11 Retirement Changes

Greg Spears  |  Dec 23, 2022

JUST IN TIME FOR Christmas, a sweeping new retirement law has passed both houses of Congress, and should be signed into law this weekend. Dubbed the SECURE Act 2.0, it makes dozens of significant changes to the employer-based savings systems that millions of workers depend on for retirement.

Under the new law, some workers will be able to save far larger catch-up contributions during the home stretch of their working years. Meanwhile, retirees can delay taking required minimum distributions until age 73 starting in 2023. Younger workers with college loans may get an employer match for paying those debts. And people facing a financial emergency will find it easier to take money from retirement savings.

Many of the provisions won’t take effect for a year or two—and sometimes even longer. With that caveat, here are 11 changes that could affect you sooner or later.

1. Delayed RMDs. Here’s one provision that has an immediate effect. The new law delays the first required minimum distribution (RMD) from tax-advantaged retirement savings accounts from age 72 to 73 starting next year. In subsequent years, the RMD age will be raised even further, reaching 75 in 2033.

But postponing withdrawals might be a Pyrrhic victory—one that comes at great cost. Income tax rates are low now and scheduled to rise in 2026. Some retirees might owe less by taking smaller, more frequent withdrawals rather than bigger slices later at steeper tax rates.

2Higher catch-ups. Starting in 2025, the maximum catch-up contribution limit is raised from $6,500 in 2022 to at least $10,000 a year—but only for workers ages 60, 61, 62 and 63. The law stipulates that this “super catch-up” will be a moving target that’s at least 50% more than the regular catch-up contribution amount. In the meantime, the regular catch-up is getting a $1,000 inflation increase to $7,500 in 2023, so the super catch-up would then pencil out at $11,250.

If workers made maximum contributions plus super catch-ups, they could pack $133,000 into their retirement plan at work in just four years. But wait, there’s more. For the first time, IRA catch-ups will be indexed to inflation starting in 2024. That catch-up has been stuck at $1,000 a year since 2015.

3. Roth catch-ups. In a big switch, catch-up contributions to employer retirement plans—but apparently not to IRAs—would have to be made with Roth after-tax dollars, except for workers who make less than $145,000. This is the biggest tax increase in the new law, and it helps pay for some of the other tax breaks it bestows.

Every retirement plan has a cadre of super-savers who try to contribute the maximum each year. These new catch-up provisions will make it more expensive to join this club. To hit the max, workers ages 60 through 63 would need to contribute well over $30,000 a year—without the benefit of a tax deduction on the catch-up portion.

4. No RMDs on Roth savings. Starting in 2024, Roth money in a 401(k) would not be subject to RMDs, as it is today. Roth IRAs were already exempt from RMDs. That’s led to a big exodus of Roth money from employer plans to IRAs. Rollovers can invite mischief in the wrong financial advisor’s hands, so this is a win for older investors—and tax simplification.

Read about all the changes on HumbleDollar

6 comments

  1. Thanks for nothing. Simple, unless Congress does something about Social Security and Medicare funding, and soon, all this SECURE 1.0 and SECURE 2.0 stuff is nothing more than “colored bubbles.”

    Some thoughts about the most prominent changes, pulled from a Forbes article:

    1. Require auto enrollment in 401(k) plans
    Employers starting new workplace retirement savings plans could be required to automatically enroll employees in the plan.

    Wrong answer. Will reduce adoption of plans in the future … just like health reform mandates have chilled addition of employer-sponsored health coverage, and actually triggered changes in hours worked as a means to avoid the employer mandate.
    For example: https://peabody.vanderbilt.edu/departments/lpo/faculty-pubs/Henrich.pdf

    2. Introduce employer contributions for student loan payments
    Secure 2.0 could let employers make a matching contribution to an employee’s retirement plan based on their student loan payments.

    Wrong answer. Better answer is to update loan provisions. For example, a $1,000 pre-tax contribution with a $500 immediately vested match, would allow the worker to borrow $1,500 to pay against student loans. Otherwise, assuming a 25% marginal income tax rate (federal and state), the worker can only make a student loan payment of $750, and only get a $375 employer match.

    3. Increase the age for required minimum distributions

    It used to be that when you turned 70-1/2 you had to start withdrawing a required minimum amount from your 401(k) or IRA. Then, the age moved up to 72. Under the latest legislation, you likely would not need to tap your retirement savings until age 75 if you did not wish to.

    Wrong answer. Only those who can afford to forego RMD would defer payment. Why allow for futher deferral … to benefit those who don’t need to take funds. Better answer is to go back to age 70 1/2 and cap the distribution at no more than 5% of the prior year end account balance, reached at about age 80.

    4. Help employees build and access emergency savings
    One option would let you make a penalty-free withdrawal of up to $1,000 a year for emergencies. While the employee would still owe income tax on that withdrawal in the year it’s made, they could get that money back if they repay the amount they withdrew within three years, Winters said.

    Wrong answer. Better to simply have an interest free loan that must be repaid within 3 months or perhaps 1 year.

    Another might let an employer add a “sidecar account” to an employee’s retirement account, where the employee can contribute after-tax money explicitly for emergencies, Spence said. That money could be taken directly from their paycheck, just as their 401(k) contributions are.

    Wrong answer. ~50% of workers who are eligible for their employer sponsored retirement savings plan don’t contribute, or don’t contribute enough to receive the full available employer match. Better answer, concentrate monies in the 401k plan and allow for plan loans using 21st Century processing functionality.

    5. Raise catch-up contribution limits for older workers
    Currently, if you’re 50 or older you may contribute an additional $6,500 to your 401(k) on top of the $20,500 annual federal limit. Under the retirement package, those between ages 60 and 64 (the final range may be narrower) may be allowed to contribute $10,000, instead of $6,500.

    Wrong answer. These are individuals who are already contributing the 402(g) limit, $22,500 in 2023 (and that doesn’t include the employer contribution). The median 401(k) contribution is ~$100T (when you include Medicare Part A, B and D).

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    1. From James Freeman, WSJ – if you are wondering whether America can afford to keep spending Trillions, including billions funding border security for countries we have never committed to defend, all funded with debt:

      America’s Top Priority
      Let’s hope that the United States Treasury never faces a funding crisis. But when congressional leaders cite military assistance to a country the U.S. does not have a treaty obligation to defend as the priority in negotiations over the federal budget, taxpayers have to wonder if they understand the debt burden. One can support Ukraine while also recognizing that a financially strapped United States wouldn’t be able to do much good in the world.

      A recent report from the Peter G. Peterson Foundation notes that “as interest rates on U.S. Treasury securities rise, so too will the federal government’s borrowing costs. The United States was able to borrow cheaply to respond to the pandemic because interest rates were historically low. However, as the Federal Reserve increases the federal funds rate, short-term rates on Treasury securities will rise as well — making some federal borrowing more expensive.” The foundation cites analysis from the Congressional Budget Office that given recent events may already be too optimistic but is still plenty concerning. The Foundation writes:

      According to CBO’s projections, interest payments would total around $66 trillion over the next 30 years and would take up nearly 40 percent of all federal revenues by 2052. Interest costs would also become the largest “program” over the next few decades — surpassing defense spending in 2029, Medicare in 2046, and Social Security in 2049…

      CBO estimates that by 2052, interest costs are projected to be nearly three times what the federal government has historically spent on R&D, nondefense infrastructure, and education, combined.
      Each new congressional spending splurge only moves the financial reckoning closer to the present.

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      1. Ominous clouds ahead and leadership across the board asleep at the wheel. If there is any reason to have confidence that our country isn’t being dismantled and run into the ground, I haven’t seen it.

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    2. Oops, last sentence truncated a phrase. Should have read: The median 401(k) contributoin is < $3,500 per year, while the unfunded liability is ~$100T (when you include Medicare part A, B and D).

      sorry

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