New retirement legislation, known as the Secure Act 2.0, was recently signed into law and has big implications for retirement savers. There are provisions in the bill that affect current retirees, soon-to-be retirees, and even those who are decades away from retirement.
Here's a rundown of some of the most important changes made by the legislation that could affect the way you save for retirement, or the ways you eventually use your retirement accounts.
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1. RMDs are getting an overhaul
One of the biggest changes of the legislation is that individuals with tax-deferred retirement accounts, such as traditional IRAs and most 401(k)s, will have extra time before they start taking required minimum distributions, or RMDs.
The age for RMDs was pushed back from 70 1/2 to 72 just a couple of years ago, but starting in 2023, the age where it becomes mandatory to start taking taxable withdrawals is increasing to 73. What's more, in 2033, the RMD age will increase again to 75. Additionally, the new law eliminates RMDs for Roth accounts in employer-sponsored retirement plans (such as Roth 401(k) accounts).
Of course, if you need the money in your retirement accounts, this might not affect you too much. But if your goal is to leave your retirement savings alone for as long as possible, this can help you do it.
In addition, the penalty for failing to take a RMD is declining from 50% to a slightly less outrageous 25%. For IRAs, the penalty will be just 10% as long as the RMD is withdrawn in a timely manner. But it's important to emphasize that the penalty for noncompliance is still high enough that it is important not to forget.
2. More workers will be automatically enrolled in plans
Beginning in 2025, the Secure Act 2.0 will require employers who adopt 401(k) and 403(b) plans to automatically enroll all eligible employees, and at a minimum contribution rate of 3%. The idea is that there are far too many people who don't save for their own retirement, even when eligible for a retirement plan, and as a result, far too many are on a path for financial insecurity later in life.
3. Good news for the soon-to-be-retired
Tax-advantaged retirement accounts like 401(k), 403(b), and IRA accounts have catch-up contribution provisions designed to allow savers age 50 or older to set aside money more aggressively for their retirement.
One major problem is that while the standard IRA contribution limits have been indexed to inflation, the catch-up limits have not. As an example, since 2006, the IRA contribution limit has increased from $4,000 to $6,500. But the catch-up contribution has been stuck at $1,000 the entire time.
Thanks to the Secure Act 2.0, this is changing. Starting in 2024, the IRA catch-up contribution limit will be indexed to inflation and could increase over time based on cost-of-living increases. And starting in 2025, individuals aged 60 to 63 will get an additional catch-up allowance for workplace retirement plans of $10,000 (currently $7,500 for 50+), which will also be indexed to inflation.
4. Roth 401(k) investors could get a boost
If you contribute to a Roth account through an employer's plan, such as a Roth 401(k), there has been one major caveat to deal with. While you can put your payroll deferrals into a Roth account, any employer matching contributions had to be kept in a tax-deferred (non-Roth) account, separately. Now, employers can give their employees the ability to receive their vested matching contributions in Roth-style retirement accounts.
Several other changes
This isn't an exhaustive list of the changes made by the Secure Act 2.0. It also expands what types of charitable entities meet the requirements for qualified charitable distributions (QCDs), the ability to establish emergency savings accounts within retirement plans, and the ability for employers to consider employee student loan payments for retirement account matching contribution purposes.
The bottom line is that this is a pretty major overhaul to retirement savings in the United States, and it's important for all Americans to familiarize themselves with the changes that could affect them now or in the future.
