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Three years after the SEC Act of 2019 introduced the first major changes to the U.S. retirement system in more than a decade, more modifications are now on the way.
Dozens of retirement-related provisions collectively known as “Secure 2.0” are included in a $1.7 trillion omnibus appropriations bill that cleared the House of Representatives on Friday — following approval by the Senate on Thursday — and will go to President Joe to Biden for his signature.
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Secure 2.0 “addresses the gaps that have left some people on the sidelines of retirement savings, unable to access the workplace retirement plans that do so much good in establishing the ability and habit of saving,” said Susan Neely, president and CEO of the American Council of Life Insurers .
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“Part-time workers, military spouses, small business employees and student loan borrowers are just a few who will benefit and have a better chance of positioning themselves for a more financially secure retirement as a result of Congress’s action today,” Neely said.
The Secure 2.0 provisions are intended to build on improvements to the retirement system that were implemented under the SECURITY Act of 2019. Those changes included giving part-time workers better access to retirement benefits and raising minimum retirement ages distributions, or RMDs, from certain retirement accounts – at age 72 from 70½.
This time, some of the many provisions found in the massive appropriations bill include:
- 401(k) automatic enrollment is required: Employers would have to automatically enroll employees in their 401(k) plan at a rate of at least 3% but no more than 10%. Among those who would be excluded from the mandate are businesses with 10 or fewer employees and new businesses that have been in business for less than three years.
- Increasing the age at which RMDs should begin: Current law would increase it from age 72 to age 73 in 2023 and then to age 75 in 2033. In addition, the penalty for not taking RMDs would be reduced to 25%, and in some cases 10%, from the current 50%.
- Creating higher ‘catch-up’ contributions for older savers in retirement: Under current law, you can put an extra $6,500 a year into your 401(k) once you turn 50. Secure 2.0 would increase the limit to $10,000 (or 50% more than the regular catch-up amount) starting in 2025 for savers ages 60 to 63. Catch-up amounts would also be indexed for inflation. In addition, all compensation contributions will be subject to Roth treatment (ie, not withheld) except for workers earning $145,000 or less.
- Expanding Employer 401(k) Matching Options: The proposal would make it easier for employers to make contributions to 401(k) plans on behalf of employees paying off student loans instead of saving for retirement.
- Improving workers’ access to emergency savings: One provision would allow employees to withdraw up to $1,000 from their retirement account for emergency expenses without paying the typical 10% early withdrawal tax penalty if they are under age 59½. Companies could also allow workers to open emergency savings accounts through automatic payroll deductions, with a limit of $2,500.
- Increasing part-time workers’ access to retirement accounts: The original SEC Act allowed part-time workers who log between 500 and 999 hours for three consecutive years to be eligible for their company’s 401(k). Secure 2.0 reduces that to two years. Companies were already required to provide benefits to employees who work at least 1,000 hours a year.
- Helping workers paying off student loans save for retirement: Secure 2.0 makes it easy for employers to make contributions to 401(k) plans (and similar workplace plans) on behalf of employees making student loan payments instead of contributing to their retirement plan.
- Increase how much can be put into a qualified longevity annuity contract: Currently, the maximum that can go into a KLAC is either $135,000 or 25% of the value of your retirement accounts, whichever is less. Secure 2.0 eliminates the 25% cap and increases the maximum amount allowed in KLAC to $200,000.
- Change in required minimum distribution rules for Roth 401(k)s: Currently, while Roth IRAs come with no RMDs during the original account holder’s lifetime, this is not the case for Roth 401(k)s. Beginning in 2024, the pre-death distribution requirement will be eliminated.
- Expanding the use of unused college savings money: The provision would allow tax- and penalty-free rollovers to Roth IRAs from 529 college savings accounts that are at least 15 years old, within limits.
- Helping Military Spouses Access Retirement Plans: Secure 2.0 creates small business tax credits that allow military spouses to immediately enroll in their plan and qualify for immediate vesting from any employer.
The bill also includes incentives for small businesses to set up retirement savings plans for their workers, encourages individuals to set aside long-term savings and makes it easier for annuities to be an income option for retirees.