What impact could Secure Act 2.0 have in 2024?

Key provisions taking effect in the new year

Secure Act 2.0 was signed into law late last year, and while some of the provisions took effect in 2023, others will become available in 2024. As you have your year-end conversations with your clients, you may want to talk about some of the important pieces of this landmark bill taking effect in 2024. Here’s a breakdown of some of the most notable.

In case of emergency

One of the most impactful pieces of Secure Act 2.0 is the change it makes to allow for emergency personal expense withdrawals. Starting in 2024, account holders can make withdrawals of up to $1,000 from their 401(k) plans or IRAs each year for “unforeseeable or immediate financial needs relating to personal or family emergency expenses” without having to pay the typical 10% IRS penalty for an early withdrawal for those under 59 1/2. The taxpayer has the option to repay the distribution within three years.¹ No further emergency withdrawals are allowed during the three-year period unless a repayment occurs.

Secure Act 2.0 also allows for penalty-free withdrawals for victims of domestic abuse (lesser of $10,000.00 or 50% of account balance) and individuals with a terminal illness.

Student loan debt

Student loan debt continues to be one of the most significant strains on the finances of savers in the U.S. As of the second quarter of 2023, the total figure was about $1.75 trillion.² Secure Act 2.0 has the potential to provide some relief. Specifically, it has a provision that allows employers to make matching contributions to their employees’ retirement plans — even if they’re not contributing themselves. Essentially, it treats the employees’ student loan repayments as elective deferrals or after-tax contributions.

According to the IRI’s Director of Compliance and Implementation Rebecca Plowman, while the final details must be ironed out by the Department of Labor, here’s how it may work:

“The initial understanding is that whatever [the individual] is paying in their student loan payment would be the amount the employer can match (subject to normal annual contribution limits applicable to the plan).”

529 account rollovers

Somewhat related to student loan payments, Secure Act 2.0 also makes changes to what 529 account holders can do with their funds. In years past, if parents established a 529 to help pay for their child’s college education, if there were funds left over, or if they were never used for college expenses at all, they would have been subject to a 10% tax penalty if they were used for non-qualified expenses.

“I think that’s what this was really intended to do, to encourage people to focus more on retirement savings..."

Secure Act 2.0 has changed that. Now, starting in 2024, a person can rollover unused funds from a 529 into a Roth IRA that’s in the 529 beneficiary’s name. There are limitations: the 529 plan must have been held for at least 15 years; the amount directly rolled over cannot exceed the Roth IRA annual contribution limit; the lifetime limit is $35,000.00.

“They can get a head start with a Roth account right away,” Plowman says. “The biggest problem with a 529 plan is that people don’t typically fund them right away because there are so many limitations on getting the money out once it’s in there if you don’t use it.

Catch-up contributions changes on hold

Originally, there were several changes to catch-up contributions under Secure Act 2.0 that were going to take effect in 2024, depending on your clients’ wages for the year. Specifically, those who earn $145,000 or more a year must treat any contribution as a Roth contribution, meaning it will not receive any pre-tax treatment. However, implementation of this provision has been delayed until 2026. Additionally, the new limits have been released for 2024 and the catch-up limit for qualified plans remained the same at $7,500 and for IRAs, $1,000.

Starter 401(k) plans

One of the most significant pieces of Secure Act 2.0 was the creation of so-called “starter” 401(k) plans. This is a new option available to plan-sponsors that do not currently maintain a retirement plan. Beginning in 2024, these employers can automatically enroll employees in a new employer-sponsored retirement plan. The default contribution rate must be applied uniformly and can be no less than 3% and no more than 15% of compensation. The employees may elect to contribute at a different rate up to the annual elective contribution limit of $6,000.00 (indexed annually for inflation), plus the IRA catch-up contribution limit, if applicable. No employer contributions are permitted.

Employees have the option to opt-out of the program, but many analysts suggest it could have a significant impact on the retirement futures for many workers. The American Society of Pension Professionals and Actuaries estimates that this could open up access to workplace-based retirement systems to 19 million workers.

Emily Micale, Director, Federal Regulatory Affairs at IRI, says it’s crucial these avenues become available to more people.

“I think that’s what this was really intended to do, to encourage people to focus more on retirement savings, especially in light of other drains on all of our take home pay whether it’s rent, mortgage, student loans, childcare,” she says. “It’s really just getting people to start saving and giving them a vehicle to do that”.

The final say

Secure Act 2.0 is a sprawling piece of legislation, and there are changes that are going to take effect in 2024, 2025 and beyond. Be sure to check in with your clients about their awareness of this law and how it may impact them not just this year, but in the years going forward.

And to hear more about Secure Act 2.0, you can check out our podcast episode, where the IRI’s Rebecca Plowman and Jason Berkowitz talked about the legislation soon after it was signed into law.