Huge changes could be coming for your 401(k) – here’s what you need to know

In the coming days, Congress is expected to pass a bill that will make major changes to 401(k) retirement plans, allowing many Americans to save more — and grow those savings for longer.

Congress is incorporating provisions from the so-called Secure Act 2.0 as part of the $1.7 trillion omnibus allocation bill for 2023, according to a summary of the legislation. The changes made will increase the contribution limit for employees age 50 and older, while also the age at which investors must withdraw money from their tax-deferred accounts is raised from 72 to 75.

In addition, the bill — which includes policies supported by both Democratic and Republican lawmakers — is designed to help low- and middle-income earners and allow employers to create savings accounts within retirement plans, which experts say will help people more easily save money. It will also expand automatic enrollment in 401(k) accounts and help those paying off student loans.

These changes to retirement savings accounts have been in the making for years and build on the first Secure Act, which went into effect in 2019.

Proponents of the plan argue the legislation could be a start to change the state of retirement savings in the U.S., where nearly half of working-age Americans don’t have access to an employer-sponsored retirement plan, and those who save for retirement is not enough to set aside.

“Americans deserve a decent retirement after decades of hard work, and our bill is a major step forward,” said Sen. Ron Wyden (D-Ore.), chairman of the Senate Finance Committee.

The omnibus spending bill “must be passed” by the end of this week to avoid a government shutdown, Senate Majority Leader Chuck Schumer (DN.Y.) said Monday.

Changes help Americans save more

There are dozens of changes to pension plans and other retirement-related laws in the legislature. One of the biggest changes will allow Americans age 50 and older to contribute more to “catch-up” contributions than they currently do to 401(k) or 403(b) accounts. Americans can contribute $20,500 to their employer-sponsored retirement accounts this year and $22,500 in 2023, and those age 50 and older can contribute another $6,500. The changes will allow older workers to contribute an additional $7,500 per year, and beginning in 2025, those aged 60 to 63 will be able to contribute at least an additional $10,000.

The new legislation will also delay when plan participants are required to withdraw a distribution from their account. Currently, they must start recording at age 72; the bill increases that to 73 next year and to 75 on January 1, 2033.

That change will help those who are still working or who don’t need to make a withdrawal at a younger age. But financial advisers also warn that deferring distributions could lead to a higher tax bill, as savers may have to withdraw more money than they would if they were a few years younger.

Beginning in 2025, the bill will also require employers to automatically enroll new employees in 401(k) plans. Research has shown that automatic enrollment significantly increases participation, which in turn can lead to more savings for employees. Participants are automatically enrolled at a contribution rate of 3% of their wages, and unless they choose not to, the contribution rate will increase by 1% each year until it reaches at least 10%.

Help with automatic savings and student finance

In addition, the bill allows employers to offer emergency savings accounts in pension plans. Employees can contribute up to $2,500, after tax, to that account, and employers can match those contributions. Savers can use these emergency accounts four times a year without penalty.

Often, employees with student loan debt refrain from paying retirement contributions so they can pay their student loans. The bill allows employers to pay retirement contributions for those employees even if they don’t contribute themselves, so they don’t miss crucial years building their nest egg.

For low- and middle-income individuals, the legislation also changes the non-refundable tax credit for depositors. Currently, eligible taxpayers receive the credit as part of their tax refund. But under the new bill, eligible individuals will receive a Saver’s Match — the federal government will match their retirement contributions, up to $2,000.

And the bill will expand the ability to make penalty-free withdrawals from 401(k)-style accounts in certain situations, including for victims of domestic violence and for the terminally ill, among others.

Changes to Non-401(k) Accounts

On the non-401(k) front, the bill also makes a change to Roth IRAs, the popular after-tax retirement savings accounts. Legislation will eliminate required distributions from these accounts starting in 2024. In addition, while those 50 or older can contribute an additional $1,000 to their IRA each year, the account will limit inflation starting in 2024.

Finally, those who have money left over in 529 plans — to be used for qualifying education expenses — can transfer up to $35,000 to their Roth IRA, if the 529 account has been open for at least 15 years.

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