New regulations are coming to your retirement plans. Thanks to a $1.7 trillion federal spending bill that the Senate and House approved just before Christmas, your retirement accounts like, spirit will soon be under a new set of regulations.
Following the original SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019, the SECURE 2.0 Act of 2022 (PDF) incentivizes retirement plans for employers and gives investors more options.
The federal spending bill now heads to President Joe Biden, who has said he will sign it by the Dec. 30 deadline.
The biggest changes for most Americans with retirement accounts would be the extension of the age for required minimum distributions and increased “catch-up” limits for people over 60. But there are more than 90 different retirement changes overall in the bipartisan bill.
Some retirement account changes would take effect immediately after the passage of the bill, while others would start in 2024 or beyond.
Required minimum distributions, or RMDs
Currently, Americans must start receiving required minimum distributions from their 401(k) and IRA accounts starting at age 72 (or 70 and a half if you turned that age before Jan. 1, 2020). If approved, the SECURE 2.0 Act of 2022 would raise the age for RMDs to 73, starting on Jan. 1, 2023, and then further to 75, starting on Jan. 1, 2033. (Roth IRAs are not subject to RMDs.)
The new rules would also reduce the penalty for failing to take RMDs. The previously steep 50% excise penalty would be reduced to 25%, and lowered further to 10% if the error is corrected “in a timely manner.” The penalty reductions would take effect immediately after the passage of the law.
While the standard limits for contributions to 401(k) plans and IRAs wouldn’t change, the bill would boost the “catch-up” limit for Americans over 50 and introduce additional potential “catch-up” contributions for those older than 60.
IRS law currently allows people 50 and up to contribute an additional $1,000 to their retirement accounts each year over the standard limit. Starting in 2024, instead of a flat $1,000 more, older Americans would be able to contribute an additional amount that is indexed to inflation.
For people aged 60, 61, 62 or 63, they would soon be able to contribute even more catch-up money, if the bill is passed. In 2025, those 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 those 50 and up. Those increased contribution limits would also be indexed with inflation starting in 2025.
If the sweeping spending bill is signed into law, the law would repeal and replace the IRA tax credit, also known as the “Saver’s Credit.” Instead of a nonrefundable tax credit, those who qualify for the Saver’s Credit would receive a federal matching contribution to a retirement account. This change in tax law would start with the 2027 tax year.
Congress is also amending the IRS laws for retirement account rollovers from 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 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.
The SECURE 2.0 Act of 2022 includes several rule changes that would benefit Americans who need to withdraw money early from their retirement accounts. Normally, withdrawals from retirement accounts made before the owner of the account reaches 59 and a half years old are subject to a 10% penalty tax.
First, Congress plans to add a basic exception for emergencies. Account holders who are younger than 59 and a half could withdraw up to $1,000 per year for emergencies, and have three years to repay the distribution if they want. No further emergency withdrawals could be made within that three-year period unless repayment occurs.
The bill also specifies that employees would be allowed to self-certify their emergencies, that is, no documentation is required beyond personal testimony. The bill would also eliminate the penalty completely for people who are terminally ill.
Americans impacted by natural disasters would also get some relief with the proposed changes. The proposed new rules would allow up to $22,000 to be distributed from employer plans or IRAs in the case of a federally declared disaster. The withdrawals would not be penalized and would be treated as gross income over three years. If the bill passes, the rule would 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 with 401(k)s, hardship withdrawals from 403(b) accounts only include employee contributions, not earnings. Starting in 2025, the rules for hardship withdrawals would be the same for 403(b) and 401(k) plans.
Student loan debt
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. Government employers would also be able to contribute matching amounts to 457(b) plans.
This would mean that people with significant student loan debt could still save for retirement just by making their student loan payments, without making any direct contributions to a retirement account.
The new regulation would take effect in 2025.
Changes for employers
The proposed retirement account rule changes in the SECURE 2.0 Act of 2022 would impact employers at least as much as employees. The biggest change for companies would be that, starting in 2025, any new 401(k) or 403(b) plans must automatically enroll workers who don’t opt out.
Contributions from workers automatically enrolled would start at a minimum of 3% and a maximum of 10%. Each year after 2025, those amounts would rise 1% until they reach a range of 10% to 15%. Retirement plans created before 2025 would not be subject to the same requirements.
The retirement rule changes would also give employers the opportunity to offer employees “pension-linked emergency savings accounts” that would act as hybrids between emergency and retirement savings. Employers could automatically enroll workers at up to 3% of their salary with a contribution cap 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 with no penalty or additional taxes. If they leave the company, they could withdraw the emergency account as cash or roll it over into a Roth account.
Other changes for employers would allow companies to automatically transfer a participant’s IRA into a retirement plan at a new employer unless the participant explicitly opts out. The SECURE 2.0 Act would also provide administrators of retirement plans the option of deciding not to recoup overpayments accidentally made to retirees, and it enacts protections and limitations for retirees if companies do decide to take money back.
More information for contributors
The SECURE 2.0 Act of 2022 would introduce several broad changes for 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 find lost or misplaced accounts. The agency would be required to launch the database within two years of the bill’s passage.
The Employee Retirement Income Security Act of 1974 would also get an update. ERISA establishes minimum standards for administrators of private retirement plans, including communication with participants.
The proposed ERISA rule change would require private retirement plans to provide participants with at least one paper statement a year unless the participant opts out. The rule wouldn’t take effect until 2026, however, and wouldn’t impact the other three quarterly statements required by ERISA.
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