Big Changes Coming to 401ks in January under the Secure Act and Secure Act 2.0
Upcoming Changes to 401(k) Plans: What You Need to Know About the SECURE Act and SECURE Act 2.0
The landscape of retirement savings is evolving, thanks to the SECURE Act and its successor, the SECURE Act 2.0. These legislative changes aim to enhance retirement security for Americans by making it easier to save and access retirement funds. Here’s a breakdown of the key changes that will impact 401(k) plans in the coming years.
1. Increased Catch-Up Contributions
Starting in 2025, individuals aged 60 to 63 will be able to make larger catch-up contributions to their 401(k) plans. The new limit will be the greater of $10,000 or 150% of the regular catch-up contribution amount for those aged 50 and older
. This change is designed to help those nearing retirement age to boost their savings significantly.
2. Mandatory Automatic Enrollment
To encourage more employees to save for retirement, the SECURE Act 2.0 mandates automatic enrollment for new 401(k) and 403(b) plans starting in 2025
. Employers will be required to automatically enroll new employees at a contribution rate of between 3% and 10% of their compensation, with the option for employees to opt out if they choose.
3. Rothification of Catch-Up Contributions
From 2026, catch-up contributions for employees aged 50 and older who earn $145,000 or more in the previous year must be made to Roth 401(k) accounts
. This means these contributions will be made with after-tax dollars, but withdrawals will be tax-free, provided certain conditions are met.
4. Changes to Required Minimum Distributions (RMDs)
The SECURE Act 2.0 also brings changes to RMDs. The age at which participants must start taking RMDs has been increased to 73, and it will further increase to 75 by 2033
. Additionally, Roth 401(k) accounts will no longer be subject to RMDs starting in 2024
.
5. Enhanced Access to Retirement Funds
The new legislation introduces more flexibility for accessing retirement funds in emergencies. For instance, starting in 2024, participants can withdraw up to $1,000 per year for emergency expenses without facing the usual 10% early withdrawal penalty
. This provision aims to provide a safety net for unexpected financial needs.
6. Student Loan Matching Contributions
One of the innovative changes in the SECURE Act 2.0 is the provision allowing employers to match student loan repayments with contributions to the employee’s 401(k) plan
. This change, effective in 2024, helps employees who are paying off student loans to simultaneously save for retirement.
Conclusion
The SECURE Act and SECURE Act 2.0 bring significant changes to 401(k) plans, aimed at enhancing retirement savings and providing greater flexibility for participants. As these changes roll out, it’s crucial to stay informed and adjust your retirement planning strategies accordingly. If you have any questions or need personalized advice, feel free to reach out to us.