Congress includes major retirement overhaul in year-end $1.7T spending bill

A collection of provisions designed to overhaul the U.S. retirement system and help Americans save more could soon become law. 

Included in the sweeping, end-of-year spending package that Congress is expected to vote on in the coming days are a series of measures that are part of the long-delayed "Secure 2.0 Act." Lawmakers have until Friday to pass the $1.7 trillion omnibus spending package in order to keep the government funded, or to approve a continuing resolution to push the deadline into next year. 

Secure 2.0 – a follow-up to the 2019 Secure Act – is designed to bolster Americans' retirement savings by making a number of key changes to existing retirement account rules and certain related tax breaks. 

"Including Secure 2.0 retirement provisions in the last major legislation of the year means that Congress is poised to help millions more workers and retirees with significant improvements to the nation’s private retirement system," Paul Richman, the chief government and political affairs officer at the Insured Retirement Institute, said in a statement. 

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Here are some of the ways that Secure 2.0 would overhaul the current retirement system: 

Automatic 401(k) enrollment

Beginning in 2025, employers that offer 401(k) or 403(b) savings plans would be required to automatically enroll employees at a rate of at least 3%, with mandatory 1% increases each year to a maximum rate of 10%. Employees could choose to opt out of the plan. 

Small businesses with 10 or fewer workers and new businesses in existence for fewer than three years would be exempt from the rule. 

Creating bigger "catch up" contributions for older savers

Under current law, Americans who are 50 or older can make so-called catch-up contributions of no more than $6,500 per year to their 401(k) and 403(b) plans, with a limit of $27,000. 

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But Secure 2.0 would increase the annual catch-up by 50% to $10,000, indexed annually for inflation, for participants between the ages of 60 and 63 starting in 2025.

On top of that, all catch-up contributions would be subject to Roth rules – meaning individuals pay taxes on the money upfront. 

Increased age for RMDs

The bill would raise the age that Americans must take a required minimum distribution from their retirement plan to 73 beginning in 2023, up from the current age of 72. 

In 10 years, the RMD age would once again move up to 75.

Emergency expense distributions 

Beginning in 2024, Americans would be allowed to take an early "emergency" distribution from their retirement accounts to cover unexpected or immediate financial needs. Individuals could take out as much as $1,000. The money could be taken once a year and would not be subject to the usual 10% tax that applies to early distributions. 

However, there is a catch: Anyone who takes the emergency expense option but does not pay it back within a certain time frame will not be allowed to tap the retirement fund penalty free for another three years. 

Expanding employer 401(k) match options 

Another aspect of Secure 2.0 would make it easier for employers to make contributions to 401(k) plans on behalf of employees paying off student loan debt. Employers could essentially make a matching contribution to your retirement account based on your student loan payment amount – a rule intended to remove student loan debt as a major obstacle to retirement savings.

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Incentives for retirement plan contributions 

Secure 2.0 would allow employers to offer small financial incentives to employees to encourage them to participate in any offered retirement plans.