Big Changes Ahead for Retirement Plans

Earlier this week, the House of Representatives overwhelmingly approved the Securing a Strong Retirement Act – also known as “SECURE Act 2.0” – in a bipartisan vote (the bill passed 414 to 5).

While the bill needs to be taken up the Senate (check out this refresher on how a bill ultimately becomes law), if signed into law, 401(k) and other retirement plans will see some significant changes.

SHRM has a good overview of the bill as a whole; Thomson Reuters also provides a helpful summary. We are going to focus here on two changes that might be the most impactful to employees working to build their retirement savings.

Catch-up contributions are expanded and are required to be treated as Roth contributions

The SECURE Act 2.0 maintains the current catch-up contribution limits for employees who have reached age 50. In addition, however, employees between the ages of 62 and 64 would be allowed to make catch-up contributions of up to $10,000.

All catch-up contributions will be required to be Roth contributions. Employees will no longer be able to exclude catch-up contributions from their current year income (but, of course, they will be able to withdraw the money tax-free in retirement).

Roth option for employer matching contributions

Under current law, all employer matching contributions to employee retirement plans must be made on a pre-tax basis – even if the employee is currently making Roth contributions through payroll deferrals. Under a provision of the bill, plan sponsors will be allowed to provide plan participants with the option to designate any matching contributions as Roth contributions.

These provisions of the SECURE Act 2.0 could go a long way to not only help plan participants save more for retirement but also gives retirement savers the ability to diversity the future tax treatment of eventual withdrawals from their retirement accounts.