Retirement reform has been a major focus for lawmakers in recent years and legislation passed at the end of 2022 is now having a direct impact on Americans preparing for retirement. The SECURE 2.0 Act of 2022 builds upon the original 2019 SECURE Act to reduce barriers to retirement saving. Some of the major provisions in SECURE 2.0 are now in effect, while other provisions will start in subsequent years.
The motivation for retirement reform is largely based on the growing retirement savings gap. Many American workers do not have enough savings for the projected costs of retirement. Lawmakers have long acknowledged the need to enhance access to retirement plans and the SECURE Act of 2019 was the first major retirement legislation in over a decade. That original Secure Act increased the age when retirees are forced to withdraw money from most retirement accounts to 72, and it removed the upper age limit for contributing to individual retirement accounts. These changes acknowledged that flexibility in retirement planning could help preserve resources for retirees with increasing life expectancies.
The original SECURE Act was popular in Congress and lawmakers immediately began discussing ways to expand it. Three years later in December 2022, the SECURE 2.0 Act of 2022 was signed into law. While a great deal of SECURE 2.0 updates provision for retirement plan sponsors and custodians, the crux of SECURE 2.0 aims at reducing some of the friction points involved in retirement saving for both younger workers and individuals nearing retirement.
Under SECURE 2.0, the age for required minimum distributions ("RMDs") from pre-tax retirement accounts has again increased. The RMD age staring in 2023 is now 73, and it will increase again to age 75 in 10 years. Individuals turning 72 in 2023 will see the most immediate impact as they can now delay RMDs until 2024. Another expanded benefit is provided for "catch-up" contributions. Historically employees have been permitted to contribute additional funds to workplace retirement plans starting at age 50 and these are referred to as "catch-up" contributions. SECURE 2.0 will allow workers ages 60-63 to contribute at least an additional 50% in these catch-up contributions. That limited time frame was included for congressional budget reasons; however, this provision will permit additional funds to be added to retirement accounts during the applicable years.
Finally, for many retirees the greatest concern is the preservation of income during retirement and SECURE 2.0 simplifies the access and accounting for guaranteed income annuity products in retirement accounts. This is especially appealing for retirees who want to avoid direct market exposure.
Many of the SECURE 2.0 provisions are designed to enhance retirement plan participation for early career employees. One of the biggest changes is that employers who sponsor new 401(k) or 403(b) plans after 2024 will be required to automatically enroll employees in the plan. Additionally, plan sponsors will be able to treat student loan payments as if they were retirement contributions for the purposes of an employer match. This should encourage participation among younger workers who are just starting out and may have student debt.
SECURE 2.0 also addresses the concern that if money is put away in a retirement account it cannot be accessed for unplanned life events. The law expands the provisions for penalty free withdrawals for emergency personal expenses, and plan sponsors will now be able to create emergency savings accounts that are linked to the retirement plan but can be accessed before retirement without a penalty.
Additional features of SECURE 2.0 include expanded retirement plan access for part-time workers and improvements to the retirement savings tax credit. Hopefully this legislation will achieve its mission of enhancing retirement savings for Americans.