Retirement savers may find it easier to sock away money beginning in 2023 with new changes approved by Congress and the White House near the end of the year.
The provisions — aimed at improving retirement readiness — are included in the year-end $1.7 trillion omnibus spending bill. While there are many facets of the new law, three main financial areas addressed include:
The changes were proposed earlier in the congressional session in legislation dubbed SECURE 2.0. Those proposals aimed to expand upon the original Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, which reformed the retirement system and gave more Americans the tools to save. (Related: Retirement rule changes: 3 things Congress is considering)
Increased retirement timeline flexibility
For the past two years, those who contribute to a tax-deferred retirement account, including a 401(k) and a traditional IRA, have had to begin taking required minimum distributions (RMDs) by age 72. Why? So that the government can recoup its share of the gains made while funds in the account grew without being taxed.
The original 2019 SECURE Act raised the age at which RMDs must begin to age 72 from age 70 ½. The new SECURE 2.0 provisions would raise that age limit again to 73 beginning on January 1, 2023, and to 75 in 2033.
Importantly, the SECURE 2.0 provisions would also reduce the penalty for failure to take RMDs to 25 percent of the amount not withdrawn, or 10 percent if the mistake is corrected in a timely manner, down from 50 percent today.
“Many Americans have saved heavily and, in some cases, exclusively in their pretax retirement accounts,” commented Sam Eppy, CPFA®, a managing partner at Levanti Wealth in Ft. Lauderdale, Florida. "Many of those account holders are doing what they can to strategically save those funds for when they need them most. Allowing Americans more time to spread out their distributions is useful for their retirement income planning.”
The new law also raises the ceiling for how much retirement savers can put into a qualified longevity annuity contract, or QLAC. These are special annuities that can be bought with money from qualified retirement accounts, removing some funds from RMD requirements, so that they can be used as a source for guaranteed income in later years. (Related: Understanding the QLAC)
Currently, only the lesser of 25 percent of the aggregate account balance or $135,000 of qualified retirement funds can be used to fund a QLAC. SECURE 2.0 eliminates the 25 percent cap and boosts the maximum amount allowed in a QLAC to $200,000.
Help more workers save
The SECURE 2.0 provisions also require most employers to automatically enroll new workers in their retirement plan at an annual contribution rate of at least 3 percent of their income, but not more than 10 percent. Workers can opt out of the contribution if they choose. The automatic enrollment provision does not pertain to businesses with 10 or fewer employees or to start-up businesses open for less than three years.
“This is powerful because, unfortunately, when given the opportunity to save for retirement, there are many who opt out with concerns that they need to take those funds home in order to cover their lifestyle,” said Eppy. “Forced and automatic savings is truly one of the most viable ways to save — and in many cases can be equivalent to the same money spent on life’s ‘extras’ like coffee, entertainment, etc.”
Part-time workers, who traditionally have been denied access to pretax retirement accounts, would be permitted to participate in a workplace retirement plan if they have at least two years of service and work a minimum of 500 hours per year. Under the old rules, part-time workers had to work at least three years to be eligible.
Catching up on savings
The new retirement provisions include a number of additional changes that may help Americans safeguard their financial future. (Calculator: How much should I save for retirement?)
For example, the IRS already allows retirement savers who are 50 or older to make additional pretax contributions to their 401(k), called “catch-up contributions,” of $6,500 per year. Starting in 2025, SECURE 2.0 raises the catch-up contribution limit to $10,000 annually for older workers aged 60 to 63. It also will index that limit to inflation.
“Many Americans are in a better financial position to save later in life as their children are grown, their incomes have climbed, and they are more actively thinking about their retirement,” said Eppy. “The current catch-up limitations are restrictive. This is a needed and valuable change for the American public.”
Those struggling with student loans may also benefit from the new retirement rules, which make it easier for employers to contribute to an employee’s 401(k) account even if they are not contributing themselves due to student loan debt.
At the same time, SECURE 2.0 gives more workers the ability to build an emergency fund through an employer-sponsored emergency savings account (ESAs). ESAs enable workers to make post-tax payroll contributions of up to $2,500 per year, although some employers may set lower limits. Unlike traditional retirement savings accounts, workers younger than age 59½ will not incur penalties for ESA withdrawals.
The new rules also enhance flexibility by permitting retirement savers to withdraw up to $1,000 from their 401(k) penalty free for emergencies. Under current rules, any distribution from a pretax retirement account before age 59½ is treated as an early withdrawal and subject to ordinary income tax, plus a 10 percent penalty.
Lastly, SECURE 2.0 allows for tax-free and penalty-free rollovers from a 529 college savings account to an after-tax Roth IRA, with a lifetime rollover limit of $35,000.
New retirement rules are giving Americans an important opportunity to get their savings back on track — or get ahead. To take advantage, however, they must still help themselves by making sound saving and spending decisions.
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