401(k) Changes, Roth IRA Updates and More. What SECURE 2.0's Retirement Updates Mean for You

Saving for retirement isn't easy. If you're one of the many Americans struggling to put money away for the future, the SECURE Act 2.0's new retirement rules could make it easier for you to contribute to tax-advantaged plans. 

Approximately 28% of nonretired adults have no retirement savings, according to a 2023 Federal Reserve study. And even if you have money saved, the Morningstar Center for Retirement and Policy Studies found that 45% of American households hadn't saved enough to cover all of their expenses.

That's a problem, especially if you're nearing retirement age.

Passed in 2022, the SECURE Act 2.0 is a piece of legislation that aims to improve access to retirement savings vehicles. This legislation builds on changes enacted by the original SECURE Act, or Setting Every Community Up for Retirement Enhancement Act, passed in December 2019.

Some parts of the SECURE 2.0 Act have already been rolled out, but other changes will go live next January and in years to come. Here's how these retirement changes could affect you. 

New required minimum distribution rules

When they take effect: 2023 to 2033

Required minimum distributions, or RMDs, are mandatory withdrawals you're eventually required to make from retirement accounts funded with pretax money like traditional 401(k)s and traditional IRAs. Those distributions are taxed as ordinary income. RMDs exist because the IRS wants to be sure you eventually pay taxes on the money you invested.

The SECURE Act 2.0 brings several changes to RMDs, including:

• Higher RMD age: The SECURE Act 2.0 pushed back the RMD age from 72 to 73 in 2023. But in 2033, it will increase again to 75.
• Lower penalties for not taking RMDs: The SECURE Act 2.0 reduced the penalty for not taking RMDs from a hefty 50% of the required distribution to 25% in 2023. If you take actions to correct the mistake in a timely manner, the penalty can be lowered to 10%.
• No RMDs from Roth accounts: Roth IRAs have long been exempt from RMDs, unless they were workplace Roth accounts. As of 2024, however, RMDs are no longer required for any type of Roth account.

💰 What this means for you

The change pushes back the RMD deadline. It may not affect you much if you'll tap into your retirement savings before age 73 (or 75) or if you primarily save for retirement in a post-tax Roth account. But if you want to keep your money growing for as long as possible -- for example, if you want to leave your retirement account to your heirs -- talk to a financial advisor about your options, such as a Roth conversion. It's also a good idea to talk with your tax advisor to avoid penalties.

Financial incentives for 401(k) contributions

When it took effect: 2023

The SECURE Act 2.0 allows employers to offer small financial incentives, such as gift cards, to encourage employees to save for retirement. Though the provision took effect in 2023, the IRS has since clarified that the value of these incentives can't exceed $250. Moreover, the incentives can only be offered to employees not currently enrolled in the employer's retirement plan.

💰 What this means for you

Saving for retirement is vital to your financial future. If your employer sweetens the deal with an extra perk, it could help you pocket some extra money. But don't delay saving if your company doesn't offer incentives. Also, any incentive you receive is considered taxable income, so keep this in mind when you file your 2024 tax return next year.

Relaxed Roth rules for employer accounts

When they took effect: 2023

A Roth retirement account is funded with money that you've already paid taxes on. As long as you follow certain rules, you get tax-free distributions in retirement. The SECURE Act 2.0 relaxes a few of these rules for employer-sponsored Roth accounts.

Prior to this change, only employee contributions could go into a Roth account. Employer matching contributions had to be made in a separate pretax account. But, the SECURE Act 2.0 gave workers the option to have their employer match treated as a Roth contribution.

The SECURE Act 2.0 also allows for Roth contributions to SEP IRAs and Simple IRAs, which are retirement accounts designed for small businesses and self-employed individuals. Before this change, which also took effect in 2023, you couldn't make Roth contributions to these accounts.

💰 What this means for you

The decision of whether to choose a traditional versus a Roth account for retirement boils down to whether you'd prefer to pay taxes now or later. If you're aiming to lower your tax bill for the current tax year, contribute to a traditional account. But if you want tax-free retirement income, a Roth account may make more sense. 

Relaxed rules for hardship distributions

When they took effect: 2023 to 2024

When you withdraw money from a retirement account before age 59 1/2, you're often subject to a 10% penalty. The SECURE Act 2.0 makes it easier to take penalty-free distributions from retirement accounts should you experience financial hardship. 

Some of the new rules include:

• You can take distributions of up to $1,000 for certain emergency expenses without penalty and repay the amount within three years.
• People diagnosed with a terminal illness can take penalty-free distributions.
• Domestic violence survivors can withdraw up to $10,000 (indexed for inflation) or 50% of their balance without penalty.
• You can take penalty-free withdrawals of $22,000 if you're affected by a federally declared disaster.

You can view the full list on the IRS website.

💰 What this means for you

Many of these provisions are optional for employers to implement. Before you withdraw money from your workplace retirement account, check with your HR department about whether its rules allow you to take the distribution without penalty.

529 to Roth IRA rollovers

When it took effect: 2024

If you're saving for your child's education in a 529 plan, you may worry about what will happen to any unused money in the account. The earnings portion of distributions that aren't for qualified education purposes are taxable as ordinary income and also subject to a 10% penalty.

The SECURE Act 2.0 now lets you roll over up to $35,000 from a 529 plan into a Roth IRA for the beneficiary. You'll only be able to roll over 529 balances if you've owned the account for at least 15 years.

Regular Roth IRA annual contribution limits apply. So, if you were exercising this option in 2024, you'd only be able to roll over up to $7,000, which is the 2024 limit for people younger than 50. You'd then be able to roll over amounts equal to the annual limit in subsequent years until you've hit the $35,000 maximum or depleted the account.

💰 What this means for you

If you're worried you've saved too much in a 529 plan, if your child decides not to attend college or if your child receives more financial aid than expected, 529 plan rollers can help you move that money into another tax-advantaged retirement account for the beneficiary.

Student loan matches

When it took effect: 2024

Saving for retirement can be tough when you're struggling with student loan payments, which could cause you to miss out on your employer's 401(k) match. Under the SECURE Act 2.0, if you're making a qualifying student loan payment, your employer can treat your payments as a retirement contribution that it matches in a 401(k)s, 403(b)s, government 457(b)s or Simple IRA plan. You don't even have to contribute to your workplace retirement plan for your employer to match your student loan payments as contributions.

For example, if you pay $3,000 toward your student loan for the year and your employer has a 401(k) match of 50%, they could kick in $1,500 (or 50% of $3,000) to your 401(k).

💰 What this means for you

The student loan match is optional for employers. But if you think you and your colleagues would benefit, talk to your HR department about the possibility of adding the feature to your plan.

Changes in catchup contributions

When it takes effect: 2024 to 2026

Catchup contributions are additional retirement account contributions you can make once you're 50 or older. In 2024, catchup contributions are:

• $1,000 for individual retirement accounts, or IRAs: Historically, this limit has not been increased annually for inflation.
• $7,500 for most workplace plans, including 401(k)s, 403(b)s and 457(b)s: These amounts are increased annually for inflation.

Beginning in 2024, the SECURE Act 2.0 will index IRA catchup contribution limits for inflation, making it likely that higher catchup contributions will be permitted. In 2025, new rules will allow higher catchup contributions of up to $10,000 (indexed annually for inflation) for workers ages 60 to 63 in most employer plans.

Another change to catchup contributions will affect higher-earning workers beginning in 2026. If you earned more than $145,000 in the previous calendar year (indexed annually for inflation), you'll be required to make catchup contributions in an after-tax Roth account instead of a traditional pretax account. This means you won't get a tax deduction. 

If your earnings for the prior calendar year fall below this threshold, you can make contributions to a traditional or Roth account. This change was initially scheduled to take effect in 2024, but the IRS pushed it back by two years to give employers more time to comply.

💰 What this means for you

The new rules will allow you to save even more money in a tax-advantaged account as you get closer to retirement. 

Automatic 401(k) enrollment

When it takes effect: 2025

If your employer has a 401(k) or 403(b) plan that was established after Dec. 28, 2022, they may be required to automatically enroll you starting in 2025. 

Employers can set the default contribution rate between 3% to 10% of your pretax salary, meaning they'll automatically allocate between 3% and 10% of your paycheck toward your retirement account. Unless they start with the maximum 10% rate, plans must have an automatic escalation rate of 1 percentage point per year until contributions reach 10% to 15% of pay. So if your workplace automatically enrolls you at a 3% rate, they'd need to bump that up to 4% the following year.

You'll be allowed to opt out or choose a different contribution rate. Some companies, such as those with 10 or fewer employees or those that have been in business for less than three years, will be exempt from auto-enrollment.

💰 What this means for you

If you're not already contributing to your company's retirement plan, look for an email during open enrollment and adjust your contribution amount or opt-out if you're not interested. Since the provision only applies to plans established after Dec. 28, 2022, your company may not be required to auto-enroll you in its retirement account. 

New rules for old 401(k)s

When it takes effect: By the end of 2024, though this deadline could be moved out.

If you've ever left a job, you may have left behind money in your old employer's 401(k). The trouble is keeping track of multiple retirement accounts can get complicated. Perhaps that's why there's about $1.3 trillion in forgotten retirement assets in the US.

The SECURE Act 2.0 directs the US Department of Labor to create a searchable database, allowing workers to track down their old retirement accounts by Dec. 29, 2024. 

The law also makes it easier for employers to "force" you out of their plan if you have a relatively low balance and leave your job. Under the old rules, former employers could roll over your 401(k) balance into an IRA on your behalf if your balance was less than $5,000. But as of Jan. 1, 2024, past employers can do so if your balance is below $7,000.

💰 What this means for you

You don't have to wait for the new database to go live to find old 401(k)s. You can use the Department of Labor's Tax Form 5500 database to search for your past employer. Or, if your old company still exists, you could simply contact them to ask for the name of their plan administrator.

More 401(k) access for part-time workers

When it takes effect: 2025

Before many of the original SECURE Act provisions took effect in 2021, most retirement plans required employees to work at least 1,000 hours in a 12-month period to participate in the plan. The first SECURE Act required companies to allow employees with at least 500 hours of service in the previous three years to participate in their 401(k)s and 403(b)s. 

The SECURE Act 2.0 relaxes the rules even further, reducing the required years of service from three to two. However, it only applies to plans established on or after Jan. 1, 2025.

💰 What this means for you

If you work for a company that currently offers a retirement account, the new rules probably won't apply. That's because only plans established in 2025 or later are required to comply. But in the future, it's worth keeping track of your hours as a part-timer so that you won't miss out on the chance to participate.

New Saver's Match

💰 When it takes effect: 2027

The federal government currently encourages low- and middle-income workers to save for retirement with a tax credit called the Saver's Credit. It ranges from 10% to 50% of the amount contributed. The current maximum is $1,000 for single filers or $2,000 for married couples filing jointly.

The problem is that it's a nonrefundable tax credit, which means you can only receive it to offset your tax bill. You won't get this credit back as a refund.

The Saver's Credit will be replaced with a matching contribution from the federal government called the Saver's Match. It's not quite clear how all of this will work, but it's expected to be deposited into your account if you qualify, which could make it more beneficial than the current Saver's Credit. The Saver's Match isn't scheduled to take effect until 2027.

💰 What this means for you

There's not much you can do at this point since the Saver's Match won't start until 2027. In the meantime, keep track of your retirement contributions to see if you can score a break at tax time.