10 of the biggest changes to retirement accounts due to new 401(k) and IRA rules
Congress has shaken up retirement plans once again, and the changes are set to benefit a wide swath of Americans saving for their golden years through IRAs or employer plans such as 401(k)s.
The SECURE Act 2.0 became law in the last days of 2022, and the new rules provide assistance for retirement savers, small businesses and many others. In fact, the changes are so wide that many of them won’t officially begin until 2024 or later. The new law is a sweeping follow-up to 2019’s SECURE Act, which itself shook up retirement funding and planning.
It’s worth noting that while the new law permits the following features, in many cases employers have to set up their retirement plans such as 401(k)s to actually enable those features. So you’ll want to check with your employer to see if they’re planning to offer the new features and when.
Here are ten of the most important changes in the SECURE Act 2.0 and what you need to know.
1. The age for required minimum distributions rises
The SECURE Act 2.0 changes the age for when savers must begin taking required minimum distributions (RMDs) from retirement plans, not once but twice. The age to start taking RMDs has now become 73, as of 2023, up from age 72. Then starting on Jan. 1, 2033, the age for beginning to take RMDs jumps to 75. The law applies to 401(k) plans, 403(b) plans and IRAs, among others.
“Probably the biggest change in the SECURE Act 2.0 is the change to RMDs,” says Brian McGraw, CFP and senior wealth advisor with Hightower Wealth Advisors in St. Louis. “It’s the one that retirees and soon-to-be retirees want to get right.”
Due to the changes in the law, no one will need to start taking their RMDs in 2023. But if you’ve already started taking your RMD, you’re not off the hook for taking it in 2023.
“People who are already taking RMDs still have to take them, but those who haven’t started don’t need to start for another year,” says McGraw.
How retirement savers are impacted: The extra time could let you compound your money inside a tax-advantaged account for even longer, meaning you could have more money when it comes time to withdraw it.
2. No more RMDs on Roth employer-sponsored accounts
Starting in 2024, employer-sponsored Roth accounts such as the Roth 401(k), will no longer have required minimum distributions. This change aligns the withdrawal rules for employer-sponsored plans with those for the Roth IRA, which has no RMD. Previously, many advisors suggested that clients roll over Roth 401(k) accounts to a Roth IRA to avoid RMDs.
How retirement savers are impacted: This change simplifies the withdrawal rules for the Roth 401(k) and helpfully aligns them with those of the Roth IRA.
3. Lower penalties for missing RMDs
If you don’t meet your RMD, you’ll be hit with a penalty. Previously, that penalty was a whopping 50 percent of the amount that you didn’t withdraw. The new law reduces that penalty to 25 percent. If you miss an RMD from an IRA, you may be able to reduce that penalty to 10 percent if you correct the deficiency in a timely manner and refile your taxes.
How retirement savers are impacted: The lower penalty means more money can stay in your pocket, though it’s easy enough to avoid this penalty in the first place.
4. Automatic enrollment and escalation in retirement plans
Starting in 2025, newly created 401(k) and 403(b) plans will be required to automatically enroll eligible employees with a minimum contribution of at least 3 percent. Plans must include an auto-escalation feature that raises the savings rate by 1 percent annually, up to a maximum of 10 or 15 percent, depending on the plan. However, the employee may opt out of the plan.
“Perhaps the biggest hurdle employers face in helping their employees invest for retirement is simply getting people enrolled in retirement plans,” says Edward Gottfried, Betterment at Work’s director of product.
How retirement savers are impacted: “Auto-enrollment and auto-escalation don’t just increase retirement savings but also contribute to better financial outcomes for employees: Employees who start out auto-enrolled more frequently contribute more than the amount they were auto-enrolled at then decrease that amount,” says Gottfried.
5. Larger catch-up contributions
“One of the bigger things for savers is the larger catch-up contributions,” says McGraw. “If you’re between [age] 60 and 63, you’ll be able to contribute up to $10,000 as a catch-up contribution.”
Currently, the law allows workers aged 50 and over to make catch-up contributions of $7,500 each year to 401(k) plans, and that will continue. However, those in the special age group will be able to contribute up to the $10,000 level. The new provision will begin on Jan. 1, 2025.
In addition, the maximum catch-up contribution will be indexed to inflation, allowing workers to save more as inflation increases overall prices.
How retirement savers are impacted: Older workers will be able to save more in their employer-sponsored retirement plans.
6. Catch-up contributions for higher earners must go into a Roth
If you earned wages of $145,000 or more in the prior calendar year, any catch-up contributions at age 50 or older to an employer-sponsored plan must be made to a Roth account. If you earned less than this amount, you won’t be forced to contribute to the Roth version but can decide to deposit it into the Roth version or a traditional (pre-tax) version of the account, for example, a traditional 401(k). That income threshold will be adjusted for inflation in the future.
How retirement savers are impacted: While it’s useful to save a lot of money, the government wants to limit how much you can save in tax-deductible retirement accounts. The benefit is that more money will be stashed in an after-tax Roth account, meaning it’s tax-free at retirement time.
7. Employer matching can be treated as a Roth contribution
Previously, any employer matching contributions had to be treated as a pre-tax contribution, meaning they went into a traditional 401(k) account or the equivalent. The new law changes that, allowing matching contributions also to go into a Roth version of the account, if desired. However, unlike the prior pre-tax matching funds, matching amounts that go into a Roth account are taxable.
How retirement savers are impacted: Workers have an even greater ability to sock away funds in Roth accounts, which lets you skip the taxes when it comes time to withdraw the funds at retirement.
8. Student loan payments qualify for matching contributions
The new law allows student loan payments to act like a salary deferral that can be matched by an employer’s matching contributions. In effect, borrowers can pay off their student loans while still receiving the employer’s matching contributions for retirement. The provision won’t kick in until 2024, however.
“In a recent survey of American employees, we found that 67 percent of savers said their student loan debt has impacted their ability to save for retirement,” says Gottfried. “By allowing employers to offer a 401(k) match on dollars their employees use to repay their loans, we’re going to see a massive increase in the number of savers and a fantastic step forward in those savers’ preparations for retirement.”
However, remember that employer-sponsored retirement plans such as 401(k)s have an annual employee contribution limit ($22,500 for 2023), capping the total potential benefit.
“This provision seems like a win-win,” says McGraw.
How retirement savers are impacted: Those with student loans can still enjoy the “free” matching funds that are enjoyed by all those contributing to an employer’s retirement plan.
9. 529 plans can be rolled over into Roth IRAs
One of the biggest downsides of saving in a 529 education savings plan has been what to do with the funds if they’re unused. The SECURE Act 2.0 allows that money to be rolled over into a Roth IRA. But there’s some fine print: The money can be rolled over into a Roth IRA for the beneficiary after the account has been open for at least 15 years, and is limited to the maximum annual Roth contribution. In addition, there’s a $35,000 lifetime limit on the rollover amount.
The provision doesn’t kick in until 2024, however, giving authorities time to work out the fine points in the law. “Congress still has to clarify a lot,” says McGraw, who adds that this change is “creating more questions than answers at this point.”
How retirement savers are impacted: This change can provide a lot of benefit for those holding 529 plans with unused money.
10. SEP IRAs and SIMPLE IRAs now have Roth options
Small employers may use SEP IRAs or SIMPLE IRAs to help their employees fund retirement. Those plans just got even better: The new law allows employers to offer Roth versions of those plans, giving employees the ability to grow and withdraw their wealth tax-free in a Roth account.
The new feature for SEP IRAs and SIMPLE IRAs is available in 2023, though plan providers will require some time to update their systems to allow for it.
How retirement savers are impacted: This is good news for the employees of small businesses who use these plans, allowing them the power of a Roth account.
Bottom line
This list of changes is just a starting point for what’s contained in the new law. Lawmakers still have to determine how some provisions will actually be enacted and determine their specifics. So some features of the new law will not come into effect until next year or even later. But even without the fine print, retirement savers can still begin preparing for the changes.
