2022 Updates Proposed
A bipartisan group of representatives has passed a bill in the house, called Secure Act 2.0, which is proposing the following changes:
- Raised RMD age to 72 from 70½, which is when people are required to start withdrawing money from retirement accounts. It would raise the age again over the next decade to 75
- People 50 and older can contribute an extra $6,500 a year to 401(k)-style retirement accounts, for a total of $27,000. This would adjust annually.
- This would be raised to $10,000 a year starting in 2024 for people ages 62, 63 and 64.
- The bill would require catch-up contributions to be made after taxes. Under the legislation, starting in 2024, the extra $1,000 people 50 and older can contribute annually to an IRA would rise to account for inflation
- Allow employers to give employees the option of channeling matching contributions into a Roth account
- Mandate automatic enrollment in retirement savings with mandatory starting in 2024 for newly created 401(k) or 403(b) plans. Employers with 10 or fewer workers and those in business for less than three years, would be exempted
- Allow plan sponsors to offer “small immediate financial incentives,” such as cash or gift cards to participants for signing up to company sponsored retirement plans
- Starting in 2023, employers can make matching contributions to the 401(k)-style accounts of employees paying off student loans who don’t contribute enough to the 401(k) plan to receive a full match
- Raise the saver’s credit starting in 2027 to 50% on contributions of up to $2,000 a year, up from a current, tiered structure of 10% to 50% that varies with income.
401K and IRA Updates (2015)
The IRS and Treasury has rolled out a number of updated and streamlined 401K and IRA rules under the guidance of the Obama administration. These are aimed at encouraging Americans who haven’t been regularly setting aside money in private accounts to save for retirement. The changes include:
1. Streamlining the process for small businesses to automatically enroll employees in savings programs when they start; they have to manually opt-out if they choose not to participate. “Automatic enrollment has made a big difference in participation rates by making it simpler for workers to save,” President Obama said in his weekly radio and Internet address. “And that’s why we’re going to expand it to more people.”
The IRS will provide approved language for employers to use when amending their retirement-savings plans to include automatic-enrollment unlike the current rules where each employer has to typically ask the IRS to approve their plan’s language when they add the automatic-enrollment feature.
With the pre-approved language for auto-enrollment, employers will be able to more quickly and easily adopt the feature which tends to improve workers’ plan participation rates.
In general, about 70% of eligible workers participate in workplace plans such as 401(k)s, but that figure rises to more than 90% when companies adopt automatic enrollment, according to a statement by the administration.
2. Expand the ability for employers to put payments for unused vacation time into retirement savings. However such contributions, combined with regular salary-based contributions, are still subject to the current annual-contribution limits.
3. Provide an option for individuals to have federal tax refunds paid as a savings bond; This would be implemented in the upcoming 2010 tax season, where taxpayers will be able to choose to buy savings bonds with their tax refund simply by checking a box on their tax return, the administration said. Taxpayers wouldn’t have to open a Treasury account or even have a bank account – the bonds will be mailed to those who check the box.
4. Simplify Roll Over Retirement Distributions into IRAs or other plans. A key risk to lifetime savings is when an employee spends his or her lump sum payment, instead of electing to roll over the payment to an IRA or other retirement plan. The updated tax rules will simplify the presentation of an employee’s options when receiving an eligible rollover distribution. It provides a rollover roadmap that satisfies the required notice that must be provided to employees taking their retirement assets.
The notice also reflects law changes (such as information on a distribution from a designated Roth account under an employer plan) and explains rules that apply in special situations (such as when a distribution is made to a surviving spouse or other beneficiary).
5. Provide an easy to understand website that clarifies and simplifies IRS rules in an effort to get employers and their workers to use tax-advantaged 401(k)s and IRA. Many of the administration’s moves are not new rules but a new emphasis on existing laws. But these laws are somewhat complex and the administration (via the Treasury and IRS) will create new explanatory road maps to make it easier for employers and workers to take advantage of these retirement provisions.
New options to fund 401K or IRA’s, like using tax refunds and unused vacation dollars, are part of the administration’s longer term effort to improve the nation sub-par savings rate and help the over 78 million Americans, or about half the workforce, that don’t participate in a retirement plan at work.
Of those who don’t participate in workplace pan, fewer than 10% contribute to a private retirement plan (like an IRA).
Further, Boston-based Fidelity Investments, the largest U.S. provider of workplace retirement plans, did a study released in July that found automatic enrollment helped younger and lower income employees the most – many who otherwise have not saved. More than half of the automatically enrolled participants in Fidelity managed plans were between 20 and 34 and 56% made less than $40,000 a year, according to the study by the Boston based firm.
“We cannot continue on this course and we certainly cannot go back to an economy based on inflated profits and maxed-out credit cards. “Working Americans should be able to retire with dignity and security, but nearly half of the nation’s workforce has little or nothing beyond Social Security benefits to get by on in old age,” Treasury Secretary Timothy Geithner said in a statement. “The measures will give more choices to families who want to save.”
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