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Understanding SECURE Act 2.0

Congress passed the new SECURE 2.0 Act to provide more people with access to retirement plans and help facilitate more contributions. Wondering how SECURE 2.0 will affect you and your retirement strategy?

Here’s what you need to know:

1. RMD Changes: The age to start taking RMDs (required minimum distributions) changed from 72 to 73 starting this year. By 2033, the age will increase to 75. Also, beginning this year, if you fail to take an RMD, the penalty tax drops from 50% to 25%. If you fix the mistake quickly, the penalty may drop down to 10%. (RMDs are required for the following retirement accounts: profit sharing plans, 401(k)s, 403(b) plans, 457(b) plans, traditional IRAs, SEP IRAs, SARSEPs and SIMPLE IRAs.)

2. Emergency Withdrawals Allowed: 401(k) plan participants can use up to $1,000 a year from their account for a personal or family emergency starting in 2024. (Other emergency provisions already exist for terminal illnesses and survivors of domestic abuse.) Additionally, you can create an emergency savings account within your 401(k) plan allowing you to save for emergencies and take a withdrawal without a penalty. The account has a cap of $2,500 and can only come from employee contributions, not employer-matched contributions.

3. Catch-up Contributions: For individuals aged 50 and up, the catch-up contribution amount increased from $6,500 to $7,500. Starting in 2025, those aged 60-63, can make annual catch-up contributions of up to $10,000 for workplace retirement plans. 4. Automatic Enrollment: In 2025, employers will have to automatically enroll employees in their 401(k) or 403(b) plans at a minimum of 3% and maximum of 10%. The employee can choose to opt out of the plan.

5. 529 Plans to a Roth: Starting in 2024, if you have unused funds in a 529 College Savings Plan, you can transfer up to a specific amount to a Roth IRA retirement account. The beneficiary of the 529 plan and the Roth IRA must be the same. Other restrictions apply but this benefit will help those whose beneficiaries received scholarships or attended less expensive schools and have left over funds in their accounts.

6. Small Business Support: The tax credit for small businesses setting up a retirement plan has increased from 50% to 100% for businesses with less than 50 employees. Employers will be eligible for a credit equal to 100% of the amount contributed by the business, up to $1,000 per employee.

7. Student Loan Matching: In 2024, companies can match employee student loan payments with retirement contributions in a 401(k) or 403(b). This provides workers with an extra incentive to save for retirement while paying off student loans.

At Sterling Financial Management, we want to help you understand your finances and make the process feel less intimidating and overwhelming. That’s why our advisors are down-to-earth, knowledgeable and create a specific plan to help you meet your financial goals. Be sure to check out some of the resources on our website on SECURE 2.0, or call us with any questions.

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