The New Retirement Law: What’s in It for You?
Secure 2.0 is far-reaching legislation that changes rules on saving for retirement and emergencies and for taking money out of retirement plans
Congress and President Joe Biden just turned into law the biggest changes for retirement savings in the past 15 years.
"This important legislation will enhance the retirement security of tens of millions of American workers," said Brian Graff, CEO of the American Retirement Association, a national group of pension professionals.
Pam Krueger, founder of the financial advisor vetting service Wealthramp, said on a recent episode of the Friends Talk Money podcast that the legislation "opens up more opportunities to save more, removing barriers and restrictions to expand the tax-free benefits that Roth IRAs and 401(k)s can offer." (I co-host that podcast with Krueger and personal finance writer Terry Savage.)
What's in It for You?
The legislation, known as Secure 2.0 (a follow-up to the Secure Act of 2019), has significant new rules for saving for retirement, withdrawing money from retirement plans, dealing with financial emergencies and more. The most important provisions are described below.
"No one should confuse [Secure 2.0] with a solution to the nation's retirement crises."
While the new law is sweeping, some retirement analysts think it doesn't go far enough.
Teresa Ghilarducci, co-author of "Rescuing Retirement" and an economics professor at the New School for Social Research has said "no one should confuse [Secure 2.0] with a solution to the nation's retirement crises."
She added that it "does little to spread retirement plans to the estimated 57 million to 63 million workers without one or make marked improvements for workers who have an inadequate plan."
New Rules for Retirement Saving
The new law, however, does offer a number of new retirement-savings incentives, including one specifically for people aged 60 to 63. That provision changes what is known as the "catch-up" rule for putting money into employers' 401(k) retirement savings plans.
Under current law, if you're 50 or older and are allowed to contribute to a 401(k) at work, in 2022 you can put in up to $6,500 more than younger people, for a maximum of $27,000. The new law says that starting in 2025, if you're 60 to 63, you'll be allowed to contribute up to $10,000 more than the standard 401(k) limit, and that amount will be indexed to inflation each year.
The new law also raises catch-up contributions for IRAs. Currently, the maximum catch-up amount for people 50+ is $1,000. Starting in 2024, the IRA catch-up amount will be indexed to inflation, too.
Help for Part-time Workers
Another change will be helpful to some part-time workers.
Under current law, if you have a part-time job at an employer with a 401(k) plan, you can contribute to it only if you work there for at least 500 hours a year for three years or if you work there for over 1,000 hours for one year. Secure 2.0 will reduce the threshold to 500 hours a year for two years, starting in 2025.
That change could especially help people working part-time in retirement on a project or gig basis for the same employer. The new law also may encourage people to save for retirement if they're offered 401(k) plans at work but haven't yet signed up for them.
Starting in 2025, its auto-enrollment provision will require companies with 401(k)s and more than 10 workers to automatically enroll employees in those plans. Workers will have 3% to 10% of their pay funneled into the 401(k)s through payroll deductions and those contributions will go up by one percentage point a year. Workers who don't want to enroll will be able to opt out.
Tax Credit for Savers
Secure 2.0 also will turn the saver's tax credit for low- and middle-income Americans into something called the "saver's match" starting in 2027.
Currently, if you earn less than $34,000 and you're single, you can get a saver's tax credit of up to $1,000 (it's a $2,000 credit for married couples filing jointly with income below $68,000). With the saver's match, the U.S. government will give workers with incomes under $35,500 (under $71,000 for couples) up to $1,000 per person that they must put into an IRA or an employer's retirement plan.
The new law will make it easier to save for emergencies and retrieve that money when necessary. These changes could be extremely useful for many Americans, nearly one-fourth of whom has zero savings set aside for financial emergencies, according to a 2022 survey of 1,600 employed adults by the Bipartisan Policy Center, Funding Our Future and Morning Consult.
But beginning in 2024, Secure 2.0 will let employers automatically enroll workers into emergency savings accounts linked to their 401(k)s. Employees using these rainy-day accounts will be able to set aside as much as 3% of their salary with after-tax dollars — with a $2,500 maximum.
"This is absolutely huge. Employers are going to jump all over this."
Withdrawals from the accounts will be tax-free; there won't be the standard 10% early withdrawal penalty for taking money out of a retirement plan before age 59½.
Employers could match these emergency savings contributions by putting extra money in their retirement accounts.
"This is absolutely huge," said Krueger. "Employers are going to jump all over this."
Under the new law, starting in 2024, employers will also be allowed to let workers make one withdrawal per year from their retirement accounts — up to $1,000 — for financial emergencies, without owing the 10% penalty for early withdrawals.
Delaying Required Distributions
One of the most significant provisions in Secure 2.0 deals with when you need to take money out of traditional retirement plans and IRAs, through what are known as Required Minimum Distributions or RMDs. (Roth IRAs don't have RMDs.)
In 2019, the Secure Act pushed back the age to start RMDs from 70½ to 72. The new law pushes back the age even further, to age 73. Starting in 2033, it'll be age 75.
But Savage says delaying the RMD age to 75 comes with a catch because the amount of your annual Required Minimum Distributions is based on your life expectancy. The less years you're expected to live, the more money the government will want to get from you each year in RMDS.
So, Savage notes, moving the start date to age 75 will mean your RMDs will be larger, starting in 2033, than they would've been if you began them at age 72 or 73.
Better Information on Plans
Finally, the new law has a few little-known provisions that will help you and your loved ones be more knowledgeable about your employers' retirement plans.
In 2024 and 2025, employers will be required to do a better job disclosing things like the fees in their 401(k) plans and the pros and cons of rolling over your 401(k) to an IRA or another retirement plan when you leave the company.
In 2025, the government will also need to create a "lost and found database" of pension plans and employer-sponsored retirement plans. This will help former employees and their families track down missing money from employers that they're due.