Welcome to NerdWallet’s Smart Money podcast, where we answer your real money questions. In this week’s episode, we discuss the latest changes to pension benefits and what they mean for you.
Congress passed a $1.7 trillion bill to avert a government shutdown just before the holidays, which includes some major changes to pension benefits that will be felt for years to come.
The provision, called Secure 2.0, will affect mostly Americans who have retirement accounts through their employers. Most of the changes will affect older Americans who are already financially secure. Here are some highlights of Secure 2.0 that will be rolled out over the next few years:
- Employers can count employee student loan payments when they qualify for employer-sponsored 401(k) retirement funds. It starts from 2024.
- The age at which you must withdraw money from a pension savings account is reduced to 73. It starts from 2023.
- Savers can withdraw up to $1,000 from 401(k) and IRA accounts to cover certain financial emergencies. It starts from 2024.
- Those with a 529 education savings account can roll some of the funds into a Roth IRA account — up to $35,000 over their lifetime. It starts from 2024.
- Employers automatically begin enrolling employees in any new employer-sponsored retirement plans and employer-sponsored emergency savings accounts. Both start in 2025
Additional savings account changes are coming in 2023, including maximum annual contributions and health savings account limits. Retirees are also set to receive long-awaited additions in the form of higher cost-of-living adjustments for Social Security, as well as lower premiums and deductibles for Medicare Part B.
Sean Pyles: You may have missed it late last year, but Congress passed some pretty notable changes to how you can save for retirement, including one that would make student loan payments count toward retirement contributions. In this Money News series of Smart Money, we’ll give you the rundown.
Anna Helhoski: Welcome to the NerdWallet Smart Money podcast, where you send us your money questions and we answer them with the help of our genius Nerds. I’m Anna Helhoski.
Sean Pyles: And I’m Sean Pyles. If you have a question about Money for Nerds, call or text the Nerd Hotline at 901-730-6373, aka 901-730-NERD, or email email@example.com.
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Sean Pyles: Anna, as I said earlier, many people may have missed many of the changes to retirement accounts approved by Congress late last year. Can you tell our listeners what happened?
Anna Helhoski: Of course. If you’re anything like me, you may have been a bit screened before the holidays, so you may have missed the details of the widely publicized federal spending package that passed just before it. The $1.7 trillion bill passed fairly quickly to avoid a government shutdown. It also includes a provision that will directly affect millions of Americans in the coming years.
Sean Pyles: The provision is known as Secure 2.0 and it brings many changes to how people can save for retirement, although we should note that many of these changes will come into effect in the coming years. What Secure 2.0 will do for savings. One big change is that starting in 2024, employers can set up a 401(k) match based on an employee’s student loan payments. Borrowers with student loan debt often report that they cannot contribute to a 401(k)s at work because of their debt. Secure 2.0 allows employers to calculate an employee’s student loan payments when they contribute matching funds to a retirement plan.
Anna Helhoski: That’s pretty remarkable, and student loan borrowers will want to take advantage of it when they can. Secure 2.0 also pushes back the age at which you should start withdrawing money from IRAs, 401(k)s, and other retirement savings accounts. In the previous legislation, the age was already reduced from 70 and a half to 72. He turns 72 to 73 this year. By 2033, this age will be 75 for those born in 1960 and later.
Sean Pyles: This update reflects some of the criticism of the pension changes, namely that many benefits go to the wealthier and older.
Anna Helhoski: Well, that’s very true, and people who can already get their pension benefits too.
Sean Pyles: But there is good news for common people. Next year, people will be able to withdraw up to $1,000 from their 401(k) and IRA accounts without paying a penalty to cover certain financial emergencies. You usually have to pay a 10% penalty for early withdrawal from such accounts. One catch is that if you want to make an emergency withdrawal without another penalty, the money must be repaid within three years.
Anna Helhoski: We’ve seen consumer savings rates drop over the past year, so this could provide a much-needed lifeline to help people pay off urgent expenses without going into expensive credit card debt. Also next year, people with money left in a 529 education savings account will be able to roll over at least some of it to a Roth IRA. Beneficiaries of these accounts will be able to transfer up to $35,000 during their lifetime.
Sean Pyles: This is one of the most significant changes to how people sign up for retirement accounts. In 2025, automatic enrollment will come into effect for newly established pension plans. This means that employees whose employers open a 401(k) or 403(b) retirement account will automatically be enrolled in those plans. Employers can also automatically enroll employees in emergency savings accounts that will work similarly to retirement savings accounts.
Anna Helhoski: We’ve just made a number of changes to how people can save and spend their retirement savings, and we haven’t even covered every change that’s coming. This is good news for employees whose employers provide pension plans. Unfortunately, many employees do not, and the Secure 2.0 Act does not help them.
Sean Pyles: But in addition to the end of 2022, the new year also brought a number of changes to retirement accounts and other savings vehicles. The IRS previously announced updated maximum annual contributions to retirement accounts in 2023. For example, employees with a 401(k), 403(b), 457 plan, or the federal government’s Thrift Savings Plan can now contribute up to $22,500 themselves. accounts.
This is an increase of about 10% from what was allowed in 2022. Also, those over 50 have a higher payout limit, allowing them to save up to $30,000 starting this year. IRA contribution limits increased more than 8% to $6,500 in 2023.
Anna Helhoski: There are also some changes coming to health savings accounts, or HSAs. If you’re enrolled in a high-deductible health plan, the amount you can save for your health savings account increases. It increases by $200 for individuals and $450 for families.
Sean Pyles: There were already a few things for people at or near retirement age. Social Security benefits will receive an 8.7% cost-of-living adjustment in 2023 — the largest since 1981. Premiums and deductibles for Medicare Part B will also drop for the first time in a decade. Insulin and vaccines will also be cheaper.
Anna Helhoski: Sean, we’ve looked at a lot of information about the changes to how people can save for retirement. If you have any questions about saving or money for retirement, feel free to leave us a voicemail or call the Nerd Hotline at 901-730-6373. This is 901-730-NERD. You can also email us at firstname.lastname@example.org. For more information on this episode, visit nerdwallet.com/podcast. Don’t forget to subscribe, rate and review us wherever you get this podcast.
Sean Pyles: This episode was produced by Anna and myself with the help of Liz Weston. Audio wizard Kaely Monahan mixed our sound and Anna recorded our show notes. Here is our brief disclaimer. We are not financial or investment advisors. This Nerdy information is provided for general educational and entertainment purposes and may not be applicable to your particular circumstances.
Anna Helhoski: With that, see you next time Nerds.
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