The latest government omnibus spending bill includes big changes to 401(k) and other retirement plans. These provisions will have a huge impact on retirees but contain benefits for all income levels and ages.
The provisions, part of a bill called the SECURE Act 2.0, basically build on changes approved by Congress in 2019, which raised the age at which retirees must begin mandatory withdrawals from their retirement accounts. Most of the changes affect 401(k), 403(b) and SIMPLE IRA employer-sponsored plans.
Here are six key changes from the new legislation:
— The age for mandatory withdrawals will eventually increase to 75.
— Employees will be automatically enrolled in new 401(k) plans.
— Employers can offer emergency savings accounts linked to workers’ 401(k) plans.
— Student loan payments may count as retirement contributions.
— Low- and middle-income workers’ retirement plans can receive a government match.
— Catch-up provisions will increase.
[READ: 10 Important Ages for Retirement Planning.]
The Age for Mandatory Withdrawals Will Eventually Increase to 75
Required minimum distributions (RMD) are the annual withdrawals from retirement accounts mandated by the IRS once the account holder reaches a certain age. The 2019 SECURE Act increased the age to 72. SECURE 2.0 will increase it to 73 in 2023 and 75 in 2033.
Driving the move to later mandated withdrawals is the fact that people are living longer. Life expectancy from birth in the U.S. was about 76 years in 2021, according to the Centers for Disease Control and Prevention, up from roughly 68 in 1950. Also, people are working longer and retiring later.
“That’s absolutely huge, especially for seniors, as people are working longer,” Robert Gilliland, managing director with Concenture Wealth Management in Houston, Texas, says. He says his clients in their early- to mid-70s who still work will be able to better control their taxes.
The IRS counts the RMD withdrawals as ordinary income, which means they increase tax liability. Some working seniors don’t need the additional income, and later withdrawals could help their retirement money last longer.
Gilliland said the new law also increases the window for a Roth IRA conversion. Because savers will have more time before the required RMD, they have more time to make the decision. Converting a traditional IRA to a Roth means paying the taxes now so future withdrawals are tax-free.
[READ: What Is a Roth IRA?]
But Craig Ferrantino, founder and president of Craig James Financial in Melville, New York, says a drawback is that seniors may have to withdraw bigger amounts later during their retirements, which would boost their incomes and potentially mean higher income-based surcharges on their Medicare Part B premiums.
Employees Will Be Automatically Enrolled in New 401(k) Plans
Employers starting new 401(k) plans will be required to automatically enroll workers — beginning with a contribution rate of 3% of salary — and escalate it automatically by 1 percentage point each year until it reaches 10%.
According to T. Rowe Price, automatic enrollment nearly doubles plan participation and brings in participants who might not have otherwise started saving. Ferrantino, however, notes it could be a burden for small businesses.
Employers Can Offer Emergency Savings Accounts Linked to Workers’ 401(k) Plans
Various surveys show that 60% of Americans, regardless of income, could not afford a $1,000 emergency today.
Employers will be able to enroll employees in emergency savings plans linked to their 401(k)s. Employees will be able to set aside as much as 3% of their salaries (up to $2,500) in these Roth-like accounts. They can make withdrawals without incurring the 10% penalty for early withdrawals from retirement accounts and won’t have to pay taxes on those funds.
Student Loan Payments May Count as Retirement Contributions
Many younger workers say they don’t contribute to a 401(k) because they have to pay off student debt. Beginning in 2024, student loan payments will be considered contributions to 401(k), 403(b) and SIMPLE IRA plans, making them eligible for an employer match. The median employer match is 4% of the employee’s salary, but most companies offer matches only if the employee contributes to the 401(k) plan.
“It allows the employer to do the matching contribution to the 401(k) for that employee who’s paying down on their student debt,” Gilliland says. “So, as an example, let’s say that I’m paying into my student debt and it’s keeping me from putting money into my 401(k). I now will have the ability to pay on my student debt, but my employer can match that in the terms of 401(k) savings, which is huge.”
[Create a Student Loan Repayment Plan: 9 Tips]
To encourage low- and middle-income workers to save, the federal government could put up to $1,000 a year into eligible workers’ retirement accounts, starting in 2027. Today that tax credit is available to certain workers only if they have tax liability.
Catch-Up Provisions Will Increase
Catch-up provisions allow people ages 50 and over to contribute to their retirement accounts in excess of the normal annual limits of $20,500 for a 401(k) or 403(b). Currently, people in that age group can contribute an additional $6,500 each year, which increases to $7,500 in 2023.
“That can go up to $10,000 (in 2025) and they have the ability to put that into a Roth if they want to,” Gilliland says. “The other thing that this provision does is allow employees to have their employer contributions go into the Roth component of their 401(k). [For] someone who’s a saver and in a higher income bracket, that potentially could be really big to get them a significant amount of tax-free income in retirement.”
“Catch-up investments I think will be a big help to people that have the money and that can afford to add more to their retirement,” Ferrantino says.
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