Q. I heard that SECURE 2.0 was recently passed. It supposedly has provisions that make it easier to set aside money for unexpected emergency expenses. I also heard that it will not only help people avoid a short-term money shortfall but also keep them on track for long-term goals, such as retirement. Both these things sound great. Can you tell me more and talk about some of the other provisions that will help seniors save for retirement. Thanks for your help!
A. On December 29, 2022, President Biden signed the SECURE 2.0 Act of 2022. The new act is being called SECURE 2.0 based on the name of its predecessor, the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). You can read more about the original SECURE Act in my article on the topic here. The new law is said to build upon the original act and include the biggest changes for retirement savings in the past 15 years. SECURE 2.0 is included in the 4,100-page, $1.7 trillion spending bill — which will fund the government for the 2023 fiscal year.
Provisions in SECURE 2.0
Some of the provisions in SECURE 2.0 include requiring automatic enrollment in some workplace plans, increasing “catch-up” contributions that older workers can make, and boosting part-time workers’ access to retirement plans. As you mentioned, there also are provisions related to increasing employees’ ability to create emergency savings and access emergency funds. Here are more details about some of the major provisions that may affect you and some of our other readers:
– Increasing the age when Required Minimum Distributions (RMDs) would need to start: Starting January 1, 2023, the required minimum distribution age, upon which qualified retirement plan distributions must begin, is increased to 73 for individuals who turn 72 after December 31, 2022. Ten years from now, the required minimum distribution age will increase again, to age 75, but only for individuals who turn 74 after December 31, 2032.
– Reducing the Exorbitant Penalty: The penalty for failure to take required minimum distributions has been 50% of the amount that you are required to take. For seniors struggling to keep track of their finances, especially elders with Alzheimer’s and other types of dementia, forgetting to take required minimum distributions as a common occurrence, and these absurdly high penalties are finally being addressed by SECURE 2.0, with the penalty for failing to take RMDs would be reduced to 25%, and in some cases, 10%, from the current 50%.
– Changing the RMD rules for Roth 401(k)s: Currently, while Roth IRAs come with no RMDs during the original account owner’s life, that’s not the case for 401(k)s. Starting in 2024, the pre-death distribution requirement would be eliminated.
– New rules for retirement savings: Under the current law, if you’re 50 or older, you can put an extra $6,500 annually in your 401(k), for a maximum of $27,000. The new law says that starting in 2025, if you’re 60 to 63, you’ll be allowed to contribute up to $10,000 more than the standard 401(k) limit, and that amount will be indexed to inflation each year. Additionally, all catch-up contributions will be subject to Roth treatment (i.e., not pretax) except for workers who earn $145,000 or less.
– Improving worker access to emergency savings: A SECURE 2.0 provision would let employees withdraw up to $1,000 from their retirement account for emergency expenses without having to pay the typical 10% tax penalty for early withdrawal if they are under age 59½. Companies also could let workers set up an emergency savings account through automatic payroll deductions, with a cap of $2,500.
– A tax credit for savers: SECURE 2.0 also turns the saver’s tax credit for low and middle income Americans into something called the Saver’s Match, which will start in 2027. Currently, if you earn less than $34,000 and you’re single, you can get a saver’s tax credit of up to $1,000 ($2,000 credit for married couples filing jointly with income below $68,000). With the Saver’s Match, the U.S. government will give workers with incomes under $35,500 (under $71,000 for couples) up to $1,000 per person that they must put into an IRA or an employer’s retirement plan.
– Making it easier to save for emergencies and retrieve that money when necessary: Beginning in 2024, SECURE 2.0 will let employers automatically enroll workers into emergency savings accounts linked to their 401(k)s.
• Employees using these accounts will be able to set aside as much as 3% of their salary with after-tax dollars ($2,500 maximum);
• Withdrawals from the accounts will be tax-free;
• There won’t be the standard 10% early withdrawal penalty for taking money out of a retirement plan before age 59½;
• Employers could match these emergency savings contributions by putting extra money in their retirement accounts;
• Emergency withdrawals can be repaid to the plan within three years of withdrawal, in which case the employee could file an amended return to receive a credit for any Federal income tax paid on the emergency withdrawal.
– Broadening uses for unused college savings money: A provision would allow for tax- and penalty-free rollovers to Roth IRAs from 529 college savings accounts, under certain conditions.
– Requiring automatic 401(k) enrollment: Employers would be required to automatically enroll employees in their 401(k) plan at a rate of least 3% but not more than 10%. Businesses with 10 or fewer workers and new companies in business for less than three years are among those that would be excluded from the mandate.
– Broadening employer 401(k) match options: A proposal would make it easier for employers to make contributions to 401(k) plans on behalf of employees paying student loans instead of saving for retirement.
– Expansion of Requirement for Part-Time Employee Participation: The SECURE Act already requires employers to start allowing certain long-time part-time employees who have worked at least 500 hours for at least three years to start participating in their employer’s 401(k) plan beginning in 2024. SECURE 2.0 reduces the period during which a part-time employee must have worked at least 500 hours a year to be eligible to participate to just two years and extends the requirement to 403(b) plans. Both changes are effective for plan years beginning after December 31, 2024.
– Terminal Illness Distributions: Starting in 2024, employers may amend their retirement plans to permit a participant who is eligible for distributions and whose physician certifies that they have a terminal illness to withdraw their benefit without the 10% excise tax for individuals under 59 1/2. This amount is also eligible for repayment in limited circumstances.
– Long-Term Care Insurance Distributions: Starting December 29, 2025, employers may amend their retirement plans to permit participants to take distributions to pay for long-term care insurance. The distribution is limited to the lesser of the cost of the insurance, 10% of the vested account balance, or $2,500 annually (to be adjusted for cost-of-living). These distributions are not subject to the 10% excise tax, if it would otherwise apply.
– Better Disclosures: In 2024 and 2025, employers will be required to do a better job disclosing things like the fees in their 401(k) plans and the pros and cons of rolling over your 401(k) to an IRA or another retirement plan when you leave the company.
– Lost and Found Database: In 2025, the government will also need to create a “lost and found database” of pension plans and employer-sponsored retirement plans. This will help former employees and their families track down missing money from employers that they’re due.
It’s Time to Plan for Your Retirement
According to a 2022 survey of 1,600 employed adults by the Bipartisan Policy Center, Funding Our Future, and Morning Consult, nearly 25% of respondents have zero savings set aside for financial emergencies! Luckily, some of the provisions in SECURE 2.0 can help with this a bit. Planning for emergencies is very important and so is planning for retirement.
In another survey, the majority of retirees wish they had done a better job planning for both the financial and the non-financial aspects of retirement. Many Americans are vastly unprepared for a retirement that is both purposeful and financially secure. Americans are realizing, however, that they need help and they’re now seeking more comprehensive retirement planning. These are two major areas that should be a focus:
– Retirement savings: It’s generally considered important to contribute as much as you can afford to your tax-advantaged retirement accounts, such as your Roth IRA, traditional IRA, and your 401(k) or another employer-sponsored plan. At a minimum, put in enough to earn your employer’s matching contribution, if one is offered.
– Long-term care: Individuals 65 and over have about a 70% chance of eventually needing some type of long-term care, such as a nursing home stay or assisted-living stay or the assistance of a home health aide, according to the U.S. Department of Health and Human Services. And these services are quite expensive with the average annual cost for nursing home care is more than $12,000 – 15,000 a month in the DC Metro Area. Medicare does not cover long-term care, so, to avoid depleting your savings and investments (and possibly subjecting your grown children to a huge financial burden), it’s important to plan ahead for long-term care. A financial advisor who is also a Certified Elder Law Attorney, such as myself, can help you create a plan that’s matched specifically to your needs.
Planning for Retirement
If you’re worried about your retirement, the best thing you can do is to plan! Whether your retirement is coming up soon or is many years away, it is important to protect your hard work and your golden years with effective retirement planning and long-term care financial planning.
Besides being a Certified Elder Law Attorney, I am also an experienced retirement planning advisor and long-term care financial advisor through my affiliation with Protection Point Advisors.
Retirement planners, such as myself, generally work with people ages 55 and older, who are within 10-20 years or so of their desired retirement age.
With changes in the law, the need to plan in advance and to make necessary updates is more important now than ever. If you have not done your Estate Planning or Retirement Planning or had your Planning documents and Retirement Plan reviewed this year, please call us as soon as possible for an initial consultation, or a free annual review for members of our Lifetime Protection Plan®:
To get started on retirement planning, estate planning, or long-term care planning, please contact us to make an appointment for an initial consultation.
Retirement Planning Fairfax: 703-691-1888
Retirement Planning Fredericksburg: 540-479-1435
Retirement Planning Maryland: 301-519-8041
Retirement Planning DC: 202-587-2797
About Evan H Farr, CELA, CAP
