The spending bill congressional leaders agreed to early this morning creates significant new incentives for retirement savings and broadly eases rules for withdrawing funds. Like earlier versions, the measure would both help low- and moderate-income workers save for retirement and create yet another tax windfall for high-income savers.

The measure, called SECURE 2.0, adopts elements of bills approved by the House and the Senate Committee earlier this year. And not surprisingly, it contains some of the best, and worst, of both bills.   

The good.

The bill would:

Increase tax incentives for small business to create retirement accounts for their workers. The firms could receive a 100 percent tax credit up to $5,000 for the administrative costs of starting a plan and up to $1,000 per employee to match the employer’s contributions to 401(k)-type plans. The matching contribution credit would phase out gradually over five years. It also would subsidize start-up costs for firms that join multiple-employer plans.

While the measure would not require small businesses to offer 401(k)-type plans to workers, it would create incentives for them to do so.

Expand auto-enrollment for 401(k)-type defined contribution plans. The bill would require new plans to automatically enroll employees once they meet eligibility rules. The initial enrollment amount would be at least 3 percent of pay, gradually increasing to at least 10 percent. Workers could opt out or choose a higher contribution level. The change would apply to new plans only. Very small businesses, start-ups, religious institutions, and government plans would be exempt. The rules would apply starting in 2025.  

Revise the Savers Credit for low and moderate-income people. It would transform the current non-refundable tax credit into a more manageable direct matching federal contribution to a retirement account.  The government would match 50 percent of contributions up to $2,000, phasing out between $20,500 and $35,500 for single filers ($41,000 and $71,000 for couples filing jointly).

Require employers to include long-term part-time workers in 401(k) plans. This has been a significant gap in many existing plans.

Expand the use of required minimum distributions (RMDs) to purchase Qualifying Longevity Annuity contracts (QLACs). These are deferred annuities that pay out starting at age 75 or older, when seniors  may incur additional health or long-term care costs. Instead of taking a required taxable distribution, retirees could purchase a future annuity. The bill would increase the maximum investment to $200,000. It currently is $135,000 or 25 percent of the total retirement account balance.  

Create a “lost and found.” Workers who frequently change jobs may have retirement plans from several employers, but they often lose track of their accounts or employers lose contact with former workers. The  bill would create national searchable database to connect workers with their former plans.

Limit syndicated conservation easements. This provision has nothing to do with retirement savings but was added to the bill at the last minute, presumably to help raise revenue as well as close an egregious tax loophole. The bill limits charitable deductions for certain deals and requires some additional disclosure for others, though the disclosure is much more modest that some reformers would have liked.

The bad

The bill also would:

Once again increase the age for Required Minimum Distributions (RMDs) from retirement accounts. This time it would bump RMDs from age 72 to age 73, starting on January 1, then to 75 in 2033.

Allow higher “catch-up” contributions. Under current law, people aged 50 or older can increase their normal contributions by an extra $6,500. The bill would boost the add-on contribution to $10,000, indexed for inflation but only for those ages 60-63. It would not take effect until 2025.

These changes largely benefit high-income or high net-worth savers. Most retirees already withdraw at least their required distribution amounts to pay for normal living costs. The big beneficiaries of delaying RMDs are the wealthy who do not need retirement savings to pay expenses or their heirs.

Protect mega-IRAs. Early drafts of the bill would have curbed the use of retirement accounts to shelter tens of millions of dollars in individual accounts. But those provisions all these provisions were dropped in the final bill.  

The ugly

The package is funded with a budget gimmick. Its sponsors say it would not add to the deficit within the 10-year budget window used by congressional scorekeepers. But lawmakers made that happen by encouraging the use of Roth-type contributions to certain retirement plans. Roth contributions are made with after-tax funds but, unlike traditional IRAs and 401(k)s, withdrawals are tax-free. Thus, the bill results in more up-front tax revenue that shows up in the official budget score, though the federal government would lose money in the long run.

There is much good in this package. But the price is more tax benefits for wealthy retirees and workers and bigger deficits in the future.