Editor’s note: This is an update for a story Originally published December 8, 2022.
There may soon be new retirement rules that could make it easier for Americans to accumulate retirement savings — and make it less expensive to withdraw them — if lawmakers pass a big spending package this week.
The retirement savings provisions — known as Secure 2.0 — were drawn from a bill passed by the House and bills passed by two Senate committees.
“[SECURE 2.0] It will help increase savings, ensure greater access to workplace retirement plans, and provide more workers with the opportunity to receive a secure stream of income in retirement,” said Thasonda Brown Duckett, president and CEO of TIAA, one of the largest providers of retirement services in the United States.
Here’s a look at seven of the items in the package, known on Capitol Hill as comprehensive, based on a breakdown from the Senate Finance Committee.
Most employers who start new workplace retirement savings plans may be required to automatically enroll employees in the plan. (It is currently optional for employers to do so.) It will then be up to the employee to actively opt out if they do not wish to participate.
Providing Secure 2.0 requires employers to set a default contribution rate of at least 3% but not more than 10% for the employee plus an automatic contribution increase of 1% annually up to a maximum contribution rate of at least 10% but no more. from 15%.
The provision will come into effect after December 31, 2024.
When you have to pay off student loan debt, it makes it harder to save for retirement. Secure 2.0 will allow employers to make a matching contribution to an employee’s retirement plan based on eligible student loan payments. This way, you will ensure that the employee builds retirement savings no matter what.
The provision will become effective after December 31, 2023.
It used to be that when you turned 70-1/2 you had to start withdrawing the minimum required amount from your 401(k) or IRA each year. After that, the age increased to 72 years. Under the Secure 2.0 package, it will rise to 73 starting in 2023 and then to 75 a decade later.
Typically if you tap into a 401(k) before age 59-1/2, you not only have to pay taxes on that money, but also a 10% early withdrawal penalty.
For employees who are discouraged from saving money in a tax-deferred retirement plan because they worry that accessing it in an emergency will be too complicated and expensive, Secure 2.0 may alleviate that fear: It will allow employees to withdraw money without penalty of up to $1,000 a year for emergencies. . While employees will still owe income tax on that withdrawal in the year it was made, they can get that tax back if they pay off the withdrawal within three years.
If they do not repay the withdrawal amount, they will have to wait until the three-year repayment period expires before they are allowed to make another emergency withdrawal.
The allowance will come into effect after December 31, 2023.
Currently, if you’re 50 or older, you can contribute an additional $6,500 to your 401(k) in addition to the $20,500 annual federal limit in effect this year.
Under the retirement package, instead of $6,500, those ages 60, 61, 62 and 63 will be allowed to contribute $10,000, or 50% more than the usual compensation amount in 2025, whichever is greater.
The provision will become effective after December 31, 2024.
To help pay for the cost of the retirement package, however, another provision that goes into effect a year ago will require anyone with more than $145,000 in compensation to “Rothify” their compensation contributions. So, instead of making pre-tax contributions that amount to a catch-up, you can still contribute the same amount but be taxed in the same year. Your contribution will then grow tax-free and may be withdrawn tax-free in retirement. But the federal government will get the tax revenue from the original compensation contribution upfront.
There is an underutilized federal match for retirement contributions for low-income earners of up to $2,000 per year. The new package will improve and simplify the so-called savings credit so that more people can use it. Eligible applicants (for example, spouses making $71,000 or less) can receive a similar contribution from the federal government worth up to 50% of their savings, but the match cannot exceed $1,000.
The ruling will enter into force after December 31, 2026.
Currently part-time workers must be allowed to participate in a workplace retirement plan if they have three years of service and work at least 500 hours per year. The new package will reduce the service time to two years.
The ruling will enter into force after December 31, 2024.
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