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

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.