Exploring the Impacts of SECURE 2.0 on Retirement Savings in 2024
The SECURE 2.0 Act, a comprehensive reform of U.S. retirement savings laws enacted in December 2022, has ushered in a series of significant changes that began to take effect in 2023 and continue into 2024. This landmark legislation has introduced novel features aimed at enhancing the retirement security of Americans. Below is a detailed examination of the key provisions that are influencing retirement planning in 2024.
New Opportunities for Employees with Student Loans
A notable innovation of SECURE 2.0 is the provision that allows employers to match student loan payments. Employees repaying student loans can now receive contributions to their retirement plans, similar to traditional matching contributions for 401(k), 403(b), 457(b) government plans, and SIMPLE IRAs. This initiative addresses the challenge many young professionals face in balancing student loan repayments with retirement savings.
Exceptions for Early Withdrawals
SECURE 2.0 introduces two new exceptions to the 10% early withdrawal penalty from retirement accounts like IRAs and 401(k)s:
Emergency Expenses: Individuals can now take a penalty-free distribution of up to $1,000 for emergency expenses, with a three-year limitation for subsequent withdrawals unless the amount is repaid or offset by new contributions.
Domestic Abuse: Victims of domestic abuse can make a penalty-free withdrawal, capped at the lesser of $10,000 or 50% of the account balance, within a year of the abuse.
Emergency Savings Accounts
Another innovative feature is the ability for employers to establish emergency savings accounts linked to retirement plans for non-highly compensated employees. Contributions are after-tax, limited to 3% of salary or a maximum of $2,500, and employers can match contributions to the employee’s retirement account.
Clarifications and Adjustments for RMDs
The Act has raised the age for required minimum distributions (RMDs) from traditional IRAs and most workplace plans, creating a staggered implementation:
Individuals born between 1951 and 1959 will see their initial RMD age increased to 73 starting in 2023.
For those born in 1960 or later, the RMD age will be 75 beginning in 2033.
In a significant shift, Roth accounts in workplace retirement plans are exempt from RMDs starting in 2024.
Transfers from 529 Plans to Roth IRAs
Beneficiaries of 529 college savings accounts with excess funds now have the option to transfer these to a Roth IRA, subject to a lifetime limit of $35,000 and annual Roth IRA contribution limits. The 529 account must have been established for over 15 years for such transfers.
Enhanced Contributions for SIMPLE Plans
Employers offering SIMPLE IRA or SIMPLE 401(k) plans can now make additional contributions. The new limits are either $5,000 or 10% of an employee's compensation, benefiting particularly smaller employers.
Inflation Indexing and Charitable Contributions
The Act has introduced inflation indexing for qualified charitable distributions (QCDs), raising the limit to $105,000 in 2024. Additionally, up to $53,000 of a QCD can fund a charitable gift annuity or charitable remainder trust, with this amount also indexed for inflation.
Revisions in Catch-Up Contributions
Catch-up contribution limits for IRAs, already indexed for inflation, remain unchanged at $1,000 in 2024. However, a significant provision — delayed until 2026 — mandates that employees earning over $145,000 must make these contributions on a Roth basis. Despite initial confusion, the IRS has confirmed that catch-up contributions will be allowed in 2024.
SECURE 2.0 Act represents a paradigm shift in retirement planning, offering more flexibility and options for Americans to secure their financial future. Its provisions cater to diverse needs, from young professionals burdened with student loans to older individuals seeking more control over their retirement savings. As these changes roll out, they are expected to significantly influence retirement planning strategies in 2024 and beyond.