The 8 Biggest Changes from Secure 2.0

Ken Hargreaves, CFP®, AIF®, AWMA®, CRPC®
The Revenue Act of 1978 introduced the 401(k),  thereby handing employees the reins to their retirement savings and allowing them to decide how much to save and where to invest, leading to a gradual yet significant transformation in the American retirement landscape. As a result, pension availability dwindled from a solid 60% in 1980 to a scant 10% by 2006, a natural consequence of this shift towards greater individual responsibility.
Fast forward to the present era, where we find Americans living longer than ever. In fact, twice as many Americans reach age 100 compared to just 20 years ago. A rapidly increasing lifespan and decreased pensions have led to an even greater reliance on personal savings for retirees. The Secure 2.0 Act, passed in December 2022, is Congress’s response to these evolving dynamics, aiming to enhance retirement security in an age where personal savings play a far more significant role than pensions or social security, which once guaranteed 2/3rds of a retiree’s income and ensured a dignified standard of living.

1. Updated Required Minimum Distribution Ages

Due to increasing lifespans, the Secure 2.0 Act significantly pushed back the age when retirees must start withdrawing from their non-Roth retirement accounts, such as the traditional 401(K) and traditional IRA. These mandatory withdrawals are called Required Minimum Distributions (RMDs). The first Secure Act of 2019 raised the Required Minimum Distribution age from 70½ to 72.
Now though, if you turn 72 on or after January 1st, 2023, you won’t have to take an RMD this year, as RMDs aren’t required until the age of 73. This gives you another year to let your investments grow, which is particularly important during a downmarket when an account needs time to catch up.
However, this adjustment might not be beneficial in certain instances, as the elevated RMD amount might push you into a higher tax bracket. This is possible because your RMD amount is based on your life expectancy – the lower the life expectancy, the higher the RMD. And since your RMD is delayed a year, you’ll have to withdraw a higher percentage of your account, which is taxable income.
For example, using’s RMD calculator, we can see the difference a year makes. If you are 73 years old this year with a million-dollar IRA account, your RMD is $37,735.85. However, if you’re 74 with a million dollars in retirement savings, your RMD is $39,215.69, for a $1,479 difference. While that may not seem like much, the tax implications may not seem so.

2. New Category of Catch-Up Contributions for Older Workers

Unfortunately, many Americans don’t start taking retirement seriously until it’s bearing down on them, which is why ‘catch-up’ contributions were first introduced as part of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001. Catch-up contributions let you increase your annual contributions to your 401(K) or IRA beyond what is typically permitted. Currently, in 2023, the catch-up limit for those 50 and older is $7,500 for a 401(K) and $1,000 for an IRA.
Secure 2.0 adds another age group to catch-up contributions, specifically for those between the ages of 60 and 63.
From January 1, 2025, those 60 and older can make catch-up contributions of up to $10,000 annually to their workplace retirement plans. However, the truly remarkable aspect of this provision is that the annual limit will be indexed for inflation every year. This will help ensure that its purchasing power remains at least somewhat consistent over time.

3. Catch-up Contributions Required to be Roth

High-income earners are most affected by this Secure 2.0 modification, which will see them losing a potentially crucial tax deferral in those vital years going into retirement.
Starting in 2024, individuals who earn more than $145,000 can no longer make traditional, pre-tax catch-up contributions to their employer-sponsored retirement plans. Instead, these contributions must be made to a Roth account, which means they will be made on an after-tax basis.
So, rather than paying taxes on those funds later in life when they start removing from their traditional IRA, they will instead be counted as taxable income for the year, possibly bumping the taxpayer up a bracket. For those with a carefully planned tax optimization strategy, adjustments will have to be made to help ensure they remain in the lowest tax bracket possible heading into and during retirement.

4. Employer Roth Matches

A 401(K) with employer matches is one of the best retirement planning tools available to Americans, giving them essentially ‘free’ money just for saving up for retirement. Before Secure 2.0, however, all matches were on a pre-tax basis, meaning all matches went into a traditional 401(K). While some companies allowed for post-tax Roth contributions, those contributions had to come from the worker, not the company.
Now though, a company can also execute a Roth match, giving Americans yet another tool to take advantage of and implement as part of their overall investment and tax strategy. While you may not notice an enormous difference between end-of-year balances between post-tax 401(K)s vs. Roth 401(K)s, you’ll definitely see the mark on your overall tax situation.
Your traditional 401(K) withdrawals are counted as taxable income, possibly bumping you up a tax bracket and increasing your AGI enough that you may lose out on certain deductible expenses. Your Roth withdrawals will be tax-free and won’t affect your tax bracket or AGI at all. Most of the time, it makes sense to have as much tax-free income as possible in retirement.

5. Elimination of RMDs for Roth 401(K)s

This is another massive piece of news that will significantly impact retirement tax planning strategies. Under previous retirement laws, only Roth IRAs could continue to grow without forced Required Minimum Distributions, but you had to take RMDs from your 401(K) post-tax accounts.
Secure 2.0 changes all that in 2024 by allowing Roth 401(K)s to grow unimpeded, keeping your taxable income lower than it otherwise would be, and giving you more options for late-life income.

6. Penalty Reduction for Failure to Take an RMD

Starting this year, the penalty for failing to take an RMD goes from 50% to 25% of the difference between the distribution vs the RMD amount. For example, if your RMD is $2,000 and you remove only $1,000, you have failed to take out $1,000. Previously, you’d be hit with a $500 penalty, but now the penalty will only be $250.
In our example, if you promptly correct the mistake, your penalty will only be 10%, or $100. As before, the IRS may waive the penalty if there is a reasonable explanation as to why you could not claim your RMD on time.

7. New and Expanded Small Business Tax Credits

To make retirement planning more cost-effective for smaller employers, the Secure 2.0 Act introduced new and expanded tax credits to offset the costs of initiating and administering a retirement plan.
To qualify for these startup tax credits, businesses need to have no more than 100 employees, and they should not have offered a plan for those same employees during the previous three tax years.

New Employer Contribution Tax Credit

It is a decreasing percentage of the employer’s contribution for each employee earning no more than $100,000 per year, up to $1,000 annually per employee, over the plan’s first five years. The tax credit applies to defined contribution plans, such as 401(k), SEP, and SIMPLE plans, with no more than 100 employees.

Plan Cost Tax Credit Credit

This expanded credit reduces the federal taxes a small business owes during the first three years of its first-ever retirement plan. The credit covers a percentage of the employer’s ordinary and necessary out-of-pocket plan costs up to an annual limit. The percentage and limit depend on the size of the business.

Automatic Enrollment Tax Credit

Employers are encouraged to include an automatic enrollment feature in their retirement plan with a tax credit of $500 per year for the first three years this feature is included. To qualify for this credit, it must be structured as an eligible automatic contribution arrangement (EACA).

7. 529 Rollovers to Roth IRAs

529 accounts are excellent tools for saving up for college tuition and other related expenses, but there is one downside. If your child doesn’t go to college for whatever reason, or if there are leftover funds, then you have a few options:
None of these options may suit your unique financial situation. However, from 2024, you have one more option: up to $35,000 can be rolled over into a Roth IRA account, with some caveats:
This loosening of the law helps families avoid that high 10% penalty which many saw as punishment for trying to save up for college in a tax-efficient way.

In Conclusion

These are but a few of the changes Secure 2.0 has enacted, but they are probably the most significant in their ability to impact your retirement plan. It’s imperative to consult with your financial advisor as soon as possible to adjust to current and upcoming changes. Also, keep in mind that the tax cuts made under the Tax Cuts and Jobs Act expire in 2025, just a couple of years away, meaning every financial plan needs a careful review to consider all of these factors.
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Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio. All investment strategies have the potential for profit or loss. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author/presenter as of the date of publication and are subject to change and do not constitute personalized investment advice.

A professional advisor should be consulted before implementing any investment strategy. WealthGen Advisors does not represent, warranty, or imply that the services or methods of analysis employed by the Firm can or will predict future results, successfully identify market tops or bottoms, or insulate clients from losses due to market corrections or declines. Investments are subject to market risks and potential loss of principal invested, and all investment strategies likewise have the potential for profit or loss. Past performance is no guarantee of future results.

Please note: While we strive to provide accurate and helpful information, we are not Certified Public Accountants (CPAs). The information in this article is intended for informational and educational purposes only and should not be interpreted as tax advice. It is crucial to consult with a CPA or tax professional to discuss you

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