Changes to Retirement Savings Included in the Omnibus Bill

I mentioned in my December AAII Journal Editor’s Note the possibility of retirement savings legislation being passed during the lame-duck session in U.S. Congress. This week, that possibility turned into a probability.

Included in the 4,155-page omnibus spending bill (at least that was the length as of Tuesday) is a section titled “SECURE 2.0 Act of 2022.” The name is a reference to the SECURE Act of 2019, which made changes to retirement savings. The new legislation adds many changes to retirement savings. 

My initial impression is that two demographic groups will be the primary beneficiaries from the changes. The biggest beneficiaries are high-income earners who are currently in their late 50s. They’ll get the opportunity to make larger catch-up contributions to their workplace retirement accounts and will have three extra years to strategically reduce their traditional individual retirement account (IRA) and 401(k) balances before required minimum distributions (RMDs) start. Younger adults will have a new opportunity to build up emergency savings, get help paying down their student debt and potentially receive a matching retirement savings contribution from the government.

Though the act was given the name “SECURE,” it does nothing to reduce the likelihood of Social Security benefits being reduced over the next decade. In my opinion, it also does not go far enough in addressing those without access to a 401(k) or similar types of workplace retirement plans.

I’ve summarized the changes affecting large numbers of investors—of various age and income groups—below. There are more changes in the bill. If you want to see them, look for the section titled “SECURE 2.0 Act of 2022” in the spending bill. (It began on page 2,046 as of Tuesday.)

A big change of interest to many AAII members is the raised required beginning date (RBD) for taking RMDs. Effective on January 1—yes, 10 days from now—RMDs will start at age 73 instead of age 72. On January 1, 2033, the RBD will be age 75. Those following under the older rules using age 70½ or 72—meaning you are at least or will turn age 72 in 2022—will continue to take RMDs as is. If you turned 72 this year (2022), my understanding of the rules is that you must still take your first RMD by April 1, 2023.

Qualified charitable distributions (QCDs) will be indexed to inflation starting in 2024. The current limit is $100,000 per year.

Catch-up contributions to traditional IRAs and Roth IRAs will finally be indexed to inflation. The cap on the additional annual amount that those age 50 or older can contribute per year has been limited to $1,000 for years. Starting in 2024, the catch-up contribution will be indexed to inflation. Future increases will be in increments of $100.

In addition, a higher catch-up contribution of at least $10,000 will be available to those ages 60 through 63 in workplace retirement plans such as 401(k) plans as well as SIMPLE plans starting in 2025. (Some outlets are projecting that the initial amount will be $11,250.) The amount will be subject to inflation adjustments after 2025.

Younger workers participating in defined-contribution plans like a 401(k) will be able to have their employers apply matching contributions toward their student debt. In other words, if a worker is eligible for a matching contribution, that contribution can be used to pay down their qualified student loans.

Both 401(k) and 403(b) plans with auto-enrollment will be required to have minimum contributions between 3% and 10%. These percentages would be automatically raised (auto-escalation) by a full percentage point each year to a maximum of between 10% and 15%. Workers would still be able to set their own contribution rates if they choose. The rule goes into effect in 2025.

An emergency withdrawal totaling no more than $1,000 will be allowed from 401(k) and other employee-sponsored retirement plan accounts without penalty. Only one withdrawal per year will be allowed. If an emergency withdrawal is taken, no additional emergency withdrawals may be taken over the next three years without the withdrawal being repaid. The rule goes into effect in 2025.

Employers would be able to offer emergency savings accounts alongside retirement savings accounts. These accounts would be funded with aftertax dollars. Participant contributions would be capped so that they do not cause the account balance attributable to those contributions to exceed $2,500 or the plan sponsor’s limit.This amount will be subject to inflation adjustments in $100 increments starting in 2025.

The federal government will make a matching contribution to retirement accounts of up to $2,000 per year under the new saver’s match. The phaseout for the match will start at modified adjusted gross income (MAGI) amounts of $41,000 per year for married joint filers, with the match not available to those with MAGI above $71,000. (The phaseouts for single filers are half of those amounts.) The phaseouts will be subject to inflation adjustments starting in 2028.