Is a Major 401(k) Overhaul Coming Next Year? What You Need to Know

• Author: Monica Jackson
• Posted: 2024-10-21

There could be significant changes coming to your 401(k) next year. In response to the currently brewing retirement crisis, Congress is looking to pass legislation that will make it easier for Americans to save money for their golden years. With pension plans becoming a thing of the past, many workers are struggling to put away enough money to bridge the gap between the income that they need and what the Social Security system pays out.

About the Legislation

The bill is engineered to boost the speed in which Americans can put more into the 401(k) programs offered by employers. The new legislation is expected to land on the desk of President Joe Biden by the end of the year. If passed, the bill would require the majority of these employer-sponsored plans to automatically enroll their workers in the program. This is just one of the changes that could completely overhaul the 401(k) program for millions of Americans.

Congress passed the legislation known as SECURE 2.0 last week. The Senate is also expected to pass its similar version by the end of the month, jumpstarting the process of overhauling the current 401(k)system.

Here is what you need to know about this proposed legislation and how it may impact you and your savings goals.

Automatic Enrollment for Workers

The most significant change for retirement programs is that SECURE 2.0 would mandate that employers enroll all eligible workers into their savings plans at a rate of 3% of their salary. Under the current system, this enrollment is voluntary. The contribution rates would increase by 1% annually until the total rate hits 10%.

Employees will have the option of opting out of the plan or changing their contribution level after enrollment. However, legislators are confident that making it automatic upon hiring would remove a significant roadblock for low-waged workers.

Student Loan Implications

Over 40 million Americans have federal student loan debt, making it difficult to think about saving for retirement as they are working to pay this off. This translates to these borrowers missing out on the power of compounding interest by not investing during their early working years. The new legislation would mark student loan repayments equal with elective retirement deferrals and allow for a matching contribution.

This means that if you pay $5,000 in student loan debt over the year, it would equate to putting that amount in a retirement account as it relates to matching. This part of the legislation will help to pad the 401(k) accounts of young workers that are more focused on paying off their student loans.

Provisions for Part-Time Workers

Part-time employees working at least 500 hours each year for two years would now be eligible to participate in a company's 401(k) plan. This part of the legislation would also encompass freelancers, gig workers, caregivers, and independent contractors. Even if you are working 10 hours per week, you would be eligible to participate in this company-sponsored plan, helping the account to grow over time.

Additional Catch-Up Benefits

Under the current legislation, workers between the ages of 62 and 64 can boost their catch-up contributions to up to $6,500 per year. The new legislation would increase this maximum to $10,000. Also under the new bill, these contributions could be taxed as Roth accounts, helping to save even more money. This change will give those inching in on retirement the incentive to put even more money away so that they get caught up before they leave the workforce.

Delay Mandatory Withdrawals

SECURE 2.0 would also increase the minimum age in which retirees must begin to take out money from their accounts to 75, up from the current 72. This change would allow the money to grow tax-free for three more years. Because so many Americans are working and living longer, raising this age gives you more time to fund the account and watch it grow tax-free before you will need to begin using it. The penalty for not withdrawing by the mandated year would also be reduced in half.

Understanding how these proposed changes may impact your retirement accounts will help you to make the best decisions with your money going forward.