's possible to withdraw $2,500 per year without penalty for long-term care contract premiums.

Beginning in 2024, retirement plan sponsors will have the option to offer a designated emergency savings account within their plan. If your employer chooses to offer this account, employees may deposit up to $2,500 into an after-tax investment account each year and withdraw up to four times per year without incurring any taxes or penalties.

Having money in a tax-advantaged short-term emergency savings account may prevent you from depleting the savings in your retirement account, thus setting you back from your savings goals when unexpected expenses arise.

Having your own retirement savings, and not just relying on government programs like Social Security, is critical for creating financial security. New 401(k) and other workplace plans established in 2025 and after must automatically enroll eligible workers unless they opt out. Automatic contributions must be at least 3% or as high as 10% of an employee's salary, and they must increase by 1% each year to a maximum of 15%.

This doesn't apply to plans that are already in force but could help those who switch jobs and enroll in newly established plans. People who otherwise may not be proactive about their retirement savings will likely benefit the most.

These changes and others brought on by the SECURE Act 2.0 could make a difference for your personal finances and your retirement plans. Thrivent financial advisors are up to date on these changes and are ready to help you identify any opportunities that may be available to you.