5 Ways the SECURE 2.0 Act Can Increase Your Retirement Savings

On December 29, 2022, the INSURANCE Law 2.0 of 2022 signed into law to improve the prospects for retirement savings in the United States. Since the original SECURE Act (Setting Every Community Up For The Retirement Improvement Act) passed in December 2019, lawmakers have continued to explore ways to address the general inadequacy of Americans’ retirement savings and the lack of opportunities for low- and middle-income workers, people of color, and women to save for retirement.

Studies have shown that people are much more likely to save for retirement if they have access to a payroll deduction savings plan at work: up to 15 times more likely in one study and 20 times more likely if they are automatically enrolled in the plan.^one But small businesses, which employ nearly half of America’s employees,² They often find that time and cost are barriers to adopting, managing, and funding a retirement plan.

With more than 90 provisions, the SECURE 2.0 Act is designed to not only make it easier for employers to adopt and manage retirement plans, but also to help people save for retirement and preserve those savings. The changes affect IRAs, small business SEP and SIMPLE IRA plans, 401(k), 403(b) and government 457(b) plans, and everyone who uses these tax-advantaged vehicles to save for the future.

1. Expand employee access to workplace plans.

The SECURE Act 2.0 builds on the existing framework to make it easier for employers to adopt retirement plans, especially small employers. For example, beginning in 2023, employers with up to 50 employees can claim a tax credit for 100% of the plan’s start-up costs (up to $5,000) for the first 3 years of plan adoption. A new tax credit is also available to offset a percentage of employer contributions made to the plan during the first 5 years (up to 100 employees). In 2024, a new type of plan “Starter 401(k)” will be available. This plan gives employees the opportunity to defer $6,000 (indexed) of their paychecks to the plan each year, but eliminates more onerous funding and administrative requirements for employers.

2. Ensure that employees participate in a retirement plan when available.

A new 401(k) or 403(b) plan established after December 29, 2022 will be required to automatically enroll eligible employees in the plan, beginning in 2025. Plans will also be required to automatically increase savings rates of employees each year. (Employees can opt out. Businesses with up to 10 employees and businesses less than 3 years old are exempt.)

3. Facilitate retirement savings.

The SECURE Act 2.0 creates several plan features that address financial barriers for workers in saving for retirement, such as paying off student loan debt or saving for emergencies instead of retirement. Starting in 2024, employers can make matching contributions based on a percentage of an employee’s student loan payments for the year instead of the amount the employee is putting into the plan. Employers will also be able to add sidecar savings accounts to their plans, which employees can fund with up to $2,500 and withdraw tax- and penalty-free. Beginning in 2025, employees nearing retirement age (ages 60-63) will be able to save more than the annual contribution limit.

4. Preserve savings for longer.

The SECURE 2.0 Act increases the age at which IRA owners and retirement plan participants must begin receiving required minimum distributions (RMDs) each year. Beginning in 2023, the starting age for RMD increases from 72 to 73 for anyone who turns 72 after December 31, 2022. (In 2034, the starting age for RMD will increase again to 75.) In 2024, designated Roth accounts in employer plans will no longer be subject to the RMD requirement for the life of the account holder, just like Roth IRAs.

5. Give people the option to pay taxes on retirement savings at current rates.

Workers can elect to pay income tax on employer contributions made to their plan accounts each year by electing to treat employer contributions as Roth contributions (if allowed by the plan). Once contributions are in the Roth account, they will never be taxed again and all investment growth will be tax-free if distributed after age 59½. Similarly, employees who participate in an employer’s SEP or SIMPLE IRA plan may choose to treat employer and employee contributions as Roth contributions.

Start taking advantage of tax savings now

With over 90 provisions, the above 5 barely scratch the surface, but they can have a big impact on your retirement savings. For a deeper dive into the SECURE 2.0 Act, you can read brief explanations of all the provisions in this Resume published by the Senate Finance Committee.

Regardless of where you are in your retirement journey, here are some key points to keep in mind:

• Some of the provisions will take effect in 2023, while others have pushed the effective dates back to 2024, 2025, and beyond. Visit Passage of Secure Act 2.0: Impact on IRAs for an overview of the timeline.
• If you turn 72 in 2023, you no longer need to start taking RMD this year. You may want to talk with your IRA custodian or retirement plan administrator to make sure you understand how your account will be affected next year.
• Think about what you can do to improve your retirement saving prospects. Your financial advisor can help you determine the right amount to save and how investments can help you meet your retirement income goals.

The information provided in this article is educational content and not investment, tax or financial advice. You should consult with a licensed professional for advice on your specific situation.