Editor’s note: This is an update of a story originally published on December 8th, 2022.
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There could soon be new retirement rules that could make it easier for Americans to accumulate retirement savings — and less costly to withdraw them — if lawmakers pass a bigger spending package this week.
The pension plan — known as Secure 2.0 — was pulled from a House-passed bill and bills passed by two Senate committees.
“[SECURE 2.0] will help increase savings, ensure greater access to occupational pension plans, and give more workers the opportunity to earn a secure income in retirement,” said Thasunda Brown Duckett, president and CEO of TIAA, one of the largest U.S. American pension provider.
Here’s a look at seven of the provisions in the package known on Capitol Hill as the Omnibus, based on a breakdown by the Senate Finance Committee.
Most employers introducing new occupational pension savings plans could be required to automatically enroll employees in the plan. (Currently, employers are free to do so.) It would then be up to the employee to actively opt out if they did not wish to participate.
The Secure 2.0 provision would require employers to set a standard contribution rate of at least 3% but no more than 10% for the employee, plus an automatic contribution escalation of 1% per year up to a maximum contribution rate of at least 10% but no more than 15%.
The provision would come into effect after December 31, 2024.
When you have to pay off student loan debt, it becomes harder to save for retirement. Secure 2.0 would allow employers to make a matching contribution to an employee’s retirement plan based on their qualifying student loan payments. This would ensure that the employee builds up old-age provision in any case.
The provision would come into effect after December 31, 2023.
It used to be that by the time you turned 70-1/2, you had to withdraw a required minimum amount from your 401(k) or IRA each year. Then the age increased to 72. Under the Secure 2.0 package, it would increase to 73 from 2023 and 75 a decade later.
Normally, if you tap your 401(k) before the age of 59-1/2, you not only have to pay tax on that money, but you also have to pay a 10% prepayment penalty.
For employees who are discouraged from saving money in a tax-advantaged pension plan because they fear it would be too complicated and costly to access for emergencies, Secure 2.0 can allay that fear: It would allow employees to save money without penalty withdraw up to $1,000 per year for emergencies. While employees still owe income tax on this payout in the year it is made, they could recover that tax if they repay the payout within three years.
If they don’t pay back the withdrawal, they would have to wait until the three-year grace period expired before making another emergency withdrawal.
The provision would come into effect after December 31, 2023.
If you are 50 years of age or older, you can currently contribute an additional $6,500 to your 401(k) in addition to the annual federal limit of $20,500 in effect this year.
Under the pension package, instead of paying $6,500, 60-, 61-, 62-, and 63-year-olds could pay $10,000, or 50% more than the regular catch-up amount in 2025, whichever is greater.
The provision would come into effect after December 31, 2024.
To cover the cost of the pension package, however, another provision, which would take effect a year earlier, would require anyone with compensation over $145,000 to “rothify” their catch-up contributions. So instead of paying pre-tax contributions up to the catch-up limit, you could still pay in the same amount but would be taxed in the same year. Your contribution then grows tax-free and can be withdrawn tax-free when you retire. But the federal government would get the tax revenue from the original catch-up contribution in advance.
There is an underutilized federal allowance for low-income pension contributions of up to $2,000 per year. The new package would improve and simplify the so-called savings loan so that more people could use it. Eligible applicants (eg, married couples with incomes of $71,000 or less) could receive a grant from the federal government of up to 50% of their savings, but the grant cannot exceed $1,000.
The provision would come into effect after December 31, 2026.
At present, part-time employees who have been with the company for three years and have worked at least 500 hours a year must be able to participate in the company pension scheme. The new package would reduce that service time to two years.
The provision would come into effect after December 31, 2024.