Changing the rules for 401(k) and IRA accounts: What’s in Congress’ new bill?

Changing the rules for 401(k) and IRA accounts: What's in Congress' new bill?
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Many rules for retirement accounts like 401(k) plans, IRAs and Roth IRAs that will soon change after the Senate and House both approved $1.7 trillion last week federal spending bill includes new rules called bulk SECURE 2.0 Act of 2022.

These new retirement laws follow in the footsteps of the original SECURE Act of 2019, which incentivized employer retirement plans and gave investors more options to save for retirement.

The spending bill now goes to President Joe Biden for his signature. It used to have to be signed by midnight on a Friday in December. 23 to prevent a a partial shutdown of the federal governmenthowever The House and Senate both passed resolutions has extended the deadline until December Friday. 30

The biggest changes for most Americans with retirement accounts will be raising the age for required minimum distributions and raising “catch-up” limits for people over 60, but the bipartisan spending bill includes more than 90 different pension changes.

Some retirement account changes will take effect immediately after the bill is passed, while others will begin in 2024 or later. Read on to learn everything you need to know about the new rules for retirement accounts.

New retirement rule will help Americans with student loan debt

One of the more revolutionary changes included in the SECURE 2.0 Act of 2022 will be the option of crediting employer student loan payments with matching contributions to 401(k) plans, 403(b) plans or SIMPLE IRAs. Government employers will also be able to contribute matching amounts to a 457(b) plan.

This proposed new rule means that people with significant student loan debt can still save for retirement by making only student loan payments and not directly contributing to a retirement account. The rule will go into effect for pension plans starting in 2025.

What are the new retirement rules for required minimum distributions (RMDs)?

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

The new retirement rules will also reduce the penalty for not taking RMDs. The previously steep 50% excise duty penalty will be reduced to 25%, and to 10% if the error is corrected “in time”. The reduced penalties will take effect immediately after the law is passed.

How do retirement account contribution limits change?

While the standard limits for contributions to 401(k) plans and IRAs are unchanged, the bill would increase the “catch-up” limit for Americans over 50 and introduce additional potential “catch-up” contributions for those over 60.

IRS law currently allows people over age 50 to add an additional $1,000 to their retirement accounts each year beyond the standard limit. Starting in 2024, instead of $1,000, older Americans will be able to contribute an additional amount indexed to inflation.

People aged 60, 61, 62 or 63 could soon be able to save more if the bill is passed. In 2025, those seniors will be allowed to contribute up to $10,000 a year or 50% more than the standard catch-up contribution for those age 50 and older, whichever is greater. Increasing contribution limits will also be indexed to inflation starting in 2025.

How will the new pension account rules affect rates?

If the sweeping spending bill passes Congress and becomes law, the law would repeal and replace the IRA tax credit.Saver loan.” Instead of a nonrefundable tax credit, those who qualify for the Savers Credit will receive a federal matching contribution to their retirement account. This change in tax law will begin in the 2027 tax year.

In the proposed legislation, Congress also amends IRS rules to change retirement accounts from 529 plans to tax-advantaged higher education savings accounts. Currently, any money withdrawn from a 529 plan not used for education is subject to a 10% federal penalty.

In the bill, beneficiaries of 529 college savings accounts would be allowed to rollover up to $35,000 from a 529 plan to a Roth IRA over their lifetime. A Roth IRA will still be subject to annual contribution limits, and the 529 account must be open for at least 15 years.

How will the new law affect early withdrawals from retirement accounts?

The SECURE 2.0 Act of 2022 includes several rule changes that will benefit Americans who need to withdraw money from their retirement accounts early. Normally, withdrawals from retirement accounts before the account owner reaches age 59 and a half are subject to a 10% penalty tax.

First, Congress plans to add a major emergency exception. Account holders under age 59 and a half can withdraw up to $1,000 a year for emergencies and have three years to return the distribution if they choose. If payment is not made, no emergency withdrawals can be made during that three-year period.

The bill also states that employees will be allowed to self-certify their emergency situations, meaning no documentation other than a personal statement will be required. The bill would also completely eliminate the penalty for the terminally ill.

Americans affected by natural disasters will also get some relief from the proposed changes. The proposed new rules would allow distributions of up to $22,000 from employer plans, or IRAs, in the event of a federally declared disaster. Withdrawals will not be penalized and will be treated as gross income for three years. If the bill passes, the rule would apply to all Americans affected by natural disasters after January. 26, 2021.

The new retirement rule changes will also allow account holders to take early withdrawals from 403(b) plans, similar to 401(k) plans. Currently, unlike 401(k)s, hardship withdrawals from 403(b) accounts only cover employee contributions, not earnings. Beginning in 2025, the hardship rules will be the same for 403(b) and 401(k) plans.

What changes will there be to the pension account for employers?

The retirement account rule changes proposed in the SECURE 2.0 Act of 2022 will affect employers at least as much as employees. The biggest change for companies is that starting in 2025, any new 401(k) or 403(b) plans will automatically enroll non-opting employees.

Auto-enrolled employee contributions will start at a minimum of 3% and a maximum of 10%. After 2025, these amounts will increase by 1% each year until they reach the 10%-15% range. Pension plans created before 2025 will not be subject to the same requirements.

Changes to pension rules will also allow employers to offer workers “retirement-linked emergency savings accounts”, which will act as a hybrid between emergency and pension savings. Employers can enroll their employees with an automatic $2,500 contribution of up to 3% of salary.

Contributions to these emergency accounts will be taxed like Roth contributions and subject to employer matching. Employees could withdraw money from the account four times a year without penalty or additional taxes. If they leave the company, they can withdraw the emergency account as cash or roll it into a Roth account.

Other changes for employers would allow companies to automatically roll over a participant’s IRA into a retirement plan at a new employer unless the participant expressly opts out. The SECURE 2.0 Act would also give pension plan administrators the option to choose not to refund overpayments accidentally made to retirees, and would set protections and limits for retirees if companies decide to recoup the money.

What system changes would Congress make for pension plans?

If approved as part of a larger spending package, the SECURE 2.0 Act of 2022 would introduce a number of sweeping changes to retirement in America as a whole. One of the biggest would be the Labor Department’s authority to create a national, searchable database of pension plans to help people find lost or misplaced accounts. The agency would be required to have the database up and running within two years of the bill’s passage.

The Employee Retirement Income Security Act of 1974 (ERISA) will also receive an update. ERISA sets minimum standards for administrators of private retirement plans, including communications with participants.

The proposed ERISA rule change would require private pension plans to provide participants with at least one paper statement each year, unless the participant opts out. The rule will not take effect until 2026 and will not affect the other three quarterly reports required by ERISA.

For more information about the scholarship, Get answers to all your questions about Social Securityincluding whether or not you can receive benefits while you are still working.

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