Trying to secure a strong retirement for more Americans
To wrap up 2022 and fund the federal government for the remainder of the fiscal year ending in September 2023, President Biden signed a $1.66 trillion omnibus spending package on December 29, 2022. Included in the package are retirement plan provisions that expand on those in the SECURE Act, which is why a piece of the legislation is referred to as SECURE Act 2.0.
SECURE Act 2.0 includes multiple provisions to enhance Americans’ ability and opportunity to save for retirement. It makes it easier for small businesses to offer a plan, creates savings options for part-time workers, makes allowances for matching student loan debt payments, and much more. Here are five key SECURE Act 2.0 items that you should be aware of—whether you want to save for retirement, are saving for retirement, or have already retired.
1 An increase in the age for required minimum distributions
If you save in an individual retirement account (IRA) or a workplace retirement plan, such as a 401(k), you’re required to take a minimum amount of money out every year, beginning at a certain age. The amount you must take is called a required minimum distribution (RMD). At the time that SECURE Act 2.0 was signed, turning 72 years old was the trigger for the RMD rule. The new rule increases the age from 72 to 73 starting January 1, 2023, with a gradual increase of the age to 75 in 2033.
Why does this matter?
If you don’t need to use the money in your retirement account, you’ll be able to leave it where it is, with the chance to continue to grow for a longer time.
2 Expansion of auto-enrollment and auto-escalation for retirement plans
Starting in 2025, new retirement plans will be required to automatically enroll their workers in a 401(k) or 403(b) plan (similar to a 401(k), but for certain public school or nonprofit employees). The minimum requirement is to automatically put at least 3% of employees’ paychecks—and no more than 10%—into their retirement account. There’s also a provision that requires that the contribution automatically increase by 1% every year up to at least 10% and no more than 15%. Employees can opt out or change their contribution rate on their own.
Why does this matter?
People are more likely to save for retirement if they’re automatically enrolled in their plan.1 (Who likes filling out forms? Very few.) And the sooner you start saving and investing, the longer your savings has the potential to grow.
3 Emergency savings capabilities within 401(k) plans
Beginning in 2024, you’ll be able to access your money from your retirement plan for emergencies without the typical penalties. There are two provisions that will allow this:
1 One provision waives the 10% tax applied to early retirement plan distributions if used for an unforeseeable personal or family emergency expense and according to certain conditions.2
2 The other will allow plans to enroll employees in an emergency savings account (linked to their retirement account) to a stated amount up to $2,500.
Why does this matter?
If you need access to your retirement savings to cover an emergency expense, you’ll have more options that don’t impose a high penalty for withdrawal prior to reaching age 59½.
4 An enhanced Saver’s Credit for lower- and middle-income workers
In 2027, the current retirement savings contribution credit (Saver’s Credit) for certain contributions to IRAs, workplace retirement plans, and Achieving a Better Life Experience (ABLE) Act accounts will become a matching contribution from the federal government for lower- and middle-income workers.
Why does it matter?
Eligible taxpayers will no longer need to actively claim the Saver’s Credit on their tax return, as it will be automatically added to their retirement account.
5 An increase in the amount that people aged 60 to 63 can contribute to their retirement accounts
People aged 50 and older are already eligible to save more in their retirement accounts per year with catch-up contributions. In 2023, the maximum that people under age 50 can contribute to a qualified retirement account is $22,500; people aged 50 and older can save up to an additional $7,500 per year in catch-up contributions. SECURE Act 2.0 increases the catch-up limit to $10,000 in 2025 for people aged 60 to 63 (i.e., attained age for the entire tax year is at least 60 and not yet 64).
Why does it matter?
This recognizes that the closer you get to retirement, the more urgent your need to save may be. This change gives older workers a chance to save more through catch-up contributions and take advantage of the potential tax-related benefits of their retirement plan.
Working to help people secure the retirement they want
The John Hancock government relations team, in partnership with senior executives and the American Council of Life Insurers, worked with key policymakers in Washington, D.C., to help push for this updated legislation to be passed before the end of 2022. Because we believe that employer-sponsored plans represent the best chance Americans have to save for retirement, we’re happy to see the provisions included in the year-end omnibus bill.
1 State of the participant 2022 report, John Hancock, 2022. All data is from our open-architecture platform. 2022 data is based on John Hancock’s 1.6 million participants, 1,716 plans, and $108.5 billion in assets under management and administration as of 3/31/22. Earlier data is from our 2020 and 2021 state of the participant reports. 2 Ordinary income taxes are due on withdrawal. Withdrawals before the age of 59½ may be subject to an early distribution penalty of 10%.
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made.
Any tax-related discussion contained in this publication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of avoiding any tax penalties or promoting, marketing, or recommending to any other party any transaction or matter addressed. Please consult your independent legal counsel and/or professional tax advisor regarding any legal or tax issues raised in this publication.
John Hancock Investment Management Distributors LLC is the principal underwriter and wholesale distribution broker-dealer for the John Hancock mutual funds, member FINRA, SIPC.
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