Inflation, if it lasts long enough and hurts deeply enough, will make people rethink priorities. That seems to be the conclusion of a new Bank of America Report called Tracking the Confidence of Plan Participants which outlines current trends of workers who are enrolled in their employer’s 401(k) plan.


Across all age categories, the average contribution rate is 6.4%. That’s down from 6.6% the previous year. But maybe the most concerning discovery is that 26% of all plan participants contribute 3% or less to their retirement accounts, and surprisingly, the age group with the largest number of people contributing 3% or less, 43%, is Baby Boomers—the group closest to retirement.


The number of participants borrowing from their 401(k) was down a bit, 2.1% from 2.3% in 2021. But defaults on those loans were 15.9%, up from 15.7% the previous year. More than half the loans taken in 2022 were taken by workers in the 30-49 age bracket, which also had the most loans in default at the end of the year than any other generation.


Knowing there is a retirement saving problem in the U.S., Congress passed the SECURE Act 2.0 in hopes of encouraging more saving and planning for retirement by making changes to contribution and distribution rules for retirement plans and IRAs.


Required Minimum Distributions (RMD)

Before the SECURE Act of 2019, you were forced to take required distributions from IRAs and 401(k)s beginning at age 70 ½. The SECURE Act changed the age to 72 for anyone reaching that age after January 1, 2020. Under SECURE 2.0, the age for RMDs goes up to 73 beginning January 1, 2023, and then to age 75 beginning January 1, 2033.


The new rules are also a little more forgiving if you fail to take your RMD by the end of the year. Under the old rules, you were charged a 50% penalty if you didn’t get the required distribution out by 12/31. As of January 1, 2023, the penalty is reduced to 25%, and it goes down to 10% if the failure is corrected “in a timely manner,” although there’s no definition of that phrase.


Contribution Limits for 401(k)s and IRAs

Standard contribution limits to 401(k)s and IRAs, adjusted each year for inflation, will not change. The improvement comes for people eligible for catch-up contributions. Under the old rules, if you were age 50 or older, the catch-up contribution limit for IRAs was $1,000 and $6,500 to 401(k) accounts.


Beginning in 2024, instead of a flat $1,000, the contribution will be indexed for inflation just like the base amount. However, if the inflation-adjusted amount is not a multiple of $100, the new amount will be rounded down to the next lower multiple of $100. As a result, the $1,000 amount might not rise right away.


In 2025, SECURE 2.0 adds a special catch-up contribution limit to 401(k) plans for employees ages 60-63. Their catch-up contribution limit will be $10,000 or 150% of the “standard” catch-up contribution amount for 2024. The $10,000 amount will be adjusted for inflation each year starting in 2026.


Starting in 2024, the SECURE 2.0 Act also requires all catch-up contributions for workers with wages over $145,000 during the previous year to be deposited into a Roth (i.e., after-tax) account. The wage threshold will be adjusted annually for inflation beginning in 2025 (rounded down to the lowest multiple of $5,000).


In 2024, the new legislation authorizes “starter 401(k) plans” for employers with no retirement plan. It would require all workers to be enrolled in the plan by default with a 3% to 15% employee contribution rate. A $1,000 catch-up contribution is also allowed for workers who are at least 50 years old and participating in the starter 401(k) plan. The $1,000 amount will be adjusted annually for inflation.


Will the changes make a difference in the retirement saving habits of Americans? Will they look at the changes as an opportunity? Or will retirement be obscured by the here and now and the reality of retirement funds needed elsewhere? The answer no doubt lies in the length and depth of the current inflation cycle.