SECURE ACT 2.0: What You Need to Know if You Are Planning to Retire in the Next Five to Ten Years
For Your Benefit - April 2023
Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 on December 29, 2022, which enhances the original SECURE Act 1.0 that was enacted in 2019. Both focus on improving retirement savings for all Americans, but 2.0 has specific provisions that will impact more participants in meaningful ways.
There is a lot to unpack with SECURE Act 2.0, with required and optional provisions that your employer and retirement plan recordkeeper will be implementing in the next two years. The most important will be updating 401(k) plan participants on what will change and when those changes will be effective. A few relevant required provisions are highlighted below:
- Required Minimum Distributions. SECURE Act 1.0 extended the age requirement to begin taking 401(k) distributions to age 72; 2.0 increases this minimum age from 72 to 75 as a phase-in approach through 2033. This is particularly important for participants retiring within the next 10 years. If you have other sources of retirement income, you’ll want to confer with a tax advisor or financial consultant to determine the order in which you should take distributions to minimize tax implications. This will be effective for required distributions to be made after December 31, 2023.
- Higher Catch-Up Provision Limits for Participants Ages 60-63. If you are between the ages of 60 and 63, you can contribute the greater of $10,000 or 150% of the regular limit. These amounts will be indexed after December 31, 2025. This will become effective on January 1, 2025.
- Roth Treatment of Catch-up Contributions for Highly Compensated Employees. If your plan allows qualified catch-up contributions and your compensation is $145,000 or more (indexed in future years for inflation), any qualified plan catch-up contributions must be Roth contributions. This means that those contributions are taxed at the time of your deferral, which most likely will be at a higher rate than when you would be taking distributions. This will become effective on January 1, 2024.
- Improving Coverage for Part-Time Workers. Part-time employees who work 500 or more hours for two consecutive years will be eligible to participate in 401(k) plans. This will become effective on January 1, 2025.
For those employers participating in the State Bankers Association Master Trust, the VBA Benefits Corp. and its retirement plan partners are already working on the implementation of 2.0 provisions and the roll-out and communications to plan sponsors and plan participants. Provision effective dates phase in from December 2019 through December 2025, with all plan amendments in place by end of 2025. Stay tuned for further updates and please reach out to the VBA Benefits Corp. team with any questions.