Money Talk: New 401k Rules

By Rodney A. Brooks Big changes are coming this year for your company sponsored 401(k) plans. These changes will have a big impact on retirees, but the bill, passed last year contains benefits for all ages and income groups. The changes are in a bill called the Secure Act 2.0, an extension on changes approved by Congress in 2019 in the original SECURE (Setting Every Community Up for Retirement) bill. Here’s what is coming with the new legislation.

• Employers starting new 401(k) plans will be required to automatically enroll their employees. The law mandates that they begin with a contribution rate of 3 percent of the worker’s salary and that they increase that by 1 percent — annually contributions reach10 percent. T. Rowe Price, the financial services company, says automatic enrollment doubles participation in company-sponsored 401(k) plans.
• The federal government will put up to $1,000 a year into retirement accounts for eligible workers starting in 2027, an effort to encourage low and middle-income workers to save.
• The age for mandatory withdrawals from retirement accounts will increase to 75. Required minimum distributions (RMD) are annual withdrawals from retirement accounts that are mandated by the IRS once the account holder reaches a certain age. The Secure Act in 2019 increased it to 70 ½ to 72. Secure 2.0 will increase it to 73 in 2023 and 75 in 2033. The big reason for the changes is that people are living longer. Many continue working into their sixties and need their savings to last longer.
• Companies can now offer emergency savings accounts linked to their 401(k) retirement accounts. Sixty percent of Americans, regardless of income, could not afford a $1,000 emergency today. Employers can enroll their workers in an emergency savings plan that would be linked to their 401(k). Employees can set aside up to 3 percent of their salaries, up to $2,500 in these Roth-like accounts. They would be allowed to make withdrawals without incurring the 10 percent penalty for early withdrawals from retirement accounts and won’t have to pay taxes on it.
• Student loan payments may count as retirement contributions, making those employees eligible for an employer match. Younger workers don’t contribute to 401(k)s because they have to pay off student debt. Beginning in 2024 those student loan payments will be considered contributions to 401(k)s 403(b)s and SIMPLE IRAS, making them eligible for an employer match. The median employer match is 4 percent of the worker’s salary, but most companies only match if the employee contributes to the 401(k).
• To encourage low- and middle-income workers to save, the federal government would put up to $1,000 a year into the retirement accounts of eligible workers starting in 2027. Today that tax credit is available to certain workers only if they have tax liability.
• For workers 50 and older, the catch-up provisions will be increased. Currently, they can
• contribute $6,500 ($7,500 in 2023), and, and that can go up to $10,000 (in 2025) and they have the ability to put that into a Roth if they want to,” said Gilliland. “The other thing that this provision does do is it does allow employees to have their employer contributions go into the Roth component of their 401(k). Someone who’s a saver and in a higher income bracket that potentially could be really big to get them a significant amount of tax-free income in retirement.”

Rodney A. Brooks is a Texas Metro News Columnist and Senior Fellow at Prosperity Now. The author of Fixing the Racial Wealth Gap: Racism and discrimination put us here, but this is how we can save future generations, he has written for USA TODAY, The Washington Post and National Geographic.