How the Federal Spending Bill Affects Your Retirement Plans
Big changes are set to roll out for retirement plans after the passage of key provisions collectively known as “Secure 2.0.”
New rules on 401(k) contributions, tax credits and other retirement-related benefits were tucked into a much larger 4,100-page, $1.7 trillion spending bill Congress and President Joe Biden approved Dec. 23.
One change — increasing the required minimum distribution age from 72 to 73 — goes into effect Jan. 1. Others won’t roll out for a few years.
Here are some of the highlights.
8 Changes That Make Managing Your Retirement Plan Easier
1. Auto-Enrollment in Workplace 401(k) Plans
Automatic enrollment in 401(k)s is shown to increase workplace participation. Employees are more likely to save for retirement if they don’t have to navigate the often confusing sign-up process.
Secure 2.0 requires employers — with some exceptions for small business owners — to automatically enroll eligible employees in 401(k) or 403(b) plans. Employees can then opt out of participation if they want.
2. Get Help Finding Your Lost 401(k) Account
Lots of people forget to roll over their 401(k) when they start a new job. Tracking down old 401(k) accounts is tricky at best and a time-consuming nightmare at worst.
Secure 2.0 gives the U.S. Department of Labor authority to create a new “lost and found” database. Workers will be able to search this database for old retirement accounts they may have forgotten about.
The database is set to roll out roughly two years from now.
3. Get Money for Retirement While Paying Down Your Student Loan Debt
Millions of Americans find themselves in a tough situation: Pay off student loan debt or save for their retirement.
Beginning in 2024, employers will be able to make retirement contributions on behalf of employees who are paying off their federal student loans.
For example, if you pay off $500 in student loan debt, your employer could put $500 in your 401(k) account — even if you didn’t make any 401(k) contributions yourself.
To be clear, your employer won’t help you pay off your student loans.
But the hope is that people saddled with student loans won’t have to choose between paying off their debt or saving for their future. With the help of their employer, they can do both at the same time.
4. Revamps the Saver’s Credit to be More Beneficial for Lower Income Workers
If you’re a low- or middle-income worker, you can claim the Saver’s Credit by adding money to a 401(k) or individual retirement account.
Depending on your adjusted gross income and tax filing status, you can claim the credit for 50%, 20% or 10% of the first $2,000 you contribute to a retirement account within a tax year.
The Saver’s Credit is worth up to $1,000 for single filers, or $2,000 for married couples filing jointly.
But there’s a big problem with the current credit: It’s nonrefundable. So if you don’t owe taxes — which many low-to-middle income workers do not — the credit doesn’t help much.
Secure 2.0 changes that by making the credit refundable.
Beginning in 2027, the credit will feature a federal matching contribution that will be deposited into your IRA or eligible retirement account.
The match will equal 50% of your retirement account contributions, up to a $1,000 match per person. Income limits and phase-out restrictions will apply.
5. Raises the Age for Required Minimum Distributions
You can’t keep your retirement savings in a tax-advantaged account forever. Uncle Sam eventually wants his cut.
Required minimum distributions — or the amount of money you are required to withdraw from your retirement account each year — currently begins at age 72.
Starting Jan. 1, 2023, that age increases to 73. In 2033, the RMD will increase to 75.
Secure 2.0 also cuts the penalty for failing to take RMDs on time in half, from a 50% penalty to 25%.
6. Bigger Catch-Up Contributions for Older Workers
People ages 50 and older can contribute more money to their 401(k) and IRAs than younger workers.
Secure 2.0 bumps those yearly retirement account contributions even higher for people ages 60 to 63.
Starting in 2025, the 401(k) catch-up retirement contributions increase to either $10,000 or 50% more than the regular catch-up amount, whichever is greater. The IRA catch-up amount had been static at $1,000 but will now rise in $100 increments with inflation.
After 2025, those catch-up contributions will be indexed for inflation.
7. Waives the 10% Tax Penalty for Early Retirement Withdrawals in Some Cases
With few exceptions, withdrawing money from retirement accounts before age 59.5 results in a 10% IRS penalty.
Secure 2.0 allows employees to withdraw up to $1,000 per year for an emergency or financial hardship penalty-free.
You won’t be able to withdraw another $1,000 for three years unless you repay the full amount of the original distribution.
You’ll still owe taxes on the withdrawal too, unless you’re withdrawing from a Roth account.
Secure 2.0 also waives the 10% penalty for people with a terminal illness and survivors of domestic abuse.
8. College Savings Accounts Can Now Rollover to Roth IRAs
A 529 plan is a tax-advantaged investment account used to help pay for educational expenses.
It can be a great way to save for a child’s college expenses. But funds withdrawn for non-educational expenses are typically subject to income tax and a 10% penalty.
Starting in 2024, account beneficiaries can roll money from a 529 plan into a Roth individual retirement account — bypassing taxes and penalties in the process.
There’s a few limitations, such as a $36,000 lifetime cap on transfers from a 529 to a Roth IRA. The 529 account must also be open for at least 15 years before funds can be rolled over.
Some people see this provision of Secure 2.0 as a way to spare 529 beneficiaries from taxes and penalties if they need to tap money for non-educational reasons. Others see the new rule as a tax break for the rich.
Rachel Christian is a Certified Educator in Personal Finance and a senior writer for Codetic.