Congress is considering passing a spending package this week, which is aimed at making it easier for Americans to accumulate retirement savings and make it less costly to withdraw them. The retirement savings provision was pulled from a House-passed bill and bills passed by a pair of Senate committees.
The provisions – titled “Secure 2.0” will help increase savings, ensure greater access to workplace retirement plans and provide workers with an opportunity to receive a stream of income in retirement. These are the seven provisions included in the package:
1. Require Auto-Enrollment in 401k Plans
Employers starting new workplace retirement savings plans could be required to automatically enroll employees in the plan. Currently, it is optional for employers to do so. It would be then up to the employee to opt out if they don’t want to participate.
2. Allow Employer Contributions For Student Loan Payments
Paying down student loan debt makes it more difficult to save for retirement. This provision would allow employers to make a matching contributions to an employee’s retirement plan based on their student loan payments.
3. Age increased for required minimum distributions
Originally, when you reached 70, you had to start withdrawing a minimum amount from your 401k or IRA each year. But then, the age was raised to 72. Under this new package, the age would again be raised to 73 in 2023 and then 10 years later raised to 75.
4. Help Employees Build and Access Emergency Savings
When you tap your 401k before age 59, you must pay taxes on the money, but also a 10% early-withdrawal penalty.
Now, as part of this package, it would allow employees to make a penalty-free withdrawal of up to $1,000 a year for emergencies. The income tax could be refunded if they repay the withdrawal within three years. If they don’t repay the withdrawal, they would have to wait for another three years to make another emergency withdrawal. This provision would go into effect after December 31, 2023.
5. Increase Catch-Up Contribution Limits For Older Workers
For those 50 or older, you can contribute an extra $6,500 to your 401k along with the $20,500 federal limit in place this year. However, under the new provision, those 60-63 would be allowed to contribute $10,000 or 50% more than the regular catch-up amount in 2025. This provision would start after December 31, 2024.
To help pay for the cost of this provision, another provision would go into effect a year earlier that would require those with compensation over $145,000 to “Rothify” their catch-up contributions. The contributions would grow tax-free and could be withdrawn tax-free in retirement. However, the federal government would get the tax revenue from the first catch-up contribution upfront.
6. Strengthen and Simplify the Saver’s Credit
This provision would enhance a lesser-known federal match that exists for lower-income earners’ retirement contributions up to $2,000 a year.
The new provisions would simplify the Saver’s Credit, so more could use it. Those eligible, including married couples earning $71,000 or less, could get a matching contribution from the government worth up to 50% of their savings. This provision would become active after December 31, 2026.
7. Part-Time Workers Given Easier Opportunity to Save
Right now part-time workers are allowed to participate in a company retirement plan if they have accumulated three years of service and work 500 hours a year. This provision would reduce the service years to only two years. This would go into effect in 2025.
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