Secure 2.0 will bring major changes to the retirement savings system. (iStock)
The Secure 2.0 lawwhich is designed to help Americans save more for retirement, was passed by Congress and was signed into law by President Joe Biden on Thursday.
Secure 2.0 introduces major changes to the retirement savings system. Here are some of the main changes to the legislation at a glance:
- The minimum age required for distribution (RMD) will increase to 73 years.
- Catch-up contributions will increase to $10,000 for older savers invested in workplace pension plans.
- Automatic enrollment in corporate plans such as 401(k) will become a requirement.
- More part-time employees will have access to workplace pension plans.
- Employers will be allowed to match pension plans based on student loan repayments.
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Secure 2.0 to increase RMDs and catch-up contributions
Among the major changes to the retirement planning system included in the Secure 2.0 law is an update to the RMD rules.
Beginning Jan. On January 1, 2023, the new RMD age will change to 73. It will increase again in 2033 to 75 years. In 2022, the RMD age was 72.
The Secure 2.0 law, starting in 2023, will also mitigate the tax penalty that people will face if they fail to take the required RMDs. This penalty will increase to 25% of the amount of RMD not withdrawn, against 50% previously.
Additionally, Roth 401(k)s will be exempt from RMD requirements beginning in 2024.
The Secure 2.0 law will also modify catch-up contribution policies for pension plans.
For 2023, the 401(k) contribution limits are $22,500 (compared to $20,500 for 2022). Savers age 50 or older can make additional catch-up contributions of $7,500 in 2023 (compared to $6,500 for 2022).
Secure 2.0 adds a special catch-up contribution of up to $10,000 specifically for savers aged 60 to 63, starting in 2025. This amount will be indexed to inflation.
The 2023 Individual Retirement Account (IRA) catch-up contribution limit for people age 50 or older is $1,000. It has remained at this level since 2006. But Secure 2.0 will make IRA contribution limits indexed to inflation starting in 2024. This means it can increase each year based on changes in the cost of living.
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Secure 2.0 can expand access to 401(k) plans
Nearly 50% of American workers do not have access to an employer-sponsored retirement plan, according to a AARP Study.
But the Secure 2.0 law can change that.
Employers who enroll in the new 401(k) and 403(b) plans are required by law to automatically enroll eligible employees in those plans starting with a contribution rate of at least 3%, beginning in 2025. These employers will also be required to increase contributions. rate of 1% each year up to a maximum of 10%. Employees can choose to opt out of these plans.
Starting in 2025, the legislation will also make part-time employees who have worked for at least two consecutive years with at least 500 hours of annual service eligible for their employer’s 401(k) plan. The previous threshold was three years.
And those struggling to repay their student loans may have an easier time saving for retirement and moving forward. Starting in 2024, the Secure 2.0 Act will allow employers to match employee student loan payments with contributions to workplace retirement plans like 401(k)s.
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Do you have a financial question, but you don’t know who to contact? Email the Creditable Money Expert at moneyexpert@credible.com And your question might be answered by Credible in our Money Expert column.
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