The $1.7 trillion spending bill President Biden signed into law last week has several pieces of welcome news for retirement savers. Included in the legislation is a set of provisions called the Secure Act 2.0, which are meant to help Americans boost their nest eggs. Here are some highlights that could help you save more for retirement.
1. Automatic 401(k) enrollment may be required
Beginning in 2025, most companies that establish 401(k) and 403(b) plans will be required to automatically enroll workers. This rule won't apply to existing plans.
Automatic-enrollment amounts will range from 3% to 10% of a worker's salary, increasing by 1 percentage point until the employee contribution reaches 10% to 15%. Workers will be allowed to opt out.
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2. Your employer can help you save for emergencies
When households don't have emergency savings, they're far more likely to tap their retirement accounts when faced with an unexpected expense. Research shows that households with a $5,000 emergency fund are about four times less likely to withdraw money from retirement funds for short-term needs, compared to economically similar households without emergency savings.
The Secure Act 2.0 allows employers to automatically enroll employees in emergency savings accounts, with the accounts capped at $2,500 (or less if the employer chooses). As with automatic 401(k) enrollment, employees can opt out. The new law also allows workers to take a $1,000 one-time withdrawal from retirement accounts for certain emergency expenses without incurring a 10% early withdrawal penalty.
3. Getting the saver's credit will be easier
The saver's credit is a tax credit of up to $1,000 for individuals or $2,000 for joint filers that goes to low- to mid-income Americans who save in a retirement account. The new law will change the saver's credit from a tax credit paid in cash upon filing taxes to a direct contribution that's made directly to a retirement account. The provision takes effect in 2027.
4. You'll be able to roll over unused 529 plan money
One of the biggest drawbacks to using a 529 plan to save for college is that you typically pay a penalty on withdrawals that aren't related to education. That's a big concern if you wind up with more money than you need in the account for your child's college or your child decides not to attend.
Starting in 2024, 529 plan beneficiaries will be allowed to roll over up to $35,000 of 529 plan money into a Roth IRA over their lifetimes, once the account has been open for 15 years.
5. RMD age will rise to 73, then 75
The Secure Act 2.0 gives savers more time to let their money grow before required minimum distributions (RMDs) from retirement accounts begin. The law pushes back the RMD age from 72 to 73 for anyone who hadn't turned 72 (the previous RMD age) by the end of 2022. By 2033, the RMD age will be pushed back to 75.
Two other big changes to RMDs: The penalty for not taking an RMD will drop from 50% of the required distribution to 25%. And in 2024, Roth-designated accounts will no longer have RMDs.
6. Catch-up contributions will increase
If you're 50 or older, you're allowed to make additional catch-up contributions to your retirement accounts. In 2023, catch-up contributions are limited to $7,500 for most workplace plans and $1,000 for Roth and traditional IRAs.
Beginning in 2025, workers ages 60 to 63 will be allowed catch-up contributions of up to $10,000 to employer-sponsored accounts, with the amount indexed for inflation. Catch-up contributions to IRAs -- which have remained at $1,000 since 2006 -- will also be indexed for inflation, starting in 2024.
7. Your employer can make Roth contributions
Previously, if you had a Roth 401(k) or another Roth-designated workplace retirement account, any employer match was made on a pre-tax basis, meaning workers would owe taxes on their withdrawals in retirement. But your employer can now make matching contributions to a Roth account.
That will translate to more tax-free money in retirement for workers. Still, don't be surprised if your employer doesn't offer this option just yet, as plans need time to make necessary adjustments.
8. Student loan payments will qualify for 401(k) match
Starting in 2024, employers can contribute your retirement match to your workplace account if you make qualifying student loan payments. For example, if your company matches 50% of your 401(k) contributions and you pay $500 in student loans, your employer could still contribute $250 to your 401(k). That should be a welcome relief for anyone who can't afford to take advantage of their employer's retirement match because they're bogged down by student loans.
