retirement accounts like 401(k) plans, IRAs and Roth IRAs will soon be subject to a new set of regulations after the Senate and House of Representatives approved a $1.7 trillion federal spending bill that includes new rules for retirement plans.
Building on the original SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019, the SECURE 2.0 Act of 2022 incentivizes retirement plans for employers and gives investors more options.
The federal spending bill now goes to President Joe Biden, who is expected to sign it by December 30.
The biggest changes for most Americans with retirement accounts would be increasing the minimum distribution age and increasing “catch-up” limits for people over 60. In total, however, the bipartisan bill contains more than 90 different pension amendments.
Some changes to the retirement account would take effect immediately after passage of the bill, while others would begin in 2024 or beyond.
Required Minimum Distributions (RMDs)
Currently, Americans must begin receiving required minimum distributions (RMDs) from their 401(k) and IRA accounts at age 72 (or 70.5 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, beginning January 1, 2023, and then further to 75, beginning January 1, 2033. (Roth IRAs are not subject to RMDs.)
The new rules would also reduce the penalty for not taking RMDs. The previously high 50% excise penalty would be reduced to 25% and further reduced to 10% if the error is corrected ‘in time’. The reductions in sentences would take effect immediately after the law was passed.
While the standard limits on 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.
The IRS law currently allows people age 50 and older to pay an additional $1,000 each year into their retirement accounts over and above the standard limit. Beginning in 2024, older Americans could make an inflation-linked contribution instead of a flat $1,000.
For people aged 60, 61, 62 or 63, they could soon contribute even more catch-up money if the law is passed. In 2025, these seniors could be paying up to $10,000 per year, or 50% more (whichever is greater) than the standard catch-up contribution for people age 50 and older. These increased contribution limits would also be inflation-indexed from 2025.
If the Comprehensive Spending Act passes Congress and is signed into law, the legislation would repeal and replace the IRA tax credit, also known as the “savings credit.” In lieu of a non-refundable tax credit, those who qualify for the savings loan would receive a matching federal contribution to a retirement account. This change in tax law would begin with tax year 2027.
In the proposed legislation, Congress will also amend the IRS laws for extending retirement accounts of 529 plans, which are tax-advantaged higher education savings accounts. Currently, any money withdrawn from a 529 plan that is not used for education is subject to a 10% federal penalty.
Under the bill, beneficiaries of 529 college savings accounts would be allowed to transfer up to a total of $35,000 from a 529 plan to a Roth IRA over their lifetime. The Roth IRA would still be subject to annual contribution limits and the 529 account must have been open for at least 15 years.
The SECURE 2.0 Act of 2022 includes several rule changes that would benefit Americans who need to withdraw money from their retirement accounts early. Typically, withdrawals from retirement accounts made before the account holder turns 59.5 are subject to a 10% penalty tax.
First, Congress plans to add a fundamental exception for emergencies. Account holders under the age of 59.5 can withdraw up to $1,000 per year for emergencies and have three years to repay the distribution if they choose. No further emergency withdrawals can be made within this three year period unless a refund is made.
The bill also allows employees to self-certify their emergencies, meaning no documentation is required aside from personal statements. The bill would also completely abolish punishment for people who are terminally ill.
Americans affected by natural disasters would also experience some relief from the proposed changes. The proposed new rules would allow for the distribution of up to $22,000 from employer plans or IRAs in the event of a federally declared disaster. The withdrawals would not be sanctioned and would be treated as gross income for three years. If the law is passed, the rule would apply to all Americans affected by natural disasters after January 26, 2021.
The new retirement rule changes would also allow account holders to make early withdrawals from 403(b) plans, similar to 401(k) plans. Unlike 401(k)s, hardship withdrawals from 403(b) accounts currently only include employee contributions, not income. Beginning in 2025, hardship withdrawal rules would be the same for 403(b) and 401(k) plans.
Debt on student loans
One of the more 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 donations to 401(k) plans, 403(b) plans, or SIMPLE IRAs. State employers could also contribute equivalent amounts to 457(b) plans.
This would mean that people with significant student loan debt could still save for retirement by making their student loan payments without making direct contributions to a retirement account.
The new regulation would come into effect in 2025.
changes for employers
The proposed changes to the retirement savings scheme in the SECURE 2.0 Act of 2022 would affect employers at least as badly as employees. The biggest change for companies would be that starting in 2025, all new 401(k) or 403(b) plans would have to automatically enroll workers who don’t opt out.
Contributions from automatically enrolled workers would start at a minimum of 3% and a maximum of 10%. After 2025, these amounts would increase by 1% each year until they reach a range of 10% to 15%. Retirement plans created before 2025 would not be subject to the same requirements.
The pension rule changes would also allow employers to offer workers “pension-linked emergency savings accounts,” which would act as a hybrid between emergency and retirement plans. Employers could automatically enroll workers with up to 3% of their salary, with a contribution cap of $2,500.
Contributions to these emergency accounts would be taxed as Roth contributions and would qualify for employer matching. Employees could make four withdrawals per year from the account without penalty or additional taxes. If they leave the company, they could withdraw cash from the 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 pension plan with a new employer, unless the participant specifically opts out. The SECURE 2.0 Act would also give pension plan administrators the ability to choose not to recover overpayments accidentally paid to retirees, and it enacts protections and restrictions for retirees if companies decide to take money back.
More information for contributors
If approved as part of the larger spending package, the SECURE 2.0 Act of 2022 would introduce several sweeping changes to retirement in America in general. One of the biggest would be a mandate for the Department of Labor to create a national, searchable database of retirement plans to help people locate lost or misplaced accounts. The agency would have to launch the database within two years of the passage of the bill.
The Employee Retirement Income Security Act of 1974 (ERISA) would also receive an update. ERISA sets minimum standards for personal pension plan administrators, including how to communicate with participants.
The proposed change to ERISA rules would require private pension companies 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 financial statements required by ERISA.
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