New retirement bill means big changes for retirement and 529 plans

Big changes are likely coming for Americans' retirement savings.

The changes, part of the Secure Act 2.0, were included in the sweeping end-of-year $1.7 trillion spending bill the Senate passed on Thursday.

The package's future now rests in the hands of the House, which is expected to follow suit Friday. President Joe Biden is expected to sign the bill into law shortly after.

The new measures benefit Americans near and far away from retirement, though many provisions won't take immediate effect.

Included in the broad retirement package are measures to allow employers to count employees’ student loan payments toward their retirement match and increases in the age you're required to begin withdrawing from tax-deferred retirement accounts.

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What is Secure Act 2.0?

Earlier this year, the House of Representatives passed the Securing a Strong Retirement Act of 2022, and the Senate approved The Enhancing American Retirement Now Act (EARN) and the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg Act, (RISE & SHINE). These three bills are the basis for the Secure Act 2.0, which builds on the 2019 Secure Act.

The 2019 Secure Act included giving part-time workers better access to retirement benefits and increasing the age when required minimum distributions from certain retirement accounts must start to age 72 from 70½.

401(k) changes for people paying off student loans

The Secure Act 2.0 is meant to help Americans save for retirement, and one particular proposal that would go into effect in 2024 and allows companies to contribute to 401(k) plans for an employee making student debt payments could help solve a problem affecting millions of people.

Eighty-four percent of adults said student loans limited the amount they’re able to save for retirement, according to a 2019 study by the Massachusetts Institute of Technology Age Lab and financial services organization TIAA.  Among those who weren’t saving for retirement at all, 26% said it was because they had to put their money toward paying off student loans.

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"Employees, including those who are not in a position to contribute at all to their 401(k) accounts because of student loans, who participate in the new program could accumulate tens of thousands of dollars in their 401(k) accounts over a decade, which could be worth hundreds of thousands of dollars at retirement," insurance company The Travelers Cos. said in a release announcing its Paying It Forward Savings Program in 2020.

The program considers student loan payments when determining the company’s 401(k) contribution. "That demonstrates the importance of starting to save for retirement early in order to realize the benefit of compounding returns over time," Travelers said.

Though some companies have launched programs like Travelers' to help their employees, the guidance included in the Secure 2.0 Act would make it easier for all businesses to do so.

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Required minimum distribution age

The Secure Act 2.0 pushes up the age when you're required to begin taking the minimum distribution from a tax-advantaged retirement savings account. Currently, the mandatory age to begin making withdrawals is 72. But starting January 1, 2023, 73 will be the new age.

And in 2033, the age to begin taking required minimum distributions will move up to 75.

People who turned 72 in 2022 will still have to take minimum distributions.

Automatic 401(k), 403(b) enrollment

If your employer has a 401(k) or 403(b) retirement savings plan, you will be automatically enrolled once you're eligible. This means that money will be taken out of each of your paychecks and transferred to the retirement savings account unless you opt-out. The act specifies that the initial contribution must be at least 3% but not more than 10% of your pretax earnings.

Small businesses with 10 or fewer employees, and businesses that started less than three years ago would be exempt. 

Effective date: January 1, 2025

Emergency withdrawals

Typically you have to pay a 10% tax if you withdraw money from a tax-preferred retirement account before your turn 59½ unless you satisfy an exemption. The new act adds an exemption "for purposes of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses" allowing you to withdraw up to $1,000 a year penalty-free.

However, if you don't replenish the funds within three years, you will face penalties if you make another emergency withdrawal for the same reasons.

Even with the new provision "withdrawing early from a retirement account should be a last resort," said Ed Slott, founder of IRAHelp.com and author of “The New Retirement Savings Tax Bomb.”

Effective date: January 1, 2024

529 plan changes

If you have funds left over in a 529 account – a tax-advantaged investment account that can only be used to cover educational expenses – you will be able to roll over up to $35,000 into a Roth IRA account without facing penalties.

This only applies to 529 accounts that were opened at least 15 years ago. Also, you still must adhere to annual IRA contribution limits.

Effective date: January 1, 2024

What else is included in Secure Act 2.0?

• Increasing catch-up contribution limits for people 60 to 63.

• Financial incentives for contributing to a plan.

• Expanded access to retirement plans for long-term, part-time workers.

• Expanded access to the Saver’s Credit (a tax credit for contributions) for lower- and middle-income employees.

• Creation of a lost and found database of 401(k) and pension plans so that people can more easily pinpoint where their retirement savings are located

Medora Lee and Elisabeth Buchwald are money, markets, and personal finance reporters at USA TODAY. Subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.

This article originally appeared on USA TODAY: Secure 2.0 Act in Congress omnibus bill 2023. Here's what's included.