The Main Retirement Savings Reforms Congress Stuffed Into a Spending Bill

Dear readers, something exceedingly rare and momentous happened last week: Congress did something helpful. Buried deep in the omnibus spending bill’s 4,000-plus pages was a little piece of legislation called SECURE 2.0—a sequel to 2019’s SECURE Act, which modernized some parts of America’s retirement saving system. The House and Senate have been trying to reconcile their separate versions of the second round for months, finally finishing the job amid last week’s holiday cheer. What big changes are coming? Read on.

Another RMD Reprieve

For decades, retirees had to begin taking required minimum distributions (RMDs) from qualified retirement accounts (e.g., traditional IRAs and 401(k)s) in the year they turned 70.5 years old. This age may have made sense once upon a time, when life expectancies were lower and people commonly retired at 65, but now people are living and working longer, suggesting that RMDs at 70.5 may be too early. So 2019’s SECURE Act inched the RMD age up to 72 for folks who turned 70.5 after 2019. But even before the ink dried on that, talk arose of going further. SECURE 2.0 crystalizes that, bumping the RMD age to 73 in 2023, 74 in 2029 and 75 in 2033. It also reduces the penalty for missed RMDs from 50% of the RMD amount to 25%.

Note that the legislation takes effect on January 1, 2023—it isn’t retroactive. So if you turned 72 in 2022 and already took your RMD, it didn’t suddenly become redundant. But if you turn 72 in 2023, congratulations, you are off the RMD hook until 2024. That doesn’t preclude you taking distributions for living expenses if need be, of course. But if you don’t need the cash flow to live on, you can keep more of your savings invested for longer.

More Room to Catch Up

Mathematically, the best way to save for retirement is to begin at the start of your career, max out your 401(k) contributions and let the market go to work for you. Decades of saving and compound growth can snowball your contributions bigtime, leaving you with a very nice nest egg.

But this strategy isn’t practical for everyone. It can be hard to make ends meet when you are just starting out. Then raising a family can reduce retirement savings potential, especially if you are socking money away into college funds. As a result, a lot of people find themselves in middle age, at peak earning power, with retirement savings well behind where they would like. Thus, retirement savings law lets folks age 50 and up make extra “catch-up” contributions to their 401(k)s and IRAs. SECURE 2.0 has bumped these up.

Currently, allowable catch-up contributions for 401(k)s are $6,500 in 2022 and $7,500 in 2023—on top of regular contribution limits ($20,500 for 2022 and $22,500 for 2023). From January 1, 2025 onward, folks ages 60 – 63 will see their catch-up contribution limits jump to $10,000, with the amount indexed for inflation each year after that. If you have a SIMPLE IRA, your catch-up contribution limit will rise to $5,000—indexed for inflation—when you are age 60 – 63.

On the IRA side, allowable catch-up contributions will stay at $1,000 annually for folks age 50 and up, but this too will be indexed to inflation from 2023 onward.

You Will Want a Roth 401(k)

There is a slight catch to the aforementioned 401(k) catch-up contributions: If you make more than $145,000, they will have to be Roth contributions. This is new—under the old law, catch-up contributions could go in a traditional or Roth 401(k), giving you a choice. Now all of these higher earners’ catch-up contributions must be funded with post-tax money, but—like a Roth IRA—they grow tax-free and withdrawals aren’t subject to income tax. SECURE 2.0 also removes Roth 401(k) RMD requirements from 2024 onward.

So, if your employer doesn’t offer a Roth 401(k) option, we suggest you alert your plan administrator and lobby for a change, lest you lose out on the potential extra savings. This will also give you more flexibility even if you aren’t making catch-up contributions, as SECURE 2.0 lets you designate your employer’s 401(k) matching contributions as Roth contributions if you wish, which will give you more tax flexibility once you retire and start living off your savings.

More Retirement Saving Help

Boomers aren’t SECURE 2.0’s only immediate beneficiaries. Younger workers are also getting a boost. Auto-enrollment will now be mandatory for employer-sponsored retirement plans, which means employees will now have to opt out of a 401(k) instead of opting in. Contributions will remain optional, but simply having the account open could remove the inertia that keeps some folks from saving. Is it a little paternalistic? Sure. But we guess it is as innocuous as paternalism can be.

Elsewhere, part-time workers will now be eligible for 401(k) participation after two years of service instead of three, which retirement experts suspect will help increase women’s savings and help young mothers in particular. And all workers with student debt should benefit from the reclassification of student loan payments as “elective deferrals for purposes of matching contributions.” The aim here is to address the long-running claim that employees who are saddled with student loans can’t save for retirement because they are paying down debt. Under SECURE 2.0, employees who make student loan payments can get their employer’s 401(k) match as if they had contributed to their retirement plan instead. 

Emergency Saving Gets Easier

Rounding out the major changes, SECURE 2.0 lets employers auto-enroll workers in emergency savings accounts in 2024. These will have Roth status—funded with after-tax money, and the first four withdrawals in a year will be tax-free—and an annual contribution limit of $2,500. Employers may also choose to make matching contributions, giving younger workers a very nice jump on their emergency funds. It will also reduce the temptation to make temporary emergency withdrawals from retirement accounts when an unexpected bill arrives, reducing complexity and the potential for paying stiff penalties if the funds aren’t repaid in time.