Unpacking the Secure Act 2.0.
Some major changes could be coming to your retirement plan. Part of the $1.7 trillion spending bill, which both the House and Senate approved this week to avert a government shutdown, is the Secure Act 2.0. The package, if passed, could benefit Americans across the spectrum — from younger workers who have just started contributing to their 401(k) plans to those closing in on retirement. Here’s a look at eight key proposals:
Automatic enrollment in 401(k) plans
Most companies would be required by 2025 to automatically enroll their staff in a 401(k) plan. (It would be left to the employee to opt out if they don’t wish to participate.) It sets a default contribution rate between 3 to 10 percent of a workers’ wages. That rate would rise 1 percent each year until it hits at least 10 percent (and doesn’t surpass 15 percent).
New businesses and those with 10 employees or less are exempt.
Raising the contribution limit for older workers
People 50 and over can currently contribute an extra $6,500 to their 401(k) plans. The proposal would raise so-called “catch-up” contributions for those between 60 to 63 to an additional $10,000 starting in 2025.
Beginning next year, those making $145,000 a year or more will be allowed to only make catch-up contributions into Roth accounts or those that accept after-tax contributions.
Raises the required minimum distribution age
Currently, when you hit 72 you must start withdrawing money from your 401(k). Secure 2.0 would raise that age to 73 starting next year, and then to 75 in 2033. Americans are living longer and experts hope this change will lower the risk that they run through their savings too early.
Saver’s match
Beginning in 2027, low and middle income earners could receive a matching contribution from the government when they save. Couples making $71,000 or less and single taxpayers earning up to $35,500 are eligible.
The proposal is meant to simplify the Saver’s Credit, which gives some savers up to $2,000 in the form of a nonrefundable tax credit.
Student loan matching
Many people who are saddled with student loans choose to focus on paying down their debt before saving for retirement. That means some of them are missing out on the matching contributions some workplaces provide.
Beginning next year, student loan payments would count as retirement contributions, giving employers the option to make a matching contribution even though an employee isn’t paying into a retirement plan.
Emergency withdrawals
Employees would be able to make one withdrawal, up to $1,000, from their 401(k) and IRAs for certain expenses, without getting dinged with a 10 percent tax. A withdrawal can be made annually if the amount is repaid; if not, another withdrawal can’t be made for three years.
Typically, you’d get hit with a penalty for taking an early distribution, usually before age 59 ½, per the New York Times.
Part-time workers
At present, part-time employees are only allowed a 401(k) if they work for one year and put in 1,000 hours or three straight years of clocking in at least 500 hours per year. The new bill would lower the requirement down to two years instead of three, beginning in 2025.
Emergency savings
Companies would be given the option to enroll employees in emergency savings accounts linked to their retirement accounts. Workers would be allowed to set aside up to three percent of their salary, with a cap of $2,500. The accounts would be taxed similar to Roth accounts, meaning contributions have already been taxed but withdrawals are tax-free.
