The $1.7 trillion government budget measure voted through both chambers of Congress last week includes significant reforms aimed at encouraging individuals to save more for retirement.
The massive 4,155-page law, which funds the federal government through September 2023, begins on page 2,046 with retirement reform legislation.
Retirement System
The law, known as SECURE 2.0, is designed to build on the retirement system enhancements achieved by the Secure Act of 2019 (SECURE).
These adjustments included expanding access to retirement benefits for part-time workers and increasing the minimum distribution age for certain retirement funds from 70 1/2 to 72 years.
The latest program adjustments come as nearly half of older workers lack retirement savings. A study conducted earlier this year by Allianz Life revealed that more than six in ten non-retirees fear running out of money more than death. Here is a glimpse at what the new program modifications might accomplish.
Employers would be obliged to automatically enroll employees in their 401(k) plan at a rate of at least 3% and no more than 10% of pre-tax earnings.
Participation in 401(k) plans is now optional for employees, and it will be up to them to opt-out if they do not choose to join. Companies with less than 10 employees and those that have been in operation for less than three years would be excluded from the mandate. The modifications will take effect after December 31, 2024.
Student Loan Payments
Those who are now struggling to save for retirement due to college debt could receive a significant boost. One proposal would allow companies to count an employee’s student loan payment toward their retirement match, so increasing the retirement contributions of such employees.
Currently, only employee contributions are matched by employers. The measure would ensure that employees are investing for retirement and paying off student loans. The clause will take effect after December 31, 2023.
Emergency Withdrawals
Currently, if an employee withdraws funds from a 401(k) prior to age 59 1/2, they must pay taxes on the funds plus a 10% early withdrawal penalty.
The employee would still owe income tax on the withdrawal in the year it is taken out, but they could receive a tax refund if they repaid the withdrawal within three years.
If the withdrawal is not reimbursed, the employee must wait until the conclusion of the three-year repayment period before being eligible for another emergency withdrawal. The regulation will become effective after December 31, 2023.
Minimum Distributions
The bill would change the present law addressing required minimum distributions, or RMDs, which are the amount of money that retirees are required to remove annually. Currently, persons must begin taking RMDs at the age of 72.
The law would increase the age to 73 in January 2023, 74 in 2030, and 75 in 2033.
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Access To Saver’s Credit
New modifications have been made to the Saver’s Credit, which allows certain lower-income individuals to receive additional tax advantages while saving for retirement.
Under the new guidelines, workers who earn less than a certain threshold and contribute to a retirement plan could receive a 50% government match for up to $2,000 in annual contributions.
The income restrictions are $35,500 for individuals and $71,000 for couples filing jointly.
The new regulations go effective after December 31, 2026.
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