Explaining the SECURE Act and SECURE Act 2.0

When the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law by President Trump on December 20, 2019, it was widely viewed at the time as the most impactful new retirement legislation in more than a decade. Then, only three years later, on December 29, 2022, President Biden signed the bipartisan SECURE Act 2.0, which delivered dozens of additional retirement-related provisions that built on the original legislation.

Key Takeaways

• The age at which Traditional IRA owners are required to begin withdrawing – and paying taxes on – the funds in their account(s) has increased from 70 ½ prior to the passage of these laws to 73 this year, and will increase again to 75 in 2033.
• New tax incentives will be available to small employers who make military spouses eligible for retirement plan participation sooner, and compress or eliminate vesting schedules.
• The definition of a tax-free or “qualified” distribution from a 529 College Savings Plan has been expanded to include repayment of up to $10,000 in qualified student loans and expenses.
• Previously, account owners were able to withdraw from an inherited retirement account over a time period equal to your life expectancy. With the passage of the SECURE Act, they will have to take the money out – and pay any applicable taxes on it – within 10 years.

Let’s take a closer look at some of the specific provisions contained in the new laws and their potential impact on both those who are not yet close to retiring, and those who are already in or approaching retirement.

Changes for Employees, Service Members and Investors Not Yet Close to Retiring

Automatic Enrollment in Retirement Plans

In the new Blended Retirement System (BRS), new military members are automatically enrolled in the Thrift Savings Plan (TSP) at a 5 percent contribution rate. Businesses adopting new 401(k) and 403(b) plans will be required to automatically enroll eligible employees at a contribution rate of at least 3%, beginning in 2025. 

Helping Those with Student Loan Debt Save for Retirement 

Starting in 2024, employers will be able to "match" employee student loan payments with contributions to their retirement plan, making it possible for workers to begin accumulating assets for their future while paying off educational loans. 

Employer Contributions 

You may have the option to receive employer contributions to your Roth account if your plan allows it. Previously, all employer contributions were required to be treated as traditional (tax-deferred), but this change will allow employees to pay tax on company contributions now, so that future earnings can grow tax-free. The more years until your retirement, the more impactful this change is likely to be.

Helping Military Spouses Save for Retirement

Because of frequent moves and job changes, military spouses often don’t stay long enough in any one job to become fully vested or qualify for benefits like matching employer contributions. To address this, the legislation offers tax incentives to small employers who make military spouses eligible for retirement plan participation sooner and compress or eliminate vesting schedules.

Emergency Expense Distributions

Beginning in 2024, early “emergency” distributions from retirement accounts will be permitted to cover unforeseeable or immediate financial needs. An emergency distribution of up to $1,000 can be taken penalty-free once during the year. Only one distribution per year is allowed and a taxpayer has the option to repay the distribution within three years. No further emergency distributions may be made during the three-year repayment period until any amounts previously taken are repaid. The employer may rely on an employee's written certification that the employee is facing a qualifying emergency personal expense, absent actual knowledge to the contrary. Further guidance is expected on this provision.

Additionally, defined contribution retirement plans would be able to add an emergency savings account that is a designated Roth account eligible to accept participant contributions for non-highly compensated employees starting in 2024. Contributions would be limited to $2,500 annually (or lower, as set by the employer) and the first 4 withdrawals in a year would be tax and penalty free. Depending on plan rules, contributions may be eligible for an employer match. In addition to giving participants penalty-free access to funds, an emergency savings fund could encourage plan participants to save for short-term and unexpected expenses.

More restrictions on inherited IRAs
If there’s a provision in the Act that’s less than investor-friendly, it’s the curtailing of what has long been known as the “Stretch IRA.” Previously, all individuals who inherited an IRA, TSP or 401(k) account could “stretch” their distributions from the account over their lifetime. Now most non-spouse individuals who inherit a retirement account are required to liquidate it – and pay any applicable taxes – within 10 years.

529 plans can be accessed for student loan debt relief.
The definition of a tax-free or qualified distribution from a 529 college savings plan has been expanded to include repayment of up to $10,000 in qualified student loans and expenses for some apprenticeship programs. This change is retroactive to distributions made after December 31, 2018.

IRAs can be used to supplement the cost of having or adopting a child.
Penalty-free withdrawals of up to $5,000 may now be made from retirement plan and IRA accounts during the one-year period from when from when an eligible child of the account owner is born or the date when the legal adoption of an eligible adoptee of the account owner is finalized. 

Long-term part-time workers will be able to participate in their company’s 401(k) plan.

Until now, if you worked less than 1,000 hour per year, you were generally ineligible to participate in your company’s 401(k) plan. The new law requires employers maintaining a 401(k) plan to offer it to any employee who works more than 1,000 hours in one year, or 500 hours over three consecutive years. This means that long-term, part-time workers will be able to participate in their company’s 401(k) plan.

It will be easier for small-business owners to offer retirement plans to their employees.

They will now have the option of joining a multiple-employer plan. These “open plans” have the potential to deliver low-cost, high-quality retirement plans for millions of small business workers. This provision addresses the fact that roughly half of private sector workers in the U.S. don’t have access to a retirement plan through their employer today.

Changes for Retirees or Those Nearing Retirement

Required Minimum Distributions (RMDs) from retirement accounts

How does the Secure Act 2.0 Affect RMDs?

• The age to start taking RMDs increases to age 73 in 2023 and to 75 in 2033.
• The penalty for failing to take an RMD decreases to 25% of the RMD amount, from 50% currently, and 10% if corrected in a timely manner for IRAs.
• Starting in 2024, RMDs will no longer be required from Roth accounts in employer retirement plans.

These changes seem to be a nod to increasing life expectancies and the fact that more Americans are working beyond traditional retirement age. What’s the benefit? If you don’t need to take money out of your IRA, you can now wait longer before beginning to make mandatory taxable withdrawals.

IRA contributions can be made by anyone with earned income.
Individuals with earned income may now make contributions to a Traditional IRA at any age. The Act eliminates the prior age limit of 70 ½ for contributions. Once again, this change is likely influenced by the fact that, according to the Census Bureau, almost 15 percent of people in their 70s are still working on at least a part-time basis. This gives those individuals additional opportunities to save for their eventual retirement.

Catch-up Contributions

Catch-up contributions were first introduced in 2001 to allow individuals who are age 50 and older to make additional contributions to their retirement accounts. These new Secure Act provisions will only serve to enhance the opportunity for those drawing closer to retirement to stash away more money in tax-advantaged accounts.

• Beginning this year, individuals aged 50 and older are able to make additional “catch-up” contributions of up to $7,500 to employer-sponsored 401(k), 403(b) and 457(b) retirement savings plans.
• Beginning in 2024, if you earn over $145,000 in wages from your current employer in the prior year, your catch-up contributions to that employer’s plan must be made on an after-tax basis to a Roth account.
• Starting on January 1, 2025, individuals ages 60 through 63 years old will be able to make larger catch-up contributions to a workplace plan (up to $10,000 annually for most plans), and that amount will be indexed to inflation. The catch-up amount for people aged 50 and older is currently $7,500 for most plans.

Greater 529 Plan Flexibility

After 15 years, any unused 529 College Savings Plan assets, excluding contributions made within the past 5 years and the earnings on those contributions, can be rolled over to the beneficiary’s Roth IRA without taxes or penalties. Previously, the only option was to withdraw the money and pay any applicable taxes and penalties, so this is an attractive alternative that can allow a parent to repurpose remaining funds to their own retirement, or give a young person a head start. It should be noted that these rollovers are subject to annual Roth contribution limits, including regular Traditional and Roth IRA contributions, and an aggregate lifetime limit of $35,000.

How will all of these new rules affect you and your financial plan?

The Secure Act and Secure Act 2.0 have significantly expanded the opportunities for Americans to save, invest and plan for retirement at different stages of their lives. The specific impact of these changes on you and your financial plan will depend, of course, on your particular circumstances and objectives. 

If you’re already working with a financial advisor, ask them to review the SECURE Act provisions with you and let you know if there are any adjustments you should make – now or in the future. And if you’re not already working with someone, consider talking to a First Command Financial Advisor. Our Advisors are well versed in the new rules. They can answer any questions you may have and let you know if there are adjustments you should consider making.

TSP funds have very low administrative and investment expenses and, low expenses can have a positive effect on the rate of return of your investment.

First Command does not provide legal or tax advice, and this [report] does not contain any legal or tax advice. Any recommendations provided to you in this article are strictly for financial planning purposes only. Should you require legal or tax advice, you should consult with your attorney or tax advisor.

Prior to investing in a 529 College Savings Plan, you should compare the Plan with any 529 college savings plan offered by your home state or your beneficiary’s home state and consider, before investing, any state tax or other benefits that are only available for investments in the home state’s plan. Please read the Plan’s Disclosure Document which includes investment objectives, risks, fees, charges and expenses, and other information. You should read the Plan Disclosure Document carefully before investing. For this and other information on any 529 College Savings Plan, contact First Command at 1-800-443-2104 or your Financial Advisor.

Please note that the availability of tax or other benefits may be conditioned on meeting certain requirements such as residency, purpose for or timing of distributions or other factors as applicable.

As with any investment, it is possible to lose money by investing in a 529 College Savings Plan.

Information provided is for general purposes only and is not intended to be a substitute for specific individualized tax or legal advice. Where specific advice is necessary or appropriate, please consult a qualified tax or legal advisor.