(Trends Wide Business) — The new retirement rules could make it easier for Americans to accumulate retirement savings, and less expensive to withdraw, if lawmakers pass a retirement reform package before the end of this month.
The US House of Representatives has already passed its own version of the retirement plan rule changes, and two key Senate committees have passed their own versions. Since last summer, lawmakers have been trying to bundle the three bills into one big package known as Secure 2.0.
Once finalized, one idea is to attach that package to a general government spending bill that both houses of Congress can vote on before the holidays. But if lawmakers can’t agree on such an overhead bill, the Secure 2.0 plan will likely need to be resubmitted next year for consideration by the new Congress.
“The House of Representatives and the Senate have been working to reach an agreement and are close to achieving it; the final bill is almost ready,” said Democratic Sen. Ben Cardin, who cosponsored the bill approved by the Senate Finance Committee, in an emailed statement. “But the question is which vehicle will get you across the finish line. We absolutely need to make sure it’s a priority.”
While the details are still under wraps and no legislative language has been released, here’s a look at seven of the savings provisions that will most likely be included in any final retirement package, according to two retirement policy experts who have been following the process closely: Chris Spence, head of Federal Government Relations at the Teachers Insurance and Annuity Association of America; and Brigen Winters, principal and president of the Policy Practice at the Groom Law Group law firm.
1. Automatic enrollment in 401(k) plans may be required
Employers starting new workplace retirement savings plans may be required to automatically enroll employees in the plan. (Currently, it is optional for employers to do so.) It would then be up to the employee to actively opt out if he or she does not wish to participate.
The provision is likely to require a default contribution rate (for example, between 3% and 10%) plus automatic escalation (for example, 1% per year up to a maximum contribution rate of at least 10% but not more than 15%).
2. Enter employer contributions for student loan payments
When you have student loan debt to pay off, it’s also harder to save for retirement. The Secure 2.0 plan could allow employers to make a matching contribution to an employee’s retirement plan based on their student loan payments. That way, you’d make sure the employee is building retirement savings no matter what.
3. Raise the age for required minimum distributions
Before, when you turned 70½, you had to start withdrawing a minimum required amount from your 401(k) or IRA. Then the age rose to 72 years. Under the latest legislation, you probably won’t need to use your retirement savings until age 75 if you don’t want to.
4. Help employees create and access emergency savings
Typically, if you use your 401(k) plan before age 59½, you must not only pay taxes on that money, but also pay a 10% early withdrawal penalty.
For employees who are discouraged from saving money in a tax-deferred retirement plan because they worry it’s too complicated and expensive to access for emergencies, the Secure 2.0 plan can include one or two options to allay that fear.
One option would allow you to make a penalty-free withdrawal of up to $1,000 a year for emergencies. Although the employee still owes income taxes on that withdrawal in the year it is made, he could get that money back if he pays back the amount he withdrew within three years, Winters said.
Another could allow an employer to add an “additional account” to an employee’s retirement account, where the employee can contribute after-tax money explicitly for emergencies, Spence said. That money could be taken directly from your paycheck, just like your 401(k) contributions.
5. Increase catch-up contribution limits for older workers
Currently, if you’re age 50 or older, you can contribute an additional $6,500 to your 401(k) plan in addition to the annual federal limit of $20,500. Under the retirement package, people between the ages of 60 and 64 (final range may be narrower) can contribute $10,000, instead of $6,500.
However, to help pay the cost of the retirement package, another provision could require anyone making catch-up contributions to apply them to a Roth (individual retirement) account. So, instead of making pre-tax contributions up to the catch-up contribution limit, you could still contribute the same amount, but it would have to be with after-tax money. That money would grow tax-free and could be withdrawn tax-free in retirement. But the federal government would get the tax revenue from the original contribution up front.
6. Improve and simplify savings credit
There is an underutilized federal match for low-income retirement contributions of up to $2,000 a year. The new retirement package could improve and simplify the so-called savings credit so that more people can use it. Low-income taxpayers could get a refundable tax credit worth 50% of their savings up to a contribution limit in a given year.
Tax credits reduce your tax liability dollar for dollar. But refundable tax credits mean the taxpayer will get the money even if they don’t have a tax liability to reduce.
7. Facilitate savings for part-time workers
Part-time workers currently must be able to participate in a workplace retirement plan if they have at least three years of service and work at least 500 hours per year. The new package would likely reduce that service time to two years.
(Trends Wide Business) — The new retirement rules could make it easier for Americans to accumulate retirement savings, and less expensive to withdraw, if lawmakers pass a retirement reform package before the end of this month.
The US House of Representatives has already passed its own version of the retirement plan rule changes, and two key Senate committees have passed their own versions. Since last summer, lawmakers have been trying to bundle the three bills into one big package known as Secure 2.0.
Once finalized, one idea is to attach that package to a general government spending bill that both houses of Congress can vote on before the holidays. But if lawmakers can’t agree on such an overhead bill, the Secure 2.0 plan will likely need to be resubmitted next year for consideration by the new Congress.
“The House of Representatives and the Senate have been working to reach an agreement and are close to achieving it; the final bill is almost ready,” said Democratic Sen. Ben Cardin, who cosponsored the bill approved by the Senate Finance Committee, in an emailed statement. “But the question is which vehicle will get you across the finish line. We absolutely need to make sure it’s a priority.”
While the details are still under wraps and no legislative language has been released, here’s a look at seven of the savings provisions that will most likely be included in any final retirement package, according to two retirement policy experts who have been following the process closely: Chris Spence, head of Federal Government Relations at the Teachers Insurance and Annuity Association of America; and Brigen Winters, principal and president of the Policy Practice at the Groom Law Group law firm.
1. Automatic enrollment in 401(k) plans may be required
Employers starting new workplace retirement savings plans may be required to automatically enroll employees in the plan. (Currently, it is optional for employers to do so.) It would then be up to the employee to actively opt out if he or she does not wish to participate.
The provision is likely to require a default contribution rate (for example, between 3% and 10%) plus automatic escalation (for example, 1% per year up to a maximum contribution rate of at least 10% but not more than 15%).
2. Enter employer contributions for student loan payments
When you have student loan debt to pay off, it’s also harder to save for retirement. The Secure 2.0 plan could allow employers to make a matching contribution to an employee’s retirement plan based on their student loan payments. That way, you’d make sure the employee is building retirement savings no matter what.
3. Raise the age for required minimum distributions
Before, when you turned 70½, you had to start withdrawing a minimum required amount from your 401(k) or IRA. Then the age rose to 72 years. Under the latest legislation, you probably won’t need to use your retirement savings until age 75 if you don’t want to.
4. Help employees create and access emergency savings
Typically, if you use your 401(k) plan before age 59½, you must not only pay taxes on that money, but also pay a 10% early withdrawal penalty.
For employees who are discouraged from saving money in a tax-deferred retirement plan because they worry it’s too complicated and expensive to access for emergencies, the Secure 2.0 plan can include one or two options to allay that fear.
One option would allow you to make a penalty-free withdrawal of up to $1,000 a year for emergencies. Although the employee still owes income taxes on that withdrawal in the year it is made, he could get that money back if he pays back the amount he withdrew within three years, Winters said.
Another could allow an employer to add an “additional account” to an employee’s retirement account, where the employee can contribute after-tax money explicitly for emergencies, Spence said. That money could be taken directly from your paycheck, just like your 401(k) contributions.
5. Increase catch-up contribution limits for older workers
Currently, if you’re age 50 or older, you can contribute an additional $6,500 to your 401(k) plan in addition to the annual federal limit of $20,500. Under the retirement package, people between the ages of 60 and 64 (final range may be narrower) can contribute $10,000, instead of $6,500.
However, to help pay the cost of the retirement package, another provision could require anyone making catch-up contributions to apply them to a Roth (individual retirement) account. So, instead of making pre-tax contributions up to the catch-up contribution limit, you could still contribute the same amount, but it would have to be with after-tax money. That money would grow tax-free and could be withdrawn tax-free in retirement. But the federal government would get the tax revenue from the original contribution up front.
6. Improve and simplify savings credit
There is an underutilized federal match for low-income retirement contributions of up to $2,000 a year. The new retirement package could improve and simplify the so-called savings credit so that more people can use it. Low-income taxpayers could get a refundable tax credit worth 50% of their savings up to a contribution limit in a given year.
Tax credits reduce your tax liability dollar for dollar. But refundable tax credits mean the taxpayer will get the money even if they don’t have a tax liability to reduce.
7. Facilitate savings for part-time workers
Part-time workers currently must be able to participate in a workplace retirement plan if they have at least three years of service and work at least 500 hours per year. The new package would likely reduce that service time to two years.
