SECURE 2.0: How Does it Affect Retirement Plans? (2024)

As the clock wound down on 2022, Congress made some major changes to the rules governing retirement savings accounts. Among other improvements, the legislation known as SECURE 2.0 Act of 2022 pushes back the start of required minimum distributions (RMDs) for retirees, raises catch-up contribution limits for retirement plans, and makes workplace retirement plans more flexible.

Before getting into some of the highlights, it's worth noting that because this law passed at the tail end of the legislative session, many of the affected agencies and institutions haven't yet fully digested all the new provisions. Some of the law's wording still needs to be interpreted, and in some cases, financial institutions and plan managers may have even printed—and sent—year-end documentation reflecting the rules that existed before the law was passed. So, be careful when reviewing any material about the rules governing topics such as RMDs and retirement savings. It may take some time for all the changes in SECURE 2.0 to be fully worked out.

Now, here are some things to know about how these changes could affect those saving for retirement, as well as those already in it.

Effective this year, the legislation raises the starting age for RMDs from tax-deferred retirement accounts to 73, from 72 previously. Then, in 2033, the starting age will increase again to 75. There is still an exception for your first RMD, which allows you to delay your distribution until April 1 of the year following your 73rd birthday. However, delaying would mean taking your first and second RMDs in the same tax year, potentially resulting in a large tax hit.

Note: If you turned 72 in 2022, you won't get a break under SECURE 2.0, based on our current understanding of the law. If you haven't taken your first RMD yet, you will still have to do so by April 1 of this year. As noted, you will also have to take your 2023 distribution within the calendar year.

Meanwhile, the 50% penalty for failing to take your RMD will fall to 25% this year. In addition, if you correct an RMD mistake in a timely fashion, the penalty is further reduced to 10%.

Finally, the law also does away with RMDs for Roth 401(k)s, but this doesn't take effect until 2024, so you'll still need to take an RMD in 2023.

Being able to delay RMDs could allow you to keep more of your tax-deferred savings invested for longer, potentially benefiting some savers. However, investors with significant tax-deferred savings could face a tradeoff.

In short, leaving more of your tax-deferred savings until you're older could leave you saddled with even larger distributions when your RMDs finally start. That could drive up your overall tax burden and potentially push you into a higher tax bracket.

We encourage retirees to work with a financial planner or advisor to create a plan to manage their income and taxes according to their needs and savings.

Starting in 2025, the law will also allow workers aged 60 through 63 to make a larger catch-up contribution to certain retirement plans. For qualified plans, such as a 401(k) and 403(b), the additional limit will be 150% of whatever the regular catch-up amount is for a given year, or $10,000—whichever is greater. For SIMPLE plans, the additional limit will be 150% of whatever the regular catch-up amount is for a given year, or $5,000—whichever is greater.

This represents an addition to existing rules that allow workers to make catch-up contributions starting at age 50. For example, in 2023, most workers can contribute up to $22,500 to a 401(k), while workers aged 50 and older can contribute an additional $7,500, for a total of $30,000. If the new provision from SECURE 2.0 were effective today, a 62-year-old could contribute $22,500 to a 401(k), plus 150% of the regular $7,500 catch-up contribution, or $11,250 ($7,500 X 1.5%)—for a total of $33,750.

Finally, all catch-up contribution limits will be indexed to inflation. This includes IRA catch-up contributions, with effect from 2024.

There is one catch: Also starting in 2024, if you make more than $145,000, all your catch-up contributions will need to be made to a Roth account, using after-tax dollars.

Older workers, particularly those who may be behind on their retirement savings, can make even more use of their tax-advantaged retirement accounts. Combined with the extended RMD schedule, investors will have more time to boost their savings.

That said, the Roth requirement for higher earners could result in some individuals paying higher up-front tax rates when making catch-up contributions in their working years than they might have faced withdrawing those funds from a tax-deferred account in retirement (assuming their tax rate in their working years is higher than what they expect to pay in retirement). This makes meeting with a wealth advisor more important than ever to ensure that contributions and distributions are made in the most tax-efficient manner possible.

Beginning in 2023, workers will be allowed to receive matching contributions to qualified retirement plans on a pre- or after-tax basis, meaning you can choose to have your employer make matching contributions to a regular 401(k) or a Roth 401(k), if available. In the past, only pre-tax matching contributions were allowed. SEP and SIMPLE IRAs will also be able to receive Roth contributions. This wasn't allowed previously.

Note that this provision is optional, and plan sponsors will decide whether to allow matching Roth contributions. It may also take time for some plans to adopt these changes given how late in 2022 the law was passed. It's likely that many retirement plans won't implement this change right away.