Congress passes new retirement rules. What these 7 changes mean for you and your 401(k)

Editor’s Note: This an update of a story that originally published on December 20, 2022.

There will soon be new retirement rules in place that will make it easier for Americans to accumulate retirement savings – and make it less costly to withdraw them – now that lawmakers have passed an omnibus spending package, which President Joe Biden is expected to sign next week.

Collectively the retirement savings provisions in that package are known as Secure 2.0.

“[Secure 2.0] will help increase savings, ensure greater access to workplace retirement plans, and provide more workers with an opportunity to receive a secure stream of income in retirement,” said Thasunda Brown Duckett, president and CEO of TIAA, one of the largest US retirement service providers.

Here’s a look at seven of the Secure 2.0 provisions, based on a breakdown from the Senate Finance Committee.

1. Require auto enrollment in 401(k) plans

Most employers starting new workplace retirement savings plans will be required to automatically enroll employees in the plan. (It is currently optional for employers to do so.) It will then be up to employees to actively opt out if they don’t wish to participate.

This Secure 2.0 provision will require employers to set a default contribution rate of at least 3% but not more than 10% for the employee plus an automatic contribution escalation of 1% per year up to a maximum contribution rate of at least 10% but not more than 15%.

The provision will go into effect after December 31, 2024.

2. Allow employer contributions for student loan payments

When you have to pay down student loan debt, it makes it harder to save for retirement. Secure 2.0 now lets employers make a matching contribution to an employee’s retirement plan based on their qualified student loan payments. That would ensure the employee is building retirement savings no matter what.

The provision is set to take effect after December 31, 2023.

3. Increase the age for required minimum distributions

It used to be that when you turned 70 1/2, you had to start withdrawing a required minimum amount from your 401(k) or IRA every year. Then, the age moved up to 72. Under the Secure 2.0 package, it will move up to 73 starting in 2023 and then to 75 a decade later.

4. Help employees build and access emergency savings

The US Capitol in Washington, DC, on December 4, 2022.

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Normally, if you tap your 401(k) before age 59 1/2, you must not only pay taxes on that money but also pay a 10% early withdrawal penalty.

For employees dissuaded from saving money in a tax-deferred retirement plan because it would be too complicated and costly to access for emergencies, Secure 2.0 may assuage that fear: It will let employees make a penalty-free withdrawal of up to $1,000 a year for emergencies. While employees would still owe income tax on that withdrawal in the year it’s made, they could get that tax refunded if they repay the withdrawal within three years.

If they don’t repay the withdrawal, they would have to wait until the three-year repayment period ends before being allowed to make another emergency withdrawal.

The provision will go into effect after December 31, 2023.

5. Raise catch-up contribution limits for older workers

Currently, if you’re 50 or older, you may contribute an additional $6,500 to your 401(k) on top of the $20,500 annual federal limit in effect this year.

Under the retirement package, instead of $6,500, those aged 60, 61, 62 and 63 will be allowed to contribute $10,000 or 50% more than the regular catch-up amount in 2025, whichever is greater.

The provision takes effect after December 31, 2024.

To help pay for the cost of the retirement package, however, another provision, which will go into effect a year earlier, will require anyone with compensation over $145,000 to “Rothify” their catch-up contributions. So, instead of making before-tax contributions up to the catch-up limit, you may still contribute the same amount but you will be taxed on it in the same year. Your contribution will then grow tax free and may be withdrawn tax free in retirement. But the federal government will get the tax revenue from the original catch-up contribution up front.

6. Enhance and simplify the Saver’s Credit

An underutilized federal match exists for lower-income earners’ retirement contributions of up to $2,000 a year. The new package enhances and simplifies the so-called Saver’s Credit so more people can use it. Eligible filers (e.g., married couples making $71,000 or less) will get a matching contribution from the federal government worth up to 50% of their savings, but the match cannot exceed $1,000.

The provision goes into effect after December 31, 2026.

7. Make it easier for part-time workers to save

Part-time workers currently must be allowed to participate in a workplace retirement plan if they have three years of service and work at least 500 hours a year. The new package reduces that service time to two years.

The provision takes effect after December 31, 2024.