A new law currently making its way through Congress is expected to bring significant changes to retirement planning for many Americans.
The changes aim to increase how many Americans save for retirement and make it easier for young and low-income savers to build nest eggs. The law includes updates and expansions of existing retirement law provisions and some creative ways to help companies offer these plans to more people. It also pushes back the threshold for required minimum distributions, which can offer more time to enact tax-savings strategies in retirement.
Here is a rundown on what is included Secure 2.0:
- Employers with newly created 401(k) or 403(b) retirement plans would be required to automatically enroll eligible workers in 401(k) retirement plans at a rate of saving 3% of their salary. That contribution would increase each year until the savings rate hit 10% of salary. Small employers would be exempt, and employees could opt out of the plan.
- Savers nearing retirement age would be able to save more. People aged 62, 63 or 64 would be able to make “catch-up” contributions of $10,000 each year to a 401(k), up from $6,500 currently. This is an increase to the IRS catch-up provision that kicks in at age 50, and it makes it more attractive to continue working for a couple of extra years before retiring. That is on top of the $20,500 a year savers of all ages can contribute to a 401(k).
- The age for required minimum distributions (RMDs) from tax-deferred savings accounts begin, would be pushed back to 73 in 2022, 74 in 2029, and 75 in 2032. Currently, RMDs begin when a retiree is 72.
- Starting in 2023, employers would be allowed to make matching contributions to the retirement accounts of employees who are paying down student loans and do not contribute enough to a 401(k) plan to receive the full employer match.
- More savers will be eligible for the Saver’s Credit, which provides extra tax savings to low-income individuals to save for retirement. The Secure Act 2.0 will make more savers eligible and increase how the credit is promoted so more Americans know it exists.
- The Act would require the Labor Department to create an online database for individuals to search for lost retirement accounts.
- Part-time workers would be eligible to participate in their employer’s retirement plans. These part-time employees would be required to work two consecutive years and complete at least 500 hours of service before saving in a workplace 401(k).
- Workers in a 401(k) with an employer match can elect for the matching funds to be applied to a Roth 401(k).
The new bill builds on the first Secure Act, passed in 2019. That law raised the RMD age from 70.5 to 72, allowed small companies to join together to offer 401(k) plans, and made it easier for employers to include annuities, which offer guaranteed income, in retirement plans. The House of Representatives passed the Secure Act 2.0 in March 2022, and the Senate will likely pass the bill.
The Act is Not Without Detractors…
The proposed law is not without its critics, some of whom say its provisions do not do enough to encourage more Americans to open and save in retirement accounts. According to a Bankrate survey, more than one-third of Americans have never held a retirement account. Criticisms include requiring only employers with new retirement plans to auto-enroll employees instead of all employers.
Timeless Retirement Planning Tips
Even with its flaws, the Secure Act will bring incremental positive changes to retirement planning. Regardless of policy changes, following some simple steps can help you ensure your retirement savings are on track. For example, always meet the requirement for an employer match, and if you are over 50, the IRS catch-up boosts your savings and saves you on taxes. And do not forget about your asset allocation – you should revisit it at least annually to make sure you are still within your risk target. As you get closer to retirement, this target will change so you want to stay on top of it.
The Bottom Line
Even when you save consistently, your retirement plan may benefit from an outside perspective. A financial advisor can help you run the numbers on how much money you will need, provide guidance on your investment strategy, and, when the time comes, help you turn your savings into a source of retirement income.