Changes to pension savings could come into effect soon. Here’s what that means for you

Editor’s note: This is an update the story originally published on December 8, 2022.

New York
CNN Business

New retirement rules could soon be in place if lawmakers pass a major spending package this week that could make it easier for Americans to accumulate retirement savings and make it less expensive to withdraw them.

Known as Secure 2.0, the retirement savings provisions were taken from a bill passed by the House and bills passed by two Senate committees.

“[SECURE 2.0] will help increase savings, provide greater access to workplace retirement plans and provide more workers with a secure income stream in retirement,” said Thasunda Brown Duckett, president and CEO of TIAA, one of the largest retirement service providers in the United States. . .

Here’s a look at the seven provisions of the package, known on Capitol Hill as an omnibus, according to an analysis by the Senate Finance Committee.

Most employers starting new workplace retirement savings plans may require employees to be automatically enrolled in the plan. (Currently, it is optional for employers to do this.) If they do not wish to participate, it is up to the employee to actively opt out.

The Secure 2.0 provision requires employers to increase the default payment rate for the employee by at least 3% but not more than 10%, plus the 1% annual automatic contribution rate by at least 10% but not more. More than 15%.

The provision will come into force after December 31, 2024.

When you have to pay off student loan debt, it makes it harder to save for retirement. Secure 2.0 will allow employers to make a matching contribution to an employee’s retirement plan based on their qualifying student loan payments. This way, it will ensure that the employee builds up retirement savings no matter what.

The provision will come into force after December 31, 2023.

Previously, you had to start withdrawing the required minimum amount from your 401(k) or IRA each year when you turned 70-1/2. Later, the age increased to 72. According to the Secure 2.0 package, it will increase to 73 starting in 2023 and 75 after ten years.

Normally, if you tap your 401(k) money before age 59-1/2, you not only have to pay taxes on that money, but you also have to pay a 10% early withdrawal penalty.

For employees who refuse to keep money in a tax-deferred retirement plan because they worry that it would be too complicated and expensive to access it in case of an emergency, Secure 2.0 could alleviate that fear: It would allow employees to withdraw from a retirement plan without penalty. up to $1,000 per year for emergencies. Although employees still owe income tax on this withdrawal, they can get that tax back if they make the withdrawal within three years.

If they don’t repay, they will have to wait until the three-year repayment period is over before another emergency withdrawal is allowed.

The provision will come into force after December 31, 2023.

Currently, if you’re 50 or older, you can add $6,500 to your 401(k) on top of the $20,500 annual federal limit that went into effect this year.

Under the pension package, instead of $6,500, 60, 61, 62 and 63-year-olds will be allowed to contribute $10,000 or 50% more than the usual withholding amount in 2025, whichever is greater.

The provision will come into force after December 31, 2024.

To help defray the cost of the pension package, another provision that would take effect a year early would require anyone with more than $145,000 in compensation to “Rothify” their contributions. So instead of making a pre-tax contribution up to the catch-up limit, you can still contribute the same amount but be taxed in the same year. Your contribution will be tax-free later and may be tax-free in retirement. However, the federal government would receive tax revenue from the original withholding contribution in advance.

There is an underutilized federal match for low-income pension contributions of up to $2,000 a year. The new package will improve and simplify the so-called Protective Credit so that more people can use it. Eligible filers (for example, married couples earning $71,000 or less) can receive a matching contribution from the federal government worth up to 50% of their savings, but the match cannot exceed $1,000.

The provision will enter into force after December 31, 2026.

Currently, part-time employees must be allowed to participate in a workplace pension plan if they have three years of service and work at least 500 hours per year. The new package will reduce this service period to two years.

The provision will come into force after December 31, 2024.

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