Saving for the future is becoming easier, thanks in part to a major overhaul of federal policies governing retirement plans.
SECURE 2.0, enacted as part of the spending bill passed by Congress and signed by President Joe Biden in late 2022, includes 92 provisions related to 401(k)s, individual retirement accounts (IRAs) and other savings vehicles.
Building upon the foundation laid three years earlier by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, SECURE 2.0 “is one of the biggest changes to retirement laws in the last 30 years,” says Derek A. Miser, chief executive officer of Miser Wealth Partners in Knoxville, Tennessee.
Enacted with support from AARP, the key provisions of SECURE 2.0 aim to bolster Americans’ opportunities to save for retirement and to draw income from those funds later in life. Some are already in effect; more will be phased in over the next several years. Here are some of the ways the measure might have the most impact on your ability to save.
Changes for 2023
These provisions are in effect now.
New rules for RMDs: Once you reach a certain age, federal law mandates annual withdrawals from most types of tax-deferred retirement accounts. The idea is to ensure you receive and are taxed on your retirement funds in your lifetime — which is what they were intended for — rather than passing the money to your heirs. The original SECURE Act raised the age when you must start taking these minimum distributions (RMDs) from 70½ to 72; SECURE 2.0 raised it again, to 73.
The new bill also reduces the excise tax for failing to take the required distribution in a given year. In the past, the penalty was 50 percent of the difference between how much you were supposed to take out and how much you did take. Under SECURE 2.0, it is now 25 percent, and can be cut to 10 percent if you act quickly to make up the missing amount.
Penalty-free early withdrawals: If you take money out of your retirement accounts before you turn 59½, you typically must pay a 10 percent penalty tax on top of the regular income tax you owe on the money. There are limited circumstances in which you can avoid the penalty; SECURE 2.0 added to the list, eliminating the extra tax on early withdrawals if:
- You are terminally ill.
- You take up to $22,000 for losses related to a federally declared disaster. Regular income taxes on such a withdrawal can be spread over three years. The rules are retroactive to cover disasters occurring on or after January 26, 2021.
Tax-free withdrawal of employer match contributions: Previously, if your company offered a traditional 401(k) with an employer match, taxes on the matching funds would be deferred until you withdrew the money from the account in retirement. Now plan administrators can give employees the option of having the matching contributions taxed in the years they are made, as is the case with Roth 401(k)s. That way, those employer contributions are tax-free when you withdraw them in retirement.