Many rules for retirement accounts such as 401(k) plans, IRA and Roth IRA that will soon change after the Senate and House approved $1.7 trillion last week federal spending bill which includes new provisions which are called general SECURE 2.0 Act of 2022.
These new retirement laws follow the path of the original SECURE (Setting Up Every Community to Improve Retirement) Act of 2019, which boosted employer retirement plans and gave investors more options to save for retirement.
The spending bill now heads to President Joe Biden to sign into law. It previously had to be signed by midnight Friday, December 23 to prevent a a partial shutdown of the federal governmentbut on The House and Senate passed resolutions extension to Friday, December 30.
The biggest changes for most Americans with retirement accounts would be raising the age for required minimum distributions and increasing “catch-up” limits for people over 60, but there are more than 90 different pension changes included in the bipartisan spending bill.
Some changes to the retirement account will take effect immediately after the bill is passed, while others will begin in 2024 or later. Read on to learn everything you need to know about the new retirement account rules.
The new retirement rule will help Americans with student loans
One of the more revolutionary changes included in the SECURE 2.0 Act of 2022 will be the option for employer plans to credit student loan payments with matching contributions to 401(k) plans, 403(b) plans or SIMPLE IRAs. Government employers could also contribute matching amounts to 457(b) plans.
This proposed new rule would mean that people with significant student loan debt could still save for retirement just by making their student loan payments and without making direct contributions to a retirement account. The rule will go into effect for pension plans starting in 2025.
What are the new retirement rules for required minimum distributions (RMDs)?
Currently, Americans must begin taking required minimum distributions (RMDs) from their 401(k) and IRA accounts starting at age 72 (or 70 1/2 if you reached that age before January 1, 2020). If passed, the SECURE 2.0 Act of 2022 would raise the RMD age to 73 starting January 1, 2023, and then further to 75 starting January 1, 2033. (Roth IRAs are not subject to RMDs. )
The new retirement rules would also reduce the penalty for not taking RMDs. The previous high 50% excise penalty will be reduced to 25% and further reduced to 10% if the error is rectified “in time”. The reduction in penalties will take effect immediately after the law is passed.
How do retirement account contribution limits change?
While standard contribution limits to 401(k) and IRA plans would not change, the bill would increase the “catch-up” limit for Americans over 50 and introduce additional potential “catch-up” contributions for those over 60.
Currently, IRS law allows people 50 and older to contribute an additional $1,000 to their retirement accounts each year above the standard limit. Starting in 2024, instead of the flat $1,000 more, older Americans will be able to contribute an additional amount that is indexed to inflation.
For people aged 60, 61, 62 or 63, they will soon be able to give even more money to catch up if the bill is passed. In 2025, these seniors will be allowed to contribute up to $10,000 per year or 50% more (whichever is greater) than the standard catch-up contribution for those 50 and older. These increased contribution limits will also be indexed to inflation from 2025.
How would the new retirement account rules affect taxes?
If the massive spending bill passes Congress and is signed into law, the law would repeal and replace the IRA tax credit, also known as the “Savings loan.” Instead of a nonrefundable tax credit, those who qualify for the Saver’s Credit will receive a federal contribution to a retirement account. This tax law change will begin with the 2027 tax year.
In the proposed legislation, Congress also amends the IRS rules for transferring retirement accounts from 529 plans, which are tax-advantaged college savings accounts. Currently, any money withdrawn from a 529 plan that is not used for education is subject to a 10% federal penalty.
In the bill, beneficiaries of 529 college savings accounts would be allowed to roll over a total of $35,000 over their lifetime from a 529 plan into a Roth IRA. A Roth IRA will still be subject to annual contribution limits, and the 529 account must have been open for at least 15 years.
How will the new law affect early withdrawals from retirement accounts?
The SECURE 2.0 Act of 2022 includes several rule changes that would benefit Americans who need to withdraw money early from their retirement accounts. Generally, retirement account withdrawals made before the account owner turns 59½ are subject to a 10% penalty tax.
First, Congress plans to add a major emergency exception. Account holders who are under the age of 59 1/2 can withdraw up to $1,000 per year for emergencies and have three years to pay back the distribution if they want. No further emergency withdrawals can be made within this three-year period unless repayment occurs.
The bill also specifies that employees will be allowed to self-certify their emergencies, meaning no documentation other than a personal ID is required. The bill would also completely remove the penalty for people who are terminally ill.
Americans affected by natural disasters will also get some relief with the proposed changes. The proposed new rules would allow up to $22,000 to be distributed from employer plans or IRAs in the event of a federally declared disaster. Withdrawals will not be penalized and will be treated as gross income for three years. If the bill passes, the rule would apply to all Americans affected by natural disasters after January 26, 2021.
New changes to retirement rules will also allow those with accounts to make early withdrawals from 403(b) plans, similar to 401(k) plans. Currently, unlike 401(k)s, hardship withdrawals from 403(b) accounts only include employee contributions, not earnings. Beginning in 2025, the rules for hardship withdrawals will be the same for 403(b) and 401(k) plans.
What would be the changes to the superannuation account for employers?
The proposed changes to the retirement account rule in the SECURE 2.0 Act of 2022 will affect employers at least as much as employees. The biggest change for companies would be that any new 401(k) or 403(b) plans starting in 2025 must automatically enroll workers who don’t opt out.
Contributions from auto-enrolled workers will start at a minimum of 3% and a maximum of 10%. Each year after 2025, these amounts will increase by 1% until they reach a range of 10% to 15%. Pension plans created before 2025 will not be subject to the same requirements.
Changes to superannuation rules will also allow employers to offer employees “pension-linked savings accounts”, which would act as hybrids between emergency and retirement savings. Employers can automatically match workers up to 3% of their salary with a contribution cap of $2,500.
Contributions to these emergency accounts will be taxed like Roth contributions and qualify for an employer match. Employees can make four withdrawals per year from the account without penalty or additional taxes. If they leave the company, they could withdraw the emergency account as cash or roll it into a Roth account.
Other changes for employers would allow companies to automatically roll over a participant’s IRA to a retirement plan at a new employer unless the participant specifically opts out. The SECURE 2.0 Act would also give pension plan administrators the ability to choose not to refund overpayments accidentally made to retirees, and introduces protections and limits for retirees if companies decide to take money back.
What systemic changes would Congress make to pension plans?
If approved as part of the larger spending package, the SECURE 2.0 Act of 2022 would introduce several broad changes to retirement in America as a whole. One of the biggest would be the Labor Department’s mandate to create a searchable national database of pension plans to help people find lost or misplaced accounts. The agency would be required to launch the database within two years of the bill’s passage.
The Employee Retirement Income Security Act of 1974 (ERISA) will also get an update. ERISA establishes minimum standards for private pension plan administrators, including communications with participants.
The proposed ERISA rule change would require private pension plans to provide participants with at least one paper statement per year unless the participant opts out. However, the rule will not take effect until 2026 and will not affect the other three quarterly reports required by ERISA.
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