The new rules for retirement accounts such asAnd the And Roth IRAs took a step closer to reality on Thursday, December 22, as the US Senate passed an amended version of Congress’ $1.7 trillion federal spending bill that includes several new retirement regulations.
The House of Representatives will vote on the spending bill later Thursday. It must be passed and signed by President Joe Biden by midnight on Friday, December 23 to avoid a partial shutdown of the federal government.
Many of the retirement law changes in the bill are follow-ups to the Every Community Preparing for Enhancement Retirement (SECURE) Act of 2019. The group’s new changes to retirement rules in the bill are called the SECURE Act 2.0 of 2022.
The biggest changes for most Americans with retirement accounts will be an extension of the minimum age required for distributions and an increase in “catch-up” limits for people over 60, but there are more than 90 different retirement changes included in the bipartisan spending bill.
Some retirement account changes will go into effect immediately after the law is passed, while others will begin in 2024 or later. Read on to learn everything you need to know about the new rules for retirement accounts.
The new retirement rule will help Americans pay off student loan debt
One of the more revolutionary changes included in SECURE Act 2.0 of 2022 will be the option for employer plans to credit student loan payments with matching donations to 401(k) plans, 403(b) plans, or simple IRAs. Government employers will also be able to contribute matching amounts to a 457(b) plan.
This proposed new rule could mean that people with significant student loan debt can still save for retirement just by making their student loan payments and without making any direct contributions to a retirement account. The rule applies to retirement plans beginning in 2025.
What are the new retirement rules for required minimum distributions (RMDs)?
Currently, Americans must begin receiving required minimum distributions (RMDs) from their 401(k) accounts and IRAs starting at age 72 (or 70 and a half if you got over that age before January 1, 2020). If approved, the SECURE 2.0 Act of 2022 would raise the age for RMDs to 73, effective Jan. 1, 2023, and then to 75, effective Jan. 1, 2033. (Roth IRAs are not subject to RMDs.)
The new retirement rules will also reduce the penalty for failing to take MSCs. The excise penalty of the previous 50% will be reduced to 25%, and it will be reduced to 10% if the error is corrected “in time”. The penalty reduction shall take effect as soon as the law is approved.
How are retirement account contribution limits changed?
While the standard limits for contributions to 401(k) plans and IRAs won’t change, the law will strengthen the “catch-up” limit for Americans over 50 and introduce additional potential “catch-up” contributions for those over 60.
The IRS currently allows people age 50 and older to contribute an additional $1,000 to their retirement accounts each year over the standard limit. Starting in 2024, instead of an additional $1,000 flat amount, older Americans will be able to contribute an additional inflation-related amount.
For people ages 60, 61, 62 and 63, they’ll soon be able to contribute more catch-up money, if the bill passes. In 2025, those seniors will be allowed to contribute up to $10,000 annually or more at 50% (whichever is greater) of the standard catch-up contribution for those 50 and over. Increased contribution limits will also be indexed with inflation starting in 2025.
How will the new retirement account rules affect taxes?
If the All-Inclusive Spending Bill is passed by Congress and signed into law, the Act would repeal and replace the IRA Tax Credit, also known as the Savings Credit. Instead of a non-refundable tax credit, those who qualify for the saver credit will receive a matching federal contribution to their retirement account. This change in the tax code will begin with the 2027 tax year.
In the proposed legislation, Congress would also amend the IRS laws for extending the retirement account from 529 plans, which are tax-advantaged savings accounts for higher education. Currently, any money withdrawn from a 529 plan that is not used for education is subject to a 10% federal penalty.
In the bill, beneficiaries of 529 college savings accounts would be allowed to accumulate up to $35,000 in total from the 529 plan into a Roth IRA. A Roth IRA will still be subject to annual contribution limits, and the 529 must have been open for at least 15 years.
How will early withdrawals from retirement accounts be affected by the new law?
The SECURE Act 2.0 of 2022 includes several rule changes that would benefit Americans who need to withdraw money early from their retirement accounts. Normally, withdrawals from retirement accounts made before the account holder turns 59 1/2 are subject to a penalty tax of 10%.
First, Congress plans to add a basic exception for emergencies. Account holders under 59 1/2 can withdraw up to $1,000 annually for emergencies, and they have three years to pay off the distribution if they want. No further emergency withdrawals can be made during the three-year period unless repayment is made.
The bill also states that employees will be allowed to self-certify their emergencies, meaning no documents are required other than a personal certificate. The bill would also completely abolish punishment for people with terminal illnesses.
Americans affected by natural disasters will also get some relief from the proposed changes. The proposed new rules would allow up to $22,000 to be distributed from employer plans, or IRAs, in the event of a federally declared disaster. Withdrawals will not be penalized and will be treated as total income over three years. If the bill passes, the rule will apply to all Americans affected by natural disasters after January 26, 2021.
The new retirement rule changes will also allow account holders to make early withdrawals from 403(b) plans similar to 401(k) plans. Currently, unlike 401(k)s, hardship withdrawals from 403(b) accounts only include employee contributions, not earnings. Starting in 2025, the rules for emergency withdrawals will be the same for 403(b) and 401(k) plans.
What would the retirement account change be for employers?
The retirement account rule changes proposed in the SECURE Act 2.0 of 2022 will affect employers at least as much as employees. The biggest change for companies will be that any new 401(k) or 403(b) plans starting in 2025 must automatically enroll workers who don’t opt out.
Contributions for registered workers will automatically start at a minimum of 3% and a maximum of 10%. Each year after 2025, these amounts will increase by 1% until they reach a range of 10% to 15%. Retirement plans created before 2025 will not be subject to the same requirements.
Pension rule changes will also give employers the opportunity to offer employees “pension-linked emergency savings accounts” that would act as a hybrid between emergency and retirement savings. Employers can automatically credit workers with up to 3% of their salary up to a maximum of $2,500.
Contributions to these emergency accounts will be taxable as Roth contributions and will be eligible for employer matching. Employees can make four withdrawals per year from the account without penalty or additional taxes. If they leave the company, they can withdraw the contingency account as cash or convert it to a Roth account.
Other changes will allow employers for companies to automatically convert a participant’s IRA into a retirement plan at a new employer unless the participant explicitly chooses to do so. The SECURE Act 2.0 would also give managers of retirement plans the option of deciding not to recover erroneous overpayments to retirees, and it enacts protections and restrictions for retirees if companies decide to recover money.
What systemic changes might Congress make to retirement plans?
If approved as part of the larger spending package, the SECURE Act 2.0 of 2022 would introduce several broad changes to retirement in America at large. One of the largest such actions will be to authorize the Department of Labor to create a searchable national database of retirement plans to help people find lost or misplaced accounts. The agency will be required to release the database within two years of the bill being passed.
The Employees’ Income Security Act of 1974 (ERISA) will also get an update. ERISA sets minimum standards for private retirement plan administrators, including communication with participants.
The proposed ERISA rule change would require private retirement plans to provide participants with at least one paper statement per year, unless the participant chooses to do so. However, the rule will not take effect until 2026, and will not affect the other three quarterly statements required by ERISA.
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