Retirement Savings Changes in the New Law, Explained

The $1.7 trillion federal government spending package recently passed by Congress and signed into law by President Biden includes a collection of provisions that will change and expand the existing retirement savings system, including 401(k)s and individual retirement accounts (IRAs). The changes were added to the annual federal spending law on a bipartisan basis.

Known as the Secure 2.0 Act of 2022 – because it builds upon the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 – the provisions attempt to improve retirement security for Americans. Lawmakers hope the changes will increase the retirement savings of low and middle-income households, provide employers with incentives to offer retirement plans, and make it easier for people to save for retirement.

The following is a breakdown of some of the changes included in Secure 2.0. Many of the changes won’t take effect immediately but rather take effect in the coming years.

Automatic 401(k) Enrollment

Secure 2.0 will require employers to automatically enroll employees in 401(k) and 403(b) plans beginning in 2025. The initial automatic contribution amount will be at least 3%, but no more than 10%, of an employee’s paycheck into a 401(k) or 403(b). Contributions would increase by one percentage point annually until they reach at least 10%, but not more than 15%. However, employees can still opt out of a plan.

The changes won’t impact existing employer-sponsored retirement plans. Moreover, small businesses with 10 or fewer employees, new businesses operating for less than three years, and church and governmental plans will also be exempt.

Matching Contributions for Student Loan Payments

Starting in 2024, student loan payments will count as retirement contributions in 401(k), 403(b), and SIMPLE IRAs, allowing individuals paying off their student loans to qualify for a matching contribution in an employer-sponsored retirement plan.

Many people with student loan debt choose to pay off their loans rather than save for retirement, even if their employer offers a 401(k) or similar plan with matching contributions. Lawmakers hope this provision will help people with student loan debt benefit from receiving the matching contributions, so they build up retirement savings while still paying off their loans.

Recommended: How an Employer 401(k) Match Works

Increased Access to Retirement Accounts for Part-Time Workers

The SECURE Act of 2019 required employers to allow part-time employees who work between 500 and 999 hours for three consecutive years to participate in 401(k) plans. Secure 2.0 reduces that to two years instead of three.

This increased access to retirement accounts for part-time employees will begin in 2025.

Improving Access to Emergency Savings

Employees may be allowed to withdraw up to $1,000 from their 401(k)s and IRAs for certain emergency expenses without the usual 10% tax penalty for early withdrawal if they are under age 59½. Employees who withdraw the savings for emergency expenses can add money back into their accounts within three years. However, if they don’t add money back into their accounts, they cannot make any more emergency withdrawals for three years. This rule will take effect in 2024.

Additionally, Secure 2.0 allows employers to automatically enroll their employees into emergency savings accounts linked to their retirement accounts. The emergency savings accounts would be funded through automatic payroll deductions, with a cap of $2,500.

Rolling 529 Savings to Roth IRA

Families with leftover savings in a 529 college savings plan – money intended for a child’s college costs – may be able to roll it to a Roth IRA tax and penalty-free, under certain conditions, starting in 2024. Currently, families must pay taxes and fees if they withdraw money from a 529 and don’t use the funds for higher education expenses.

There is a $35,000 lifetime limit on these transfers per account beneficiary. The rollovers are also subject to Roth IRA annual contribution limits, and the 529 accounts must have been open for more than 15 years.

Changes to Catch-Up Contributions

Individuals age 50 years or older can make catch-up contributions to a 401(k) to help increase savings as they near retirement. In 2023, the catch-up contribution limit is $7,500 over the regular contribution limit of $22,500. Under the Secure 2.0 provisions, the catch-up contribution limit increases to $10,000, or 50% more than the regular catch-up amount, for individuals between the ages of 60 and 63 starting in 2025. Catch-up amounts also would be indexed for inflation.

The catch-up contribution limit for IRAs, which is currently $1,000 more than regular annual contribution limits, will be indexed to inflation beginning in 2024.

Increased Age of Required Minimum Distributions (RMDs)

The new provisions will increase the age individuals must make withdrawals from 401(k), IRAs, and other retirement plans from age 72 to age 73 in 2023, and then to age 75 in 2033. Before the SECURE Act of 2019, the required minimum distribution (RMD) age was 70½. Also, the penalty for failing to take RMDs would be reduced to 25% from the current 50%.

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