Your 401(k) is Changing

Congress recently passed a(nother) bill that will overhaul the U.S. retirement system. Known as SECURE 2.0, these provisions are intended to help lower income earners, folks who are struggling to save for retirement, as well as assist older Americans who may be behind in their savings. President Biden is likely to sign the bill into law soon. A few of these changes take effect immediately, while others will take a few (or even several) years.

I have summarized many of the highlights in order of proposed implementation along with my thoughts on each. Please note that not all provisions are mentioned (because there’s a lot).

RMD Age Increased Again (Proposed Start Date: January 1, 2023)

No, you are not crazy, this just happened a few years ago when the RMD (Required Minimum Distribution) age increased from 70-1/2 to 72. This is the age when you are required to start taking distributions from your Traditional IRA and employer plans. Next year, it becomes 73 and incrementally 10 years down the line, the minimum age will be 75. In addition, the 50% penalty for not taking your RMD on time gets reduced to 25%, and if corrected in a timely manner, becomes only 10%. This provision allows your savings to continue to grow and avoids paying Uncle Sam just a little bit longer.

529 Plan Rollover to Roth IRA (Proposed Start Date: January 1, 2024)

Under certain conditions, a 529 plan beneficiary may do a tax and penalty-free rollover of up to $35,000 over their lifetime from their 529 plan to their Roth IRA. The (big) caveats are that the 529 must have been open for more than 15 years and the rollover is subject to annual Roth IRA contributions limits. IRA contributions limits are fairly low relative to other plans and this is a bit unusual for an IRA rollover, which normally has no restrictions on amount. However, it gives working adults the option to put some of that leftover college money to good use without paying a penalty for an unqualified withdrawal.

More Roth Options (Proposed Start Date: January 1, 2024)

Several changes are being made to Roth accounts. Previously, RMDs must be taken from Roth 401k and similar plans, but starting in 2024, they will no longer be required. Up until now, only the Roth IRA was exempt from this rule. Employers will also be given the option to make Roth matching contributions rather than pre-tax. And finally, SEP and SIMPLE IRA plans will soon be allowed to be designated as a Roth IRA. I am a big fan of the Roth, so in my opinion, these changes were needed.

Student Loan Payment Contributions (Proposed Start Date: January 1, 2024)

Sky-high student loans payments have prevented many from saving for retirement. This provision will allow employers to treat student loan payments as deferrals and contribute a matching contribution into their retirement plan. A huge win for those millions of Americans who are burdened with student loan debt.

Help with Emergency Savings (Proposed Start Date: January 1, 2024)

Many workers have avoided saving for retirement because of worries around accessibility. Most withdrawals from retirement plans prior to age 59-1/2 also include a 10% early withdrawal penalty in addition to any taxes owed. Now, employers can link an employee’s savings account and contribute up to $2,500 per year into a Roth account. Future contributions exceeding this limit will automatically go towards retirement. The worker is limited to $1,000 per year that must be paid back within 3 years before another withdrawal can be taken. On one hand, this gives workers an incentive to save for a rainy day, but it also blurs the line between saving for retirement and saving for emergencies. Not to mention, moving money in and out of investments.

Catch-Up Contributions Overhauled (Proposed Start Date: January 1, 2025)

Savers who turn 50 are currently able to contribute an additional $6,500 ($7,500 in 2023) above the annual limit to most employer retirement plans. Starting in 2025, that amount increases to $10,000 for those aged 60-63. This should help workers who are late in their careers and trying to catch up on their retirement savings.

Auto Enrollment (Proposed Start Date: January 1, 2025)

Currently, auto enrolling employees in a 401k or similar plan is optional, but with this provision, most employers will be required to auto enroll everyone unless the employee specifically opts out. The default contribution rate must be at least 3%, but no more than 10% with a 1% auto escalation each year until the percentage reaches 10%, but no more than 15%. Ideally, employees will not opt out.

Help for Part-Timers (Proposed Start Date: January 1, 2025)

Part-time workers are currently prohibited from participating in their employer retirement plan unless they have worked for a minimum of 3 years and worked at least 500 hours during the year. This will be decreased to a 2 year service minimum. Employees who work at least 1,000 hours will be able to participate after only one year of service. This will benefit teens and college students working part-time who can now start saving much earlier and take advantage of compounding returns.

As previously mentioned, this is not an exhaustive list of everything that is included. You can find one of the many articles here: https://bipartisanpolicy.org/blog/what-made-it-in-secure-2/. While the bill is not perfect, it is one of the biggest retirement savings updates we’ve seen in a long time that should help many Americans build a secure retirement future. Please consult with a financial advisor on how these new provisions might affect your situation.