It was not an ordinary moment when the $1.7 trillion federal spending bill passed by Congress on December 23 was signed into law by President Joe Biden.
The huge amount is planned to include provisions like the reworking of the way in which Congress counts the votes in an election and also a part is dedicated to aiding Ukraine.
The law is also said to bring significant changes to retirement accounts like 401(k) plans, IRAs, and Roth IRAs. So if you are someone who is making plans for your retirement, make sure that you are well aware of the changes that will be made in effect with the new law.
Even though there will be many changes, the law is said to benefit all people with different income levels and ages. The new changes that will be introduced in retirement regulations fall in line with the amendments of the Secure Act of 2019 and together it will be called the Secure 2.0 Act of 2022.
As the act was signed into law by President Biden, new changes will come into place. While some of these new changes will take place immediately, some might take years to be put into practice.
As one of the biggest changes will take place regarding retirement plans of people, here is everything you need to know about the changes.
Following are the key six changes that will come into effect from the new legislation.
- The Increase in Age Limit for Mandatory Withdrawal
As per the law, every citizen is advised to make a withdrawal from their retirement accounts once they reach a certain age. This withdrawal is termed as Require Minimum Distributions or in-short, RMD. Earlier, as per the 2019 Secure Act, the age at which the withdrawal was mandatory was 72 years.
With the new law in place, the age limit has been raised to 73 and it will be in effect from 2023. The law also leaves in provision to raise the age limit for RMD in the future as it will be 75 in 2023.
As per the reports, the change and increase in the age limit are going to change the life expectancy of people. Also, the fact that people are working longer and retiring late in their life is also another reason for the increase in the age limit. Earlier, the life expectancy of people in the United States was around 68 as opposed to 76 years in 2021.
- Employees Will Be Enrolled In 401(k) Plans Automatically
Just like the retirement plans will affect the employees, the employers are also affected by the newly introduced changes. One such big change in the new law is that all employers who start a new 401(k) or 403(b) plan must enroll their workers automatically.
This new change will come into effect in 2025. After the workers are automatically added, the contribution from their side will start from a minimum value of 3% and it can reach a maximum value of 10%.
After 2025, with the passing of each year, the contributions will increase by 1% until they reach a value between 10% and 15%. These new changes will not be applicable to any retirement plans that are created before 2025.
- Student Loan Payments Will Be Considered Retirement Contributions
This is one of the revolutionary decisions in the Secure 2.0 Act of 2022. The new change comes with a provision for where there is an option for the employer to credit student loan plans and this can be done by matching donations to 401(k) plans, simple IRAs, or even 403(b).
In simpler words, this will allow people who have a significant amount in terms of student loans to save for their retirement.
This can be achieved just by paying their student loans and does not require the person to make any payments for their retirement accounts. The change will come into effect in 2025.
- Employers Can Offer Emergency Savings Accounts Linked To Their Worker’s 401(k) Plans
This has also turned out to be a very useful change in the newly introduced law as it is reported that almost 60% of Americans cannot afford an emergency of $1000, whatever their profession.
With the new law, employers will be able to enroll their employees in emergency savings plans that are linked to their 401(k)s.
The employers will then have the provision to set aside around 3% of the salary of their workers in these accounts. They will be able to make withdrawals from this amount and are not expected to pay taxes on these funds.
Also Read:- Supplemental Security Income (SSI) Program
- Increase In Catch-up Provisions
As per the current catch-up provisions, people who are above the age of 50 years are allowed to make a contribution to their retirement account. The normal annual limit for a 401(k) or 403(b) is $20,500.
As per the current limitations, an additional contribution of $6,500 can be made to their retirement account. This amount is expected to go up in 2023 when it will be raised to $7,500.
The increment in the excess limit is expected to go up to $10,000 in 2025. The change is expected to benefit people who have the money and can afford to add more to their retirement accounts.
- Government Match For Low And Middle-Income Worker’s Retirement Plans
The government has also formulated specific plans which are expected to come into effect in 2027. As it is understandable, saving up for retirement is not an easy thing for workers with low or middle income.
So, in order to encourage them to start saving for their retirement, governments can deposit up to $1000 in their account for a year.
Just like the Secure Act, the Employee Retirement Income Security Act of 1974 is also planned to undergo a change.
This act establishes a minimum standard and is forced to maintain it for administrators of private retirement plans. The changes which are planned to introduce the act will not take place until 2026.
While the changes are destined to bring positive changes, there are also arguments against the newly introduced changes.