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11 Retirement Changes

Greg Spears

JUST IN TIME FOR Christmas, a sweeping new retirement law has passed both houses of Congress, and should be signed into law this weekend. Dubbed the SECURE Act 2.0, it makes dozens of significant changes to the employer-based savings systems that millions of workers depend on for retirement.

Under the new law, some workers will be able to save far larger catch-up contributions during the home stretch of their working years. Meanwhile, retirees can delay taking required minimum distributions until age 73 starting in 2023. Younger workers with college loans may get an employer match for paying those debts. And people facing a financial emergency will find it easier to take money from retirement savings.

Many of the provisions won’t take effect for a year or two—and sometimes even longer. With that caveat, here are 11 changes that could affect you sooner or later.

1. Delayed RMDs. Here’s one provision that has an immediate effect. The new law delays the first required minimum distribution (RMD) from tax-advantaged retirement savings accounts from age 72 to 73 starting next year. In subsequent years, the RMD age will be raised even further, reaching 75 in 2033.

But postponing withdrawals might be a Pyrrhic victory—one that comes at great cost. Income tax rates are low now and scheduled to rise in 2026. Some retirees might owe less by taking smaller, more frequent withdrawals rather than bigger slices later at steeper tax rates.

2. Higher catch-ups. Starting in 2025, the maximum catch-up contribution limit is raised from $6,500 in 2022 to at least $10,000 a year—but only for workers ages 60, 61, 62 and 63. The law stipulates that this “super catch-up” will be a moving target that’s at least 50% more than the regular catch-up contribution amount. In the meantime, the regular catch-up is getting a $1,000 inflation increase to $7,500 in 2023, so the super catch-up would then pencil out at $11,250.

If workers made maximum contributions plus super catch-ups, they could pack $133,000 into their retirement plan at work in just four years. But wait, there’s more. For the first time, IRA catch-ups will be indexed to inflation starting in 2024. That catch-up has been stuck at $1,000 a year since 2015.

3. Roth catch-ups. In a big switch, catch-up contributions to employer retirement plans—but apparently not to IRAs—would have to be made with Roth after-tax dollars, except for workers who make less than $145,000. This is the biggest tax increase in the new law, and it helps pay for some of the other tax breaks it bestows.

Every retirement plan has a cadre of super-savers who try to contribute the maximum each year. These new catch-up provisions will make it more expensive to join this club. To hit the max, workers ages 60 through 63 would need to contribute well over $30,000 a year—without the benefit of a tax deduction on the catch-up portion.

4. No RMDs on Roth savings. Starting in 2024, Roth money in a 401(k) would not be subject to RMDs, as it is today. Roth IRAs were already exempt from RMDs. That’s led to a big exodus of Roth money from employer plans to IRAs. Rollovers can invite mischief in the wrong financial advisor’s hands, so this is a win for older investors—and tax simplification.

5. Matching contribution for student loan payments. Starting in 2024, employers can, if they choose, make matching retirement contributions on the dollars their employees spend repaying college loans. Result? Some workers might be tempted to skip retirement savings, knowing their employer is throwing 3% or 4% of their pay into a 401(k) account in their name. By itself, of course, that isn’t enough for a comfortable retirement. Still, many workers are strapped today, paying student debt, higher rents and everything else, so maybe half a loaf is better than none.

6. Automatic enrollment grows. Starting in 2025, newly established 401(k) plans would be required to automatically enroll eligible workers, except for new or very small companies—those with 10 or fewer employees. Enrolled workers will still be free to drop out at any time, yet few do. Research shows that automatic enrollment tends to lift plan participation rates above 90%.

The new law doesn’t require employers to offer a 401(k) plan, however. Labor economist Teresa Ghilarducci of The New School calls this the “huge problem untouched” by the legislation. Only about 35% of working-age Americans report having a 401(k), 403(b) or similar account, says the Census Bureau.

7. Don’t settle for 3%. These automatic enrollment plans can start workers’ savings rates at just 3% of pay, with annual increases of just one percentage point. That’s too low and slow, according to experts. Nobel laureate Richard Thaler, who pioneered the automatic 401(k), recommends saving at least 10% for retirement—and says 15% would be better. These figures include any employer contributions.

To save more, workers might time their savings increases to coincide with their annual raises at work. That way, they can ramp up their savings without seeing a cut in take-home pay.

8. Emergency fund. The 401(k) plan has become a de facto emergency fund for many, with the number of workers taking hardship withdrawals already at record levels. The new law reflects this reality by allowing employers to designate up to $2,500 of employee savings as an emergency fund for each worker.

Currently, workers living on the edge can max out on plan loans, which are usually limited to one or two at a time. A revolving emergency fund, like the one allowed by the new legislation, would make it easier for workers to tap into their savings when the rent is due. Plan administrators see this happen all the time, and want to help their workers.

9. Emergency withdrawals. Victims of domestic violence could take up to $10,000 from their employer plan, no questions asked. A similar provision would allow workers to take $1,000 from their plan once a year for an emergency without owing the 10% early withdrawal penalty.

Sound tempting? It still might be better for workers to borrow the money from their plan, rather than opting for the $1,000 penalty-free withdrawal. A plan loan gets repaid with interest through automatic payroll deductions. Workers avoid owing income taxes on the withdrawal, plus their retirement savings are left intact.

10. Saver’s tax credit. Uncle Sam would match 50% of retirement savings, up to $2,000 annually, made by lower- and middle-income workers. In a twist, this payment of up to $1,000 would be directly deposited into the saver’s retirement account, and not issued as a check.

The current saver’s tax credit is nonrefundable, meaning you have to owe taxes to get the money. Not many lower-wage workers do. Now that the credit is refundable—in the form of a matching retirement contribution—lots more workers should benefit.

11. Lost and found department. People move, change jobs and—believe it or not—lose track of their retirement savings all the time. The new law requires the Department of Labor to create a “lost and found” database within two years where you could type in your name and find any retirement money you forgot about. This is similar to the lost property databases run by the states, which have made it far easier for people to find lost bank accounts and other assets.

Greg Spears is HumbleDollar’s deputy editor. Earlier in his career, he worked as a reporter for the Knight Ridder Washington Bureau and Kiplinger’s Personal Finance magazine. After leaving journalism, Greg spent 23 years as a senior editor at Vanguard Group on the 401(k) side, where he implored people to save more for retirement. He currently teaches behavioral economics at St. Joseph’s University in Philadelphia as an adjunct professor. The subject helps shed light on why so many Americans save less than they might. Greg is also a Certified Financial Planner certificate holder. Check out his earlier articles.

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rgscl
rgscl
1 month ago

Greg, thank you for your concise and yet informative summary. I have been led to believe that when converting (partially) one’s IRA to a lifetime annuity, the annuity payments are now (thanks to SECURE 2.0) considered to be part of the RMD calculation (as opposed to having RMD drawn twice, once for the annuity and once for the leftover money in the IRA). Any thoughts on this?

Greg Spears
Greg Spears
1 month ago
Reply to  rgscl

This is the first I’ve heard of this. There are a surprising number of features to this act, and because of its fast passage, we’ll all be learning more in the days to come.

UofODuck
UofODuck
1 month ago

All nice features – if you have the means to contribute to a retirement savings plan and your employer offers any sort retirement savings plan.

For too may Americans, they have no retirement savings, and if they do, it is even less likely that their current retirement balances will be adequate to fund their future retirement needs. Unfortunately, these latest changes will once again likely benefit only more affluent Americans.

If Congress had the courage, they would pass legislation that required every employer to offer some sort of retirement savings plan with some minimum of required employer contribution. Of course, employers and business associations would rise up in opposition to such a plan, aided by too many politicians citing this as yet another example of unbridled socialism via unfair wealth transfer.

All I can do is sigh as the old maxim “pay me now or pay me later” certainly applies to the state of our current retirement system. If we don’t invest and help more Americans save for retirement now, we will simply have to pay out much larger amounts of taxpayer dollars somewhere down the road when they retire.

tshort
tshort
1 month ago

While directionally I guess this is all good news. However it still feels like a bandaid on the larger problem these defined contribution plans perpetuate: lack of guaranteed income for retirees.

For the vast majority of retirees who have diligently saved over their careers, the spectre of self-annuitizing one’s savings looms large as retirement approaches. The risks are many, starting with sequence of returns risk, longevity risk, and end of life care.

Even with a relatively large nest egg to start out with, self-annuitization presents an overwhelmingly complex tast that almost no one is equipped to handle.

I say abolish these defined contribution plans, which were never intended to fulfill the role they are now playing, and replace them with a federally supported, portable defined benefit plan.

There is an easy solution: allow employees to contribute to their Social Security accounts, employer match, catch up contributions, and all.

R Quinn
R Quinn
1 month ago
Reply to  tshort

Perhaps in theory, but remember there is no such thing as a Social Security account and there is no relationship between SS taxes paid and the benefit received. There is a Social Security law and taxes, never the twain shall meet.

Even if your idea were to happen, the benefit would still be based on employee/employer contributions. No different than annuitizing all or part of a 401k.

Remember not even half of all Americans ever had a pension.

tshort
tshort
1 month ago
Reply to  R Quinn

A lot different than annuitizing a 401k: it would be way less expensive to the individual; and it would be indexed for inflation – two features of existing personal annuity options that are mutually incompatible and therefore non-existent.

If I could buy more social security right now I’d do it in a heartbeat. I have yet to find an annuity option that I’d touch with a barge pole.

Closet thing would be a tontine, which so far doesn’t exist in the US. Canada has some options along those lines that just came out. Will be interesting to see how they work out.

R Quinn
R Quinn
1 month ago

Thanks for the timely summary, Greg

Congress has done it again. Making plans more complicated to understand and administer and in the process discouraging adoption of new plans.

In addition, some of these changes encourage not using a retirement plan for its primary purpose- retirement – not emergency funds or loans.

Getting people to save and invest over many years is hard. The data indicate all the problems so who is changing RMD rules going to benefit?

Higher income retirees with multiple sources of retirement income, not the average person who needs every penny they can get.

David Golden
David Golden
1 month ago
Reply to  R Quinn

It often seems our political calculus is give a ton to the most fortunate (my tribe) to get some crumbs for those who really need it. More attractive RMDs appear to be the balm necessary to expand savers credit for low income earners.

Rick Connor
Rick Connor
1 month ago

Greg, thanks for the great summary.

Larry Sayler
Larry Sayler
1 month ago

Most of these changes are positive. But some of them sure do complicate matters. I am a big believer in “simple is good.”

I do appreciate your succinct and quick summary of this law.

Last edited 1 month ago by Larry Sayler
David J. Kupstas
David J. Kupstas
1 month ago
Reply to  Larry Sayler

When it comes to simple and retirement plans, that ship left the port long ago.

Newsboy
Newsboy
1 month ago

Another change of significance for many small business owners (and their employees): SIMPLE IRA plans will see comparable increases to allowable “catch-up” amounts, along with the addition of a turbo-charged “super catch-up” between age 60-63. Lastly, the super catch-up option will be finally indexed for inflation, beginning in 2025.

A helpful summary of all SECURE 2.0 “catch-up” changes can be found on Kiplinger’s website.

Guest
Guest
1 month ago

The provision allowing unused 529 assets to be transferred into a Roth will be valuable for many.

Randy Dobkin
Randy Dobkin
1 month ago
Reply to  Guest

The restrictions on this are significant: 15-year clock on the 529 account before transfers can start, transfer limited to IRA contribution limit for the year, reduced by contributions, $35k lifetime max, to name a few.

Guest
Guest
1 month ago
Reply to  Randy Dobkin

Thank you. I believe there are many who will benefit from this new law as there are often restrictions in laws that are still helpful.

Andrew Forsythe
Andrew Forsythe
1 month ago

Greg, props to you for the instant analysis of a bill whose ink isn’t even dry.

There are some good things in it for younger and catch-up savers. As an almost 71 yoa retiree, I appreciate the age 73 RMD start date—one more year for a Roth conversion.

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