How the Secure 2.0 Act of 2022 could impact your retirement plans
New federal legislation affects how we save for retirement, and how we make distributions from retirement plans. Learn some of the key components of the Secure 2.0 Act of 2022.
In December 2022, Congress approved appropriations legislation that included retirement security legislation commonly referred to as "Secure 2.0 Act". With a goal of helping Americans better prepare for retirement, the Secure 2.0 Act builds on the Setting Every Community Up for Retirement Enhancement, or SECURE, Act of 2019. The changes were aimed to help people increase their retirement savings and clarify some of the complicated rules within existing retirement plans.
To make it easy for readers to understand how the new law might impact their plans, we've identified some of the key changes and separated them into three groups:
On the accumulations side, the act primarily focuses on saving for retirement. On the distribution side, it emphasizes annuity solutions inside employer-provided plans. Some of the "special allowances" for withdrawals are geared toward reducing penalties when people need access to their retirement funds for other purposes.
1. Retirement accumulation
Expanded automatic enrollment in employer provided retirement plans
Takeaway: Beginning in 2025, certain employees will be automatically enrolled into the most popular employer-provided retirement plans. They'll also be eligible for automatic annual increases up to a limit.
Why it helps: Studies have shown that when people are automatically enrolled into a retirement plan — rather than being asked to opt in — they're more likely to participate. The automatic increase in savings feature allows participants to advance incrementally toward their desired contribution levels.
New "saver's match" to help boost retirement savings
Takeaway: Starting in 2027, the federal government will match 50% of retirement plan contributions up to $2,000 for individuals earning up to certain income limits.
Why it helps: Under the old law, the Saver's Credit provided millions of low- and middle-income individuals with a tax credit when they made contributions to IRAs, employer retirement plans and ABLE accounts. The credit created an incentive to save for retirement each year. However, the Saver's Credit was complicated. Although these changes don't take effect until 2027, the new law removes some complexity and makes it easier to participate.
Increased catch-up limits for older workers
Takeaway: Starting in 2025, the catch-up amount for those 60 or older will be $10,000 or $5,000 for SIMPLE plans and will be adjusted for inflation. This is for employees who participate in their employer-provided retirement plans, such as 401(k)s, 403(b)s, most 457 plans and the Thrift Savings Plan. Note that the new rule that requires higher income 401(k) and TSP participants to make their catch-up contributions to only Roth accounts, has been delayed and won't take effect until 2026.
Why it helps: Many Americans are working longer and are behind in their retirement preparation. This change allows them to save more during a time in their lives when they may have more financial flexibility.
Employer match for student loan debt
Takeaway: In 2024, employers can provide a match into 401(k) plans, 403(b) plans or SIMPLE IRAs for workers who make "qualified student loan payments."
Why it helps: Employees with student debt often feel torn between paying off their debt and saving for the future. If they opt for paying off their student loan debt, they may not be able to take advantage of their employer's contributions to employer-provided retirement plans, like 401(k)s. This change in the law helps employees do both.
Small-business retirement plan credit for military spouses
Takeaway: Beginning in 2023, a tax credit will encourage small businesses to make military spouses eligible for elective and employer-provided contributions to a retirement plan. These contributions will start within two months of hire and will provide employers a tax credit up to a maximum of $500 per military employee: $200 per military employee and 100% of all employer contributions up to $300.
Why it helps: If employees aren't confident they'll stay at a job long enough to meet the vesting schedule, they are often less likely to participate in their company's retirement plan. That's especially true for military spouses, who may not be in one place long enough to become eligible for their employers' retirement plan or to vest in employer contributions. In the past, a military spouse could wait up to six years to be fully vested in an employer provided plan. With a shorter eligibility wait, military spouses have more incentive to participate in employer-provided retirement plans.
Improvements for part-time workers
Takeaway: Starting in 2025, certain part-time employees will be able to participate in their employer-provided retirement plans after two years of service instead of three.
Why it helps: Part-time employees can start saving for retirement sooner rather than later.
Penalty-free rollovers from 529 accounts to Roth IRAs
Takeaway: Beneficiaries of the popular 529 college savings plan will be able to roll over up to $35,000 of unused funds into a Roth IRA beginning in 2024 and based on certain rules.
Why it helps: Many families are hesitant to contribute to 529 plans because of the uncertainty surrounding college costs or the fear of over-contributing. This has led to delaying or declining funding 529s to levels needed to pay for the rising costs of education. Although the 529 plan has never been a "use-it or lose-it" proposition, this change makes saving for college a much easier decision.
Retirement savings lost and found
Takeaway: Through the Department of Labor, Secure 2.0 creates an online lost-and-found database that lets Americans search for any lost funds from past employers.
Why it helps: If you're like a lot of people who've worked for multiple companies over the years, you have past employers who have since moved, changed their names or gone out of business. Conversely, many companies are left with employee balances and are unable to locate the ex-employees to transfer their benefits. The new database is supposed to be up and running no later than 2025.
Matching contributions to Roth accounts
Takeaway: In the past, employers were only able to match contributions to traditional, pre-tax employer-provided retirement accounts, such as 401(k)s, 403(b)s and governmental 457(b) plans. Under Secure 2.0 and starting in 2023, employers are allowed the option to match contributions to Roth accounts.
Why it helps: This is a big win for young savers who have time on their side and may stand to benefit the most from Roth accounts.
2. Retirement distributions
Required minimum distribution, or RMD, changes
Takeaway: Beginning in 2023, Secure 2.0 raises the age to 73 for individuals to take RMDs. The penalty for failure to take RMD is reduced from 50% to 25%, and if corrected in a timely manner — or, within the "correction window" — the penalty is reduced from 25% to 10%.
The following table provides a recent history of the legislation governing RMDs.
| Legislative Act | RMD Rule | RMD Age |
|---|---|---|
| Tax Reform Act of 1986 | Individuals reaching age 70½ before 2019 | 70½ |
| Secure Act of 2019 | Individuals reaching age 70½ in 2020 or later | 72 |
| Secure 2.0 Act of 2022 | Individuals reaching age 72 after 12/31/2022 and age 73 before 1/1/2033 | 73 |
| Secure 2.0 Act of 2022 | Individuals reaching age 74 after 12/31/2032 | 75 |
Why it helps: Americans working longer to save for their retirement now have an opportunity to delay required distributions for accounts like IRAs. This change also presents an opportunity to make conversions from traditional to Roth accounts — especially helpful for those already taking Social Security benefits or making qualified charitable distributions. Participants will be able to earn tax-free growth on their investments for an additional year. For more information, see the IRS chart that compares different retirement plan RMDs.See note1 Also, complying with RMDs can be complex, especially for those with multiple retirement accounts and employment circumstances. The reduction in penalties softens the blow for those who fail to make their RMDs accordingly.
Lifetime annuities
Takeaway: Effective in 2023, Secure 2.0 changes make lifetime annuity options within a retirement plan RMD friendlier.
Why it helps: Because of some of the actuarial math involved in calculating RMDs, certain annuities within retirement plans that featured annual benefit increases didn't adhere to the RMD requirements. Once again, there's now a greater focus on guaranteed retirement income through annuity solutions.
Qualified Longevity Annuity Contracts
Takeaway: Individuals are already allowed to purchase a fixed deferred income annuity that begins at age 85, known as a qualified longevity annuity contract, or QLAC, to satisfy a portion of their RMD requirements at age 72 or later. Secure 2.0 eliminates the requirement that premiums for QLACs be limited to 25% of an individual's account balance. For new QLACs purchased or exchanged as of the date of Secure 2.0, the new purchase amount is increased to $200,000 with adjustments for inflation and facilitates joint and survivor benefits.
Why it helps: The emphasis on guaranteed income during retirement highlights annuity solutions for retirement security. That's important because with sufficient guaranteed income, retirees can cover at least essential expenses in retirement. QLACs not only provide income that can't be outlived, but they also help with retirement planning since they remove some of the uncertainty regarding matching guaranteed income with life expectancy.
Qualified charitable distributions
Takeaway: Previously, the annual qualified charitable distribution, or QCD, limit from an IRA to a qualified charity was set at $100,000. Secure 2.0 indexes the annual exclusion limit for inflation for taxable years beginning after 2022. In addition, Section 307 expands the IRA charitable distribution provision to allow for a one-time, $50,000 distribution to charities through charitable gift annuities, charitable remainder unitrusts and charitable remainder annuity trusts.
Why it helps: For those who are charitably inclined and who may not rely on their RMDs for retirement income — or are trying to manage their taxable income in retirement — the increase in the QCD amount may help. In addition, the provision for one-time QCD distribution to a charitable gift annuity or charitable remainder trust can create a reliable income stream for a set period, and still leave the remainder to charity.
Roth accounts within employer-provided retirement plans
Takeaway: You may recall that Roth IRA distributions are tax-free — and the owner of a Roth isn't subject to RMDs. However, before Secure 2.0, the account owner of a Roth account within an employer-provided plan was required to take RMDs, albeit tax-free. Now, Secure 2.0 eliminates the retirement plan Roth account owner's RMD. The new rule doesn't apply to distributions required before Jan. 1, 2024, but are permitted to be paid on or after such date.
Why it helps: Many folks have large amounts built up in Roth accounts within their employer-provided retirement plans. These account owners can now let those funds grow tax-deferred without the obligation of taking funds out during their lifetime.
3. Special withdrawals and distributions
Emergency expenses
Takeaway: Secure 2.0 eliminates the 10% tax on certain early distributions from tax-deferred retirement accounts. Account owners can take one distribution per year up to $1,000, with the option to repay within three years. This is effective for distributions made starting in 2024.
Why it helps: Although withdrawals from retirement accounts for uses other than retirement should be avoided, life happens and unplanned emergencies can pop up. The elimination of the penalty for limited emergency withdrawals, coupled with the new Emergency Savings Account feature in Section 127, could help folks avoid high-interest debt when emergencies arise.
Emergency savings accounts linked to retirement plans
Takeaway: In 2024, employers will have the option to provide a Roth-like savings feature up to $2,500 for employees' short-term emergency needs. The "out of sight, out of mind" feature allows employees automatically to make Roth-like contributions to an emergency fund that's linked to their retirement account. Employees can make up to four emergency withdrawals per year free of fees or charges. If employees change jobs, they can roll the balance over to their new employer's Roth retirement plan or to a Roth IRA.
Why it helps: According to the Federal Reserve, almost half of Americans would struggle to cover an unexpected $400 expense. Many are forced to tap into their retirement savings. Separating emergency savings from retirement savings helps participants understand that one account is for short-term emergency needs and the other is for long-term retirement savings. Employees are thus empowered to handle unexpected financial shocks without jeopardizing their long-term financial security.
Long-term care contracts purchased with retirement plan distributions
Takeaway: Beginning in 2026, employees may use up to $2,500 per year from their employer-provided retirement plan account, free of early withdrawal penalties, to pay for long-term care insurance. The insurance can be for themselves, their spouse or other family members, according to regulations.
Why it helps: Many studies point out that about 70% of Americans over the age of 65 will require some form of long-term care. Although the majority may not require care in a nursing facility, at-home care and care provided by family members can be costly.
If you're retired or nearing retirement and have more questions about the Secure 2.0 Act, talk to a USAA retirement income specialist. If you're still growing your nest egg and looking for some guidance, consider Schwab's financial planning services.
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