Congress just made big changes to the retirement system. Here’s what you need to know
Samantha-Jo Roth
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Significant reforms designed to help people save more for retirement are tucked into the $1.7 trillion government spending bill lawmakers passed through both chambers of Congress last week.
The bill, which funds the federal government through September 2023, also includes retirement reform legislation beginning on page 2,046 of the massive 4,155-page bill.
The legislation, known as SECURE 2.0, is intended to build on improvements to the retirement system that were implemented under the 2019 Secure Act. These changes included giving part-time workers better access to retirement benefits and increasing the age when required minimum distributions from certain retirement accounts must start to age 72 from 70 1/2.
“Americans deserve dignified retirements after decades of hard work, and our bill is an important step forward,” said Sen. Ron Wyden (D-OR) in a statement last week. Wyden, chairman of the Senate Finance Committee, was a key architect of the bill along with Sen. Mike Crapo (R-ID), Rep. Richard Neal (D-MA), and Rep. Kevin Brady (R-TX).
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The new revisions to the program come as almost half of older workers have no retirement savings. A study from Allianz Life earlier this year found that more than 6 in 10 nonretirees fear running out of money more than death. Here’s a look at exactly what the new revisions to the program would do.
Require auto enrollment in 401(k) plans
Employers would be required to enroll employees automatically in their 401(k) plan at a rate of at least 3% but not more than 10% of a worker’s pre-tax earnings. Currently, it is optional for employees to participate in 401(k) plans, and it will be up to them to opt out actively if they don’t wish to participate. Businesses with 10 or fewer workers and new companies in business for less than three years are among those that would be excluded from the mandate. The changes will go into effect after Dec. 31, 2024.
Allow employer contributions for student loan payments
People saddled with student debt who have trouble saving for retirement now could get a major boost. One measure would allow employers to count an employee’s student loan payment toward their retirement match, which would increase retirement contributions for those employees. Right now, companies can only match employee contributions. The change would ensure employees are building retirement savings while also paying off their student loans. The provision is set to go into effect after Dec. 31, 2023.
Emergency withdrawals
Currently, if an employee tries to withdraw money from a 401(k) before age 59 1/2, they must pay taxes on the money and also pay a 10% early withdrawal penalty. Now, there’s a new exemption “for purposes of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses,” allowing employees to make a penalty-free withdrawal of up to $1,000 a year for emergencies. There are some strings attached — the employee would still owe income tax on the withdrawal in the year it’s made, but they could get the tax refunded if they repay the withdrawal within three years. If the withdrawal is not repaid, the worker would be forced to wait until the three-year repayment period ends before being eligible to make another emergency withdrawal. The rule will go into effect after Dec. 31, 2023.
Increase the age for required minimum distributions
The legislation would change the current law regarding required minimum distributions, or RMDs, which is the amount of money retirees are required to withdraw each year. Currently, people need to start taking their RMDs at age 72. The bill would boost the age to 73 beginning in January 2023, 74 in 2030, and 75 in 2033.
Creating bigger “catch-up” contributions for older retirement savers
Under current law, an employee can put an extra $6,500 annually in a 401(k) beginning at age 50. The new rules would increase the limit for those aged 60, 61, 62, and 63 to $10,000 or 50% more than the regular catch-up amount in 2025, whichever is greater.
The provision takes effect after Dec. 31, 2024. Catch-up amounts also would be indexed for inflation. All catch-up contributions will be subject to Roth treatment, which means workers will be taxed on them in the same year, but the contribution will grow tax-free and will be withdrawn tax-free in retirement, enabling the federal government to get the tax revenue from the catch-up contribution upfront. The provision has an exception for workers who earn $145,000 or less.
529 plan changes
The bill makes major changes for those who have money left over in a 529 account, a tax-advantaged investment account that can only be used to cover educational expenses. Employees will be able to roll over up to $35,000 into a Roth IRA account without facing penalties. The policy change only applies to accounts that were opened at least 15 years ago and are subject to IRA annual contribution limits. This change goes into effect on Jan. 1, 2024.
Expanded access to the Saver’s Credit
There are new updates to the Saver’s Credit, which allows certain lower-income earners to get additional tax breaks when they save for retirement. Under the new rules, workers who earn below a specific income and contribute to a retirement plan could receive a 50% match from the government for up to $2,000 in contributions a year. The income limits are $35,500 for single filers and $71,000 for married couples. The new rules go into effect after Dec. 31, 2026.
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Making it easier for part-time workers to save
Part-time workers would no longer be required to work three consecutive years to be eligible for their company’s 401(k) plans. Instead, they would need to work between 500 and 999 hours for two consecutive years to be eligible. The new provision takes effect after Dec. 31, 2024.