Many rules for retirement accounts such as, And That may soon change, as both the Senate and the House last week approved a $1.7 trillion federal spending bill that includes new rules collectively called the SAFE 2.0 Act of 2022.
These new laws for retirement follow in the path of the original SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019, which encouraged retirement plans for employers and gave investors more options for saving for retirement.
The spending bill now goes to President Joe Biden for signing into law. It was previously required to be signed by midnight of Friday, December 23 to prevent a partial shutdown of the federal government, but both the House and Senate passed resolutions extending the deadline to Friday, December 30.
The biggest changes for most Americans with retirement accounts will be an extension of the age for required minimum distributions and an increase in the “catch-up” limit for people over 60, but the bipartisan spending bill includes more than 90 different retirement changes.
Some retirement account changes would take effect immediately after the bill’s passage, while others would begin in 2024 or later. Read on for 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 radical changes included in the SECURE 2.0 Act of 2022 will be the option for employer plans to credit student loan payments with donations to 401(k) plans, 403(b) plans or SIMPLE IRAs. Government employers will also be able to 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 by paying off their student loans and making no direct contributions to a retirement account. The rule will go into effect for retirement plans beginning in 2025.
What are the new retirement rules for required minimum distributions (RMDs)?
Currently, Americans must begin receiving required minimum distributions (RMDs) from their 401(k) and IRA accounts starting at age 72 (or 70 and a half if you died before January 1, 2020). have changed at that age). If approved, the SECURE 2.0 Act of 2022 would raise the RMD age to 73 beginning January 1, 2023, and then to 75 beyond January 1, 2033. (Roth IRAs are not subject to RMDs.)
The new retirement rules will also reduce the penalty for failing to take RMDs. The earlier 50% excise penalty will be reduced to 25%, and further reduced to 10% if the error is corrected “in a time-bound manner”. The fine cuts will take effect immediately after the legislation is passed.
How are retirement account contribution limits changing?
While the standard limits for contributions to 401(k) plans and IRAs would not change, the bill would boost “catch-up” limits for Americans over 50 and additional potential “catch-up” contributions for those over 60. Will present
IRS law currently allows people 50 and up to contribute an additional $1,000 to their retirement accounts each year over and above the standard limit. Beginning in 2024, instead of a flat $1,000 more, older Americans will be able to contribute an additional amount that is indexed for inflation.
For people aged 60, 61, 62 or 63, if the bill is passed, they will soon be able to contribute more catch-up money. In 2025, those seniors will be allowed to contribute up to $10,000 per year or 50% more than the standard catch-up contribution for those 50 and up (whichever is greater). Those increased contribution limits will also be indexed with inflation starting in 2025.
How will the new retirement account rules affect taxes?
If the comprehensive spending bill passes Congress and is signed into law, the legislation would repeal 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 will receive a federal matching contribution to a retirement account. This change in tax law will begin with the 2027 tax year.
In the proposed legislation, Congress is also amending 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 a total of $35,000 from the 529 plan into a Roth IRA over their lifetime. The Roth IRA will still be subject to annual contribution limits, and the 529 account must have been 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. Generally, withdrawals from retirement accounts made before the account owner reaches five and a half years old are subject to a 10% penalty tax.
First, Congress plans to add a basic exception for emergencies. Account holders under age 59½ can withdraw up to $1,000 per year for emergencies, and have three years to repay distributions if they wish. No further emergency withdrawals can be made within that three-year period until repayment is made.
The Bill also specifies that employees will be allowed to self-certify their emergencies, ie, no documentation is required beyond personal testimony. The bill would also completely eliminate penalties for those who are seriously ill.
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 employer plans or IRAs in the case of a federally declared disaster. Withdrawals will not be penalized and will be treated as gross income over the 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 change will also allow those accounts 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 rules for hardship withdrawals will be the same for 403(b) and 401(k) plans.
What Will Retirement Account Changes Do for Employers?
Retirement account rule changes proposed in the SECURE 2.0 Act of 2022 will impact employers at least as much as employees. The biggest change for companies will be that any new 401(k) or 403(b) plans starting in 2025 will have to automatically enroll employees who don’t opt out.
The contribution of automatically enrolled workers will start from a minimum of 3% and a maximum of 10%. Each year after 2025, those amounts will increase by 1% until they reach the 10% to 15% range. Retirement plans created before 2025 will not be subject to the same requirements.
The retirement rule change will also give employers the opportunity to offer employees “pension-linked emergency savings accounts” that will act as a hybrid between emergency and retirement savings. Employers can automatically enroll employees for up to 3% of their pay, with a contribution limit of $2,500.
Contributions to these emergency accounts will be taxed like Roth contributions and will be eligible for employer matching. Employees can make up to four withdrawals per year from the account without penalty or additional tax. If they leave the company, they can withdraw the emergency account as cash or roll it over to a Roth account.
Other changes for employers will allow companies to automatically transfer a participant’s IRA to a new employer’s retirement plan unless the participant explicitly opts out. The SECURE 2.0 Act will also give retirement plan administrators the option of not compensating retirees for mistakenly overpayments, and it imposes protections and limits on retirees if companies decide to withhold the money.
What Systemic Changes Will Congress Make to Retirement 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 generally. One of the biggest will 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 will have to launch the database within two years of the passage of the bill.
The Employee Retirement Income Security Act of 1974 (ERISA) will 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 annually unless the participant opts out. However, the rule won’t go into effect until 2026, and won’t affect the other three quarterly statements required by ERISA.
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