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Robert Bloink and William H. Byrnes

Retirement Planning > Retirement Investing

Secure 2.0 Act’s Changes to Retirement Planning for 2025 and Beyond

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What You Need to Know

  • The Secure 2.0 Act contains many provisions that will become effective over the coming years.
  • Many of these provisions could significantly affect taxpayers who contribute to traditional company-sponsored plans and IRAs.
  • It’s never too early for clients to begin planning for the important changes.

The Setting Every Community Up for Retirement Enhancement (Secure) 2.0 Act has received significant attention since it was enacted back in December. Much of that attention has focused on the current (and substantial) changes that the law has made to the retirement planning landscape effective immediately.

However, the law contains many provisions that will become effective over the coming years — some not until 2025 or later. Many of these provisions could significantly affect taxpayers who contribute to traditional company-sponsored plans and IRAs. Even though 2025 may seem far off, it’s really just right around the corner — and it’s never too early for clients to begin planning for the important changes that will become impactful in the coming years.

Changes Affecting Defined Contribution Plans and IRAs

Beginning in 2026 (three years after the enactment of the Secure 2.0 Act), clients will be able to tap their retirement funds without penalty to cover the cost of long-term care insurance. Taxpayers will be entitled to withdraw up to $2,500 each year to cover the costs of long-term care insurance without triggering the 10% early withdrawal penalty (these withdrawals will be subject to ordinary income taxation). The penalty-free withdrawals will only be permitted for long-term care insurance policies that provide “high-quality” coverage.

Beginning in 2027, the law also makes significant changes to the saver’s credit for lower-income taxpayers who contribute to retirement accounts. The existing saver’s credit will be replaced by a 50% matching contribution from the federal government. The match will be deposited into taxpayers’ existing 401(k)s and IRAs. That matching contribution will be limited to 50% of a $2,000 contribution (for a maximum $1,000 matching contribution) and will also be subject to phase out based on income levels.

The Treasury Department is also required to begin evaluating the existing rollover process with the goal of developing standardized forms and procedures for completing retirement plan rollover transactions. The forms and procedures will affect rollovers between company-sponsored plans and IRAs, as well as IRA-to-IRA rollovers. The sample forms are to be released no later than Jan. 1, 2025.

Looking further into the future, beginning after Dec. 29, 2029, Secure 2.0 Act changes are also expected to facilitate the development of a new type of insurance-dedicated exchange-traded fund. Under current regulations, ETFs do not satisfy requirements to be insurance dedicated. The Treasury Department has been directed to modify regulations so that “look-through” treatment is available to qualifying ETFs so that these investment vehicles can be made available under certain annuity contracts.

Auto-Enrollment Requirements

Beginning in 2025, most company-sponsored retirement plans established after 2022 will be required to automatically enroll employees. The minimum auto-enrollment contribution rate will range from 3% to 10%. Each year, the minimum contribution rate will then increase by 1% until the rate reaches 15%. Small business employers with 10 or fewer employees and new businesses will be exempt from the auto-enrollment requirement.

Within three years after the law was passed in late 2022, the Labor Department is required to review fiduciary disclosure requirements with respect to its participant-directed individual account plan regulations and report findings and recommendations to Congress. The review is generally expected to increase efficiency and improve the value of notices provided to participants.

For Employee Retirement Income Security Act-covered plans, the law also directs the department to update existing regulations on their performance benchmarks for asset allocation funds beginning in 2025. The new regulations must allow a retirement plan investment that uses a mix of asset classes to be benchmarked for performance purposes against a blend of broad-based securities indexes.

To qualify, the following requirements must be met: (1) The index blend must be reset each year, (2) the index blend must reasonably match the investment funds’ investment allocation over time, and (3) the chosen indexes must be appropriate for the investment’s asset classes and otherwise meet the rule’s conditions for index benchmarks. The change is intended to allow plan participants to better understand investment performance and make informed decisions regarding these complex investments.

Conclusion

The changes made by the Secure 2.0 Act are wide-reaching. Many of the changes are complex and will not become effective for several years and future guidance is expected. However, many of these changes are expected to be extremely significant and understanding their potential future impact can be a valuable tool for advisors and clients alike.


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