Changing Rules for 401(k) and IRA Accounts: What’s in the New Congressional Bill?

Changing Rules for 401(k) and IRA Accounts: What's in the New Congressional Bill?
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Many rules for retirement accounts like 401(k) plans, GO TO Y Roth IRA soon to change, after the Senate and House approved a $1.7 trillion appropriation last week federal spending bill which includes new regulations that are collectively referred to as SECURE Law 2.0 of 2022.

These new retirement laws follow the path of the original SECURE (Shaping Every Community for Retirement Improvement) Act of 2019, which incentivized retirement plans for employers and gave investors more options to save for retirement. retirement.

The spending bill now heads to President Joe Biden for signing into law. Previously, it had to be signed before midnight on Friday, December 1. 23 to avoid a partial federal government shutdownbut Both the House and the Senate passed resolutions The deadline is extended until Friday, December 10, 30.

The biggest changes for most Americans with retirement accounts would be the extension of the age for required minimum distributions and higher “catch-up” limits for people age 60 and older, but there are more than 90 different retirement changes. included in the bipartisan spending bill.

Some retirement account changes would take effect immediately after the bill passes, while others would begin in 2024 or beyond. Read on to learn everything you need to know about the new retirement account rules.

New retirement rule would help Americans with student loan debt

One of the most revolutionary changes included in the SECURE 2.0 Act of 2022 would be the option for employer plans to credit student loan payments with matching gifts to 401(k) plans, 403(b) plans, or SIMPLE IRAs. Government employers may also contribute matching amounts to 457(b) plans.

This proposed new rule would mean that people with significant student loan debt could still save for retirement simply by making their student loan payments and without making direct contributions to a retirement account. The rule would take effect for retirement plans starting 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) and IRA accounts starting at age 72 (or 70½ if you reached that age before January 1, 2020). If passed, the SECURE 2.0 Act of 2022 would raise the age for RMDs to 73, effective January 1. on January 1, 2023, and then until 75, starting on January 1. January 1, 2033. (Roth IRAs are not subject to RMD.)

The new retirement rules would also reduce the penalty for not taking RMDs. The previously high 50% special penalty would be reduced to 25% and further reduced to 10% if the error is corrected “in a timely manner.” The sentence reductions would take effect immediately after the approval of the law.

How are retirement account limits changing?

While the standard limits for contributions to 401(k) plans and IRAs would not change, the bill would increase the “catch up” limit for Americans age 50 and older and introduce potential additional “catch up” contributions. per day” for those over 60 years of age.

IRS law currently allows people age 50 and older to contribute an additional $1,000 to their retirement accounts each year above the standard limit. Starting in 2024, instead of a flat $1,000 more, older Americans could contribute an additional amount that is indexed for inflation.

For people age 60, 61, 62 or 63, they will soon be able to contribute even more money to catch up, if the bill passes. In 2025, those seniors would be allowed to contribute up to $10,000 per year or 50% more (whichever is greater) than the standard catch-up contribution for people age 50 and older. Those increased contribution limits would also be indexed to inflation beginning in 2025.

How would the new retirement account rules affect taxes?

If the sweeping spending bill passes Congress and becomes law, the law would repeal and replace the IRA tax credit, also known as the “saver’s credit.” Instead of a non-refundable tax credit, those who qualify for the Savings Credit would receive a federal contribution equal to a retirement account. This tax law change would begin with tax year 2027.

In the proposed legislation, Congress is also amending IRS laws for retirement account rollovers 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 transfer up to a total of $35,000 over their lifetime from a 529 plan to a Roth IRA. The Roth IRA would still be subject to annual contribution limits, and the 529 account must have been open for at least 15 years.

How would early withdrawals from retirement accounts be affected by the new law?

The SECURE 2.0 Act of 2022 includes several rule changes that would benefit Americans who need to withdraw money early from their retirement accounts. Withdrawals from retirement accounts made before the account holder turns 59 1/2 are typically subject to a 10% penalty tax.

First, Congress plans to add a basic exception for emergencies. Account holders under age 59½ can withdraw up to $1,000 per year for emergencies and have three years to pay the distribution if they choose. No further emergency withdrawals can be made within that three-year period unless a refund occurs.

The bill also specifies that employees would be allowed to self-certify their emergencies, meaning no documentation is required beyond personal testimony. The bill would also eliminate the penalty entirely for the terminally ill.

Americans affected by natural disasters would also get some relief from the proposed changes. The proposed new rules would allow up to $22,000 from employer plans or IRAs to be distributed in the event of a federally declared disaster. Withdrawals would not be penalized and would be treated as gross income for three years. If the bill passes, the rule would apply to all Americans due to natural disasters after January 1. 26, 2021.

Changes to the new retirement rule would also allow those with accounts to make early withdrawals from 403(b) plans similar to 401(k) plans. Currently, unlike 401(k) plans, hardship withdrawals from 403(b) accounts only include employee contributions, not earnings. Beginning in 2025, the rules for hardship withdrawals would be the same for 403(b) and 401(k) plans.

What would be the changes to the retirement account for employers?

The proposed changes to the retirement account rule in the SECURE 2.0 Act of 2022 would affect employers at least as much as employees. The biggest change for companies would be that any new 401(k) or 403(b) plan after 2025 must automatically enroll workers who do not opt ​​out.

Contributions from affiliated workers would automatically start at a minimum of 3% and a maximum of 10%. Each year after 2025, those amounts would increase by 1% until reaching a range of 10% to 15%. Retirement plans created before 2025 would not be subject to the same requirements.

The retirement rule changes would 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 could automatically enroll workers for up to 3% of their salary with a contribution cap of $2,500.

Contributions to these emergency accounts would be taxed like Roth contributions and would qualify for employer matching. Employees could make four withdrawals per year from the account without additional penalties or taxes. If they leave the company, they could withdraw the emergency cash account or transfer it to a Roth account.

Other changes for employers would allow companies to automatically transfer a participant’s IRA to a retirement plan at a new employer, unless the participant explicitly opts out. The SECURE 2.0 Act would also give retirement plan administrators the option to opt out of recovering overpayments accidentally made to retirees, and enacts protections and limitations for retirees if companies choose to recover the money.

What systematic changes would Congress make to retirement plans?

If passed as part of the larger spending package, the SECURE 2.0 Act of 2022 would introduce several broad changes to retirement in the United States in general. One of the biggest would be a mandate for the Department of Labor to create a searchable national retirement plan database to help people find lost or misplaced accounts. The agency would be required to launch the database within two years of the bill’s passage.

The Employee Retirement Income Security Act of 1974 (ERISA) would also receive an update. ERISA sets minimum standards for private retirement plan administrators, including communication with participants.

ERISA’s proposed rule change would require private retirement plans to provide participants with at least one paper statement per year, unless the participant opts out. However, the rule would not go into effect until 2026 and would not affect the other three quarterly statements required by ERISA.

For more information on retirement, get answers to all your questions about Social Securityincluded whether or not you can receive benefits while you are still working.

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