The budget bill signed by President Joe Biden in December included a sweeping provision dubbed the SECURE 2.0 Act—a wide-ranging series of changes to how retirement plans work, affecting retirees, people nearing the end of their careers, and young workers just starting out. Broadly speaking, the changes are intended to make it easier and less risky for people to save for when they can’t work anymore. More retirement savings could help deal with a looming financial crisis facing many U.S. households—a massive shortfall between how much they will need to retire, and how much they’ve actually put away. Indeed, the collective “retirement gap” stood at $7.1 trillion according to a 2019 analysis by Boston College. What does it all mean, and how might it change your strategy for retirement planning? We decipher the bill’s biggest changes here.
You Can Wait Longer Before Taking Money Out of Your Retirement Accounts
You can now wait until you’re 73 before taking mandatory distributions from retirement accounts. Until last year, you had to start drawing down your accounts when you were 72. What’s more, people born in 1959 or later will have until age 75 to start taking those withdrawals. That means if you don’t immediately need your retirement money to live on, you can leave it in your retirement account longer, where it can continue to generate returns. More importantly, you won’t have to pay the taxes you otherwise would if you took it out. (When you take money from an individual retirement account, it generally counts as taxable income, unless it’s a Roth IRA.) Lauren Wybar, a certified financial planner and senior wealth advisor for Vanguard, said this is one of the most significant provisions of the new retirement rules. “It all comes down to taxes,” she said. “By delaying further and keeping that money tax sheltered, it continues to grow in that tax-sheltered way.”
If Your Next Job Offers a Retirement Plan, You’ll Automatically be Enrolled
At many workplaces, setting up a retirement account takes some initiative on the part of the worker. Starting in 2025, if your job offers a retirement plan, you’ll be automatically enrolled to put anywhere from 3% to 10% of your income towards retirement, with the amount growing by one percent each year to at least 10% and a maximum of 15%. Instead of volunteering to save, you’ll be “volen-told.” This automatic enrollment is not applicable if the company you work for has fewer than 10 employees or has been in business for less than three years. The lawmakers behind the new rules view non-participation in retirement plans as a major reason many people reaching retirement age have little or no savings. In 2021, 29% of workers with access to a defined-contribution plan such a 401(k) did not participate, a Department of Labor survey found. Now, you’ll automatically have to contribute to your retirement account, unless you take the time to opt out of the plan. In other words, the path of least resistance is now to save. “I would hope this makes a large impact,” Wybar said. “Right now, the average amount that a typical investor has saved for retirement is not necessarily where it should be… this makes it easier, less of a decision.”
Your Retirement Savings Will be Able To Double as a Small Emergency Fund
If you’re wondering whether to put savings into a retirement account or an emergency fund, a provision of the new law makes that decision a little less stressful. Starting in 2024, you’ll be able to use up to $1,000 per year from your IRA to cover emergency expenses without paying the 10% penalty that usually applies to early withdrawals. Borrowers will have up to three years to repay the withdrawal. This provision could encourage people to save for retirement even if they’re worried about having enough cash on hand to cover unexpected expenses, Wybar said.
The Government is Establishing a “Lost and Found” For Retirement Accounts and Pension Plans
The new law directs the Department of Labor to create a centralized retirement plan database to reunite lost 401(k)s, pension plans, and other retirement accounts with their owners. Let’s face it, moving your employer-sponsored retirement accounts to a new job can be a hassle under the best of circumstances, and even more difficult if your old company goes out of business or is bought out. That could be one reason why it’s shockingly common for retirement plans to be left behind when people switch jobs. As of 2021, there were 24.3 million stranded retirement accounts with an average balance of $55,400 each, according to an analysis by Capitalize, a company that helps locate and consolidate retirement accounts. What becomes of these abandoned assets? Under current law, if they have a balance of under $5,000, the old employer can cash out an employee’s workplace retirement plan and roll the money over into a new IRA in the employee’s name, or, if it’s less than $1,000, send the employee a check. (The rollover limit is increasing to $7,000 from $5,000 under the new law.) Otherwise, orphaned 401(k)s will just sit there until claimed. It’s common for people to leave a trail of retirement accounts as they move from job to job, Wybar said. Having multiple accounts makes retirement saving more complicated, and also means a lot of money left on the table, since older 401(k)s may have higher fees and lower returns. Capitalize estimates the average worker with multiple accounts is $700,000 worse off over their lifetime than one who consolidated into a single, low-fee account.
Your 401(k) might follow you between jobs
The new law allows retirement plan service providers to offer “automatic portability” services—that is, they can roll your retirement plan from your old job into your new one without any action taken on your part, unless you tell them not to. This service could be especially useful for people with low-balance retirement accounts, who typically have their retirement plans cashed out whenever they change jobs, according to a commentary by Fidelity.
If you’re aged 60-63, you can “catch up” on your savings by putting more tax-free money towards retirement
If you’re aged 60-63, you’ll be able to make up to $10,000 in extra “catch-up” contributions to your 401(k), starting in 2025, rather than the up to $7,500 catch-up that workers over 50 can currently contribute. This new limit is indexed to inflation, too, which means it will increase along with the cost of living over time. For those making $145,000 or more, the contributions must be made into a Roth IRA. This year, workers under 50 can put $22,500 into their 401(k) per year tax-free—the extra “catch up” money is a way for workers closer to retirement to bolster their retirement savings even more.
Your employer can match your student loan payments, not just your retirement contributions
Many employers match contributions to their employees’ retirement savings, and starting in 2024, they might match student loan payments, too, if they want. This new type of benefit is designed to help workers whose student loan payments are holding them back from saving for retirement and taking advantage of employer matching contributions.
Your College Fund Can Become Your Retirement Fund
Under the new law, starting in 2024, you’ll be able to move up to $35,000 over your lifetime from a 529 college savings plan to a Roth IRA without paying any taxes or penalties. Currently, you’ll have to pay a hefty penalty if you use money from a 529 for anything other than education, and it counts as income for tax purposes, to boot. “The fact that you could now roll at least a portion into the Roth gives a little bit of peace of mind to the investor knowing that, well, hey, if I don’t use all of this money towards education, then I have that option,” Wybar said. Have a question, comment, or story to share? You can reach Diccon at dhyatt@thebalance.com.
