Personal finance

‘Secure 2.0’ is part of the $1.7 trillion spending bill, putting it on track to usher in retirement system improvements

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Another round of changes to the U.S. retirement system appears to be on its way.

A collection of retirement-related provisions known as “Secure 2.0” is included in a 4,100-page, $1.7 trillion spending bill — which would fund the government for the 2023 fiscal year — that was unveiled Monday night. Approval by both the Senate and House are expected by the end of this week.

“It’s headed for passage,” said Paul Richman, chief government and political affairs officer for the Insured Retirement Institute. “I don’t believe there will be further changes to [Secure 2.0].”

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The Secure 2.0 provisions are intended to build on improvements to the retirement system that were implemented under the 2019 Secure Act. Those changes included giving part-time workers better access to retirement benefits and increasing the age when required minimum distributions, or RMDs, from certain retirement accounts must start — to age 72 from 70½.

This time around, some of the many provisions that are in the massive appropriations bill include:

  • Requiring automatic 401(k) enrollment: Employers would be required to automatically enroll employees in their 401(k) plan at a rate of least 3% but not more than 10%. Businesses with 10 or fewer workers and new companies in business for less than three years are among those that would be excluded from the mandate.
  • Increasing the age when RMDs would need to start: The current bill would increase it from age 72 to age 73 in 2023 and then to age 75 in 2033. Additionally, the penalty for failing to take RMDs would be reduced to 25%, and in some cases, 10%, from the current 50%.
  • Creating bigger “catch-up” contributions for older retirement savers: Under current law, you can put an extra $6,500 annually in your 401(k) once you reach age 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 also would be indexed for inflation. Additionally, all catch-up contributions will be subject to Roth treatment (i.e., not pretax) except for workers who earn $145,000 or less.
  • Broadening employer 401(k) match options: A proposal would make it easier for employers to make contributions to 401(k) plans on behalf of employees paying student loans instead of saving for retirement.
  • Improving worker access to emergency savings: One provision would let employees withdraw up to $1,000 from their retirement account for emergency expenses without having to pay the typical 10% tax penalty for early withdrawal if they are under age 59½. Companies also could let workers set up an emergency savings account through automatic payroll deductions, with a cap of $2,500.
  • Increasing part-time workers’ access to retirement accounts: The original Secure Act made it so part-time workers who book between 500 and 999 hours for three consecutive years could be eligible for their company’s 401(k). Secure 2.0 reduces that to two years. Companies already have been required to grant eligibility to employees who work at least 1,000 hours in a year.
  • Boosting how much can be put in a qualified longevity annuity contract: Currently, the maximum that can go into a QLAC 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 a QLAC to $200,000.
  • Changing the required minimum distribution rules for Roth 401(k)s: Currently, while Roth IRAs come with no RMDs during the original account owner’s life, that’s not the case for 401(k)s. Starting in 2024, the pre-death distribution requirement would be eliminated.
  • Broadening uses for unused college savings money: A provision would allow for tax- and penalty-free rollovers to Roth IRAs from 529 college savings accounts, under certain conditions.

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.

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