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Congress Passes Major Changes to 401(k) and IRA Accounts: Everything You Need to Know

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Major rule changes for retirement accounts such as 401(k) plans🇧🇷 IRAs and Roth IRAs will go into effect soon. On Friday, December 23, the US House of Representatives passed Congress’ $1.7 trillion federal spending bill, which includes many changes to the rules for retirement accounts.

The US Senate passed the bill on Thursday and it now heads to President Joe Biden to have his signature become law. Previously, the spending bill needed to be signed into law by midnight tonight to avoid a partial federal government shutdown, but both the House and Senate passed resolutions extending the deadline to Friday, Dec. 30.

Many of the retirement rule changes in the bill are follow-ups to the Each Community Configuration for Retirement Enhancement (SECURE) Act of 2019. The new collective retirement rule changes in the bill are being called the SECURE 2.0 Act of 2022.

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

Some retirement account changes would take effect immediately after bill approval, while others would start in 2024 or later. 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 donations to 401(k) plans, 403(b) plans, or SIMPLE IRAs. 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 just by making their student loan payments and not 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 Minimum Required Distributions (RMDs)?

Currently, Americans must start receiving required minimum distributions (RMDs) from their 401(k) and IRA accounts starting at age 72 (or 70 and a half if you reached that age before January 1, 2020). If passed, the SECURE 2.0 Act of 2022 would raise the age of RMDs to 73, starting January 1, 2023, and then to 75, starting January 1, 2033. (Roth IRAs are not subject to RMDs.)

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

How are retirement account contribution limits changing?

While standard contribution limits for 401(k) plans and IRAs are unchanged, the bill would increase the catch-up limit for Americans over age 50 and introduce additional potential catch-up contributions. for people over 60 years old.

Currently, IRS law 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 an extra $1,000, older Americans could contribute an additional amount indexed for inflation.

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

How would the new retirement account rules affect taxes?

If the broad spending bill passes Congress and is signed into law, the bill will repeal and replace the IRA Tax Credit, otherwise known as the “Saverer Credit.” In lieu of a non-refundable tax credit, those who qualify for Saver’s Credit would receive a federal contribution equivalent to a retirement account. This tax law change would begin with the 2027 tax year.

In the proposed legislation, Congress is also amending IRS laws for renewals of 529 Plan Retirement Accounts, 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 fine.

Under the bill, beneficiaries of 529 college savings accounts would be allowed to roll up to $35,000 total in their lifetime from a 529 plan into 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 retirement account withdrawals 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 cash early from their retirement accounts. Typically, retirement account withdrawals made before the account holder reaches age 59 1/2 are subject to a 10% penalty.

First, Congress plans to add a basic exception for emergencies. Account holders under the age of 59 and a half can withdraw up to $1,000 a year for emergencies and have three years to pay the distribution if they choose. No further emergency withdrawals could be made within that three year period unless repayment took place.

The bill also specifies that employees would be allowed to self-certify their emergencies, meaning no documentation is required other than personal testimony. The bill would also completely eliminate the penalty for people with terminal illnesses.

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 employers’ 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 January 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. Beginning in 2025, the rules for hardship withdrawals would be the same for both 403(b) and 401(k) plans.

What would be the retirement account changes for employers?

The proposed changes to retirement account rules 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 starting in 2025 must 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%. Each year after 2025, these values ​​would increase by 1% until they reach a range of 10% to 15%. Retirement plans created before 2025 would not be subject to the same requirements.

Changes to retirement rules would also give employers the opportunity to offer employees “pension-linked emergency savings accounts” that would act as hybrids between emergency savings and retirement. Employers can automatically enroll workers up to 3% of their salary with a contribution limit 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 penalty or additional taxes. If they leave the company, they can 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 decide not to recover overpayments accidentally made to retirees, and it enacts protections and limitations for retirees if companies decide to take money back.

What systemic 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 America at large. 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 find lost or misplaced accounts. The agency would be required to launch the database within two years of project approval.

The Employee Retirement Income Security Act of 1974 (ERISA) would also receive an update. ERISA establishes minimum standards for private pension 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 annually, unless the participant opts out. The rule would not take effect until 2026, however, and would not affect the other three quarterly returns required by ERISA.

For more information about retirement, get answers to all your Social Security questionsIncluding whether or not you can receive benefits while still working🇧🇷

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