401(k) and IRA accounts: New rules are coming for your retirement plans. Here's what to know

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New regulations are coming to your retirement plans. Thanks to a $1.7 trillion federal spending bill that the Senate and House passed just before Christmas, your retirement accounts as 401(k) plans🇧🇷 IRAs and Roth IRAs will soon be under a new set of regulations.

Building on the original SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019, the SECURE 2.0 Act of 2022 (PDF) encourages retirement plans for employers and gives investors more choice.

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 extending the age for required minimum distributions and raising “recovery” limits for people over 60. But there are more than 90 different overall retirement changes in the bipartisan bill.

Some retirement account changes would take effect immediately after bill approval, while others would start in 2024 or later.

Minimum Required Distributions, or RMDs

Currently, Americans must begin receiving the minimum required distributions 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 rules would also reduce the penalty for not carrying 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.

Contribution limits

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.

tax credits

If the spending bill is signed into law, the bill would repeal and replace the IRA tax credit, also known as the “Saver’s 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.

Congress is also changing IRS laws for extensions 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.

early withdrawal

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.

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 would mean that people with significant student loan debt could still save for retirement just by paying off their student loans, without making direct contributions to a retirement account.

The new regulation will come into force in 2025.

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, starting in 2025, any new 401(k) or 403(b) plan 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.

More information for collaborators

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 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 per year, 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.

To learn more about retirementget answers for everyone your Social Security questionsIncluding whether you can receive benefits while you are still working🇧🇷

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