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

Many rules for retirement accounts like 401(k) plans, IRA and Roth IRA will soon change, after the Senate and House last week both approved $1.7 trillion federal spending bill which includes new regulations that are collectively referred to as the SECURE 2.0 Act of 2022.

These new retirement laws follow in the footsteps of the original SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019, which encouraged 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. It had previously had to be signed before midnight on Friday 23 December in order to avoid a partial federal government shutdownbut the Both the House and the Senate passed resolutions extending the deadline to Friday, December 30.

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

Some changes to the retirement account 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 rules for retirement accounts.

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 ability for employer plans to credit student loan payments with matching gifts to 401(k), 403(b) or SIMPLE plans. IRA. Government employers could 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 come into effect for pension plans from 2025.

What are the new retirement rules for required minimum distributions (RMDs)?

Currently, Americans must begin receiving the Required Minimum Distributions (RMDs) from their 401(k) and IRA accounts at age 72 (or 70½ if you reached that age before January 1, 2020). If approved, the SECURE 2.0 Act of 2022 would increase the age of RMDs to 73, effective January 1, 2023, and then to 75, effective January 1, 2033. (Roth IRAs are not subject to RMDs .)

The new retirement rules would also reduce the penalty for failing to take RMD. The previously high 50% excise penalty would be reduced to 25%, and further lowered to 10% if the error is corrected “in a timely manner”. The sentence reductions would take effect immediately after the law is passed.

How are the retirement account contribution 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 over 50 and introduce additional potential “catch-up” contributions. for those over 60.

IRS law currently allows people age 50 and older to contribute an additional $1,000 each year to their retirement accounts beyond the standard limit. Starting in 2024, instead of an additional $1,000 lump sum, older Americans could contribute an additional amount indexed to inflation.

For people aged 60, 61, 62 or 63, they could soon contribute even more catch-up money, if the bill is passed. In 2025, these 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 ages 50 and older. These 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 will repeal and replace the IRA tax credit, also known as “Savings loanInstead of a non-refundable tax credit, those eligible for the savings credit would receive a matching federal contribution to a retirement account. This change in tax law would begin with the 2027 tax year.

In the bill, Congress also changes IRS laws for retirement account rollovers of 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 roll over up to $35,000 in total 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 impacted by the new law?

The SECURE 2.0 Act of 2022 includes several rule changes that would benefit Americans who need to take money out of their retirement accounts sooner. Normally, withdrawals from retirement accounts made before the account owner reaches age 59.5 are subject to a 10% penalty tax.

First, Congress plans to add a basic exception for emergencies. Account holders under the age of 59½ could withdraw up to $1,000 a year in an emergency and have three years to repay the distribution if they choose. No further emergency withdrawals can be made during this three-year period unless a refund is made.

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

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

The new retirement rule changes would also allow those with accounts 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. From 2025, the hardship withdrawal rules would be the same for 403(b) and 401(k) plans.

What would be the retirement account changes for employers?

Proposed changes to retirement account rules in the SECURE 2.0 Act of 2022 would impact employers as well as employees at least as much. The biggest change for companies would be that any new 401(k) or 403(b) plan starting in 2025 must automatically enroll workers who don’t opt ​​out.

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

Changes to pension rules would also give employers the ability to offer employees “pension-linked emergency savings accounts” that would act as hybrids between emergency savings and retirement savings. Employers could automatically enroll workers up to 3% of their salary with a contribution limit of $2,500.

Contributions to these emergency accounts would be taxed as Roth contributions and would be eligible for employer matching. Employees could make four withdrawals per year from the account without penalty or additional tax. If they leave the company, they can withdraw the cash emergency 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 pension plan administrators the ability to opt out of recovering overpayments accidentally paid to retirees, and it enacts protections and limitations for retirees if companies decide to claw back the money.

What systemic changes would Congress make to pension plans?

If approved as part of a broader spending package, the SECURE 2.0 Act of 2022 would introduce several sweeping changes for retirement in America generally. One of the biggest would be a mandate for the Department of Labor to create a searchable national database of pension plans 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 Employees Retirement Income Security Act 1974 (ERISA) would also receive an update. ERISA sets minimum standards for administrators of private pension plans, including communication with plan members.

The proposed ERISA rule change would require private pension plans to provide participants with at least one paper statement per year, unless the participant opts out. However, the rule would not take effect until 2026 and would not affect the other three quarterly filings required by ERISA.

For more information on the retreat, get answers to all your social security questionsincluding whether or not you can receive benefits while you are still working.

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