Americans will soon enjoy greater access to retirement plans and be able to delay withdrawing their savings, thanks to a year-end bill that President Joe Biden is expected to sign soon.
The $1.7 trillion appropriation package passed by the US Senate on December 22 and the House of Representatives on December 23 funded the government for another year, thus averting an imminent shutdown. But it also contains many other legislative efforts.
One of them is the Secure 2.0 Act. As the name suggests, this law was created based on changes to the pension law that are part of the Setting Every Community Up for Retirement Enhancement Act of 2019, also known as the Secure Act.
Specifically, the Secure 2.0 Act will complete the following major changes.
These provisions, among other things, will help millions of workers, from new college graduates who don’t know where to start preparing for retirement to the older workers closest to the goal line. It will also help retirees hold on to more of their retirement savings for longer.
Raise the age for mandatory withdrawal
The Secure Act of 2019 raised the threshold at which people generally must begin withdrawing required minimum distributions (RMD) from their retirement accounts to the year they turn 72, up from 70½.
The Secure 2.0 Act will further increase that age to 73 years starting January 1, 2023, and finally to 75 years in 2033.
Reduce the RMD penalty
As we explained in “3 Tax Sanctions That Can Break Your Retirement Account,” current law harshly penalizes those who fail to withdraw the required minimum distributions from retirement accounts on time: The amount of the fine is equivalent to 50% of the RMD amount they don’t take time.
The Secure 2.0 Act will reduce the fine to 25% and give taxpayers the opportunity to reduce the fine to 10% by promptly correcting the error and withdrawing the full amount requested.
These provisions come into effect in 2023.
Create an IRA pursuit contribution limit index for inflation
Currently, people age 50 and over can contribute an additional $1,000 per year to an individual retirement account (IRA), known as a “catch-up contribution.” That $1,000 amount is not indexed for inflation, meaning it doesn’t increase as inflation rises.
The Secure 2.0 Act will index that amount, allowing it to track inflation, starting in the 2024 tax year — the year your return is due in April 2025.
Increase the catch-up contribution limit for older employees
This change will increase savings opportunities for employees ages 60 to 63 who have a workplace retirement plan, increasing their catch-up contribution limit to $10,000.
This provision will take effect in 2025, and the higher catch-up contribution cap will be indexed for inflation in subsequent years.
Extend automatic enrollment in 401(k) and 403(b) plans.
With a few exceptions, new employees who qualify to contribute to 401(k) and 403(b) workplace retirement plans will automatically be enrolled in them.
Their initial automatic contribution will be 3% to 10% of their salary, and the rate will increase by 1 percentage point each year until it reaches at least 10%, unless a worker changes the percentage or chooses not to contribute at all.
This provision will apply starting from the 2025 retirement plan year.
Expand retirement savings options for part-time workers
The Secure 2.0 Act also requires employers to allow certain part-time workers to participate in their employer’s 401(k) plan or in some cases a 403(b) plan, with the exception of union plans, which are exempt from this provision.
New savings opportunities will become available to part-time employees with at least one to three years on the job, depending on the situation.
Create a lost-and-found retirement
The Secure 2.0 Act required the US Department of Labor to create a national database for Americans’ retirement plans that was online and searchable. These lost-and-found retirement savings accounts, as the bill makes clear, will allow people who have lost track of their retirement or 401(k) to find contact information for program administrators.
This provision gives the Department of Labor two years to create the database.
Help the state find owners of maturing savings bonds
The Secure 2.0 Act requires the US Department of the Treasury to provide each state with certain relevant information about owners of past-due and unredeemed savings bonds with the last known address in that state.
States could in turn use that information to find the registered owner of the bonds just as they would to facilitate the recovery of other types of abandoned property.
These provisions will enter into force on the same date that the president signs the law into law.
Enable matching of retirement contributions for student loan payments
The Secure 2.0 Act will allow employers to “match” worker student loan payments by making contributions equivalent to worker retirement plans. For example, if you make a $100 student loan payment, your employer can contribute $100 to your 401(k).
According to the official summary, this provision is “intended to assist employees who may be unable to save for retirement due to being burdened with student debt, and thus miss out on appropriate contributions to retirement plans.”
This provision will apply starting from the 2024 retirement plan year.
Enable rollover from 529 plan to Roth IRA
This provision will allow for tax-free and penalty-free rollover from a 529 college savings plan to a Roth individual retirement account (IRA) under certain circumstances.
The turnover will be limited to a total of $35,000 over the lifetime of the account recipient, and will be limited to 529 accounts that have been opened over 15 years.
Official summary of the Secure 2.0 Act notes:
“Families who make sacrifices and save in 529 accounts may not be subject to taxes and penalties years later if the recipients have found alternative ways to pay for their education. They should be able to maintain their savings and start their retirement accounts on a positive note.”
These provisions come into effect in 2024.
