New Retirement Rules Could Be Passed By Congress: Consider These Four Alternatives!

Congress may pass new retirement rules

If lawmakers manage to pass a major spending package this week, we may soon see new retirement rules that make it easier for Americans to accumulate retirement savings and make it less costly to withdraw those savings in the future.

Secure 2.0 is a combination of three separate pieces of legislation: one passed by the House and two by separate committees in the Senate that deal with retirement savings.

Thanda Brown Duckett, president and CEO of TIAA, one of the largest US retirement service providers, has said that “[SECURE 2.0] will help increase savings, ensure greater access to workplace retirement plans, and provide more workers with an opportunity to receive a secure stream of income in retirement.”

Implement Mandatory 401(k) Enrollment

When a company initiates a new retirement savings plan for its employees, it may be required by law to “automatically enroll” employees.

(At the moment, this is entirely voluntary for businesses.) The obligation to participate would then shift to the employee, who would need to take affirmative action to opt-out.

The Secure 2.0 provision mandates that employers establish a default contribution rate for the employee of at least 3% but no more than 10%, with an automatic contribution escalation of 1% per year up to a maximum contribution rate of at least 10% but no more than 15%.

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Increase The Age-Based Catch-Up Contribution Cap For Employees Over The Age Of 55

The current federal limit for 401(k) contributions is $20,500 per person, per year; however, if you are 50 or older, you are eligible to contribute an additional $6,500.

Retirement plan participants aged 60, 61, 62, and 63 would be eligible to contribute either $10,000 (a 50% increase over the regular catch-up amount) or the equivalent of $6,500 (the current standard deduction) beginning in 2025. After 2024’s December 31st, the provision would go into effect.

Increase The Age-Based Catch-Up Contribution Cap For Employees Over The Age Of 55

However, another provision that would go into effect a year earlier would require anyone with compensation over $145,000 to “Rothify” their catch-up contributions, which would help pay for the cost of the retirement package.

In other words, you could still contribute up to the catch-up limit, but you would have to pay taxes on that money in the same year you made the contribution. When you retire, you can withdraw your contribution without paying taxes. Nonetheless, the federal government would receive the tax revenue from the initial catch-up contribution right away.

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Assist Workers In Establishing And Gaining Access To Savings Accounts

When you withdraw money from your 401(k) before you reach age 59 and 1/2, you’re subject to a 10% early withdrawal penalty in addition to paying taxes on the money you withdraw.

Secure 2.0 may reassure workers who are hesitant to contribute to a tax-deferred retirement plan due to concerns that it will be difficult and expensive to withdraw money in case of an emergency.

Employees could withdraw up to $1,000 annually without incurring any fees. Employees would still be responsible for paying income tax in the year the withdrawal was made, but they would be eligible for a refund of that tax if they repaid the withdrawal within three years.

An Uptick In “Catch-Up” Donations

People over the age of 50 have the option of contributing more money to their 401(k) or individual retirement account (IRA) than the maximum allowed by law.

Those between the ages of 62 and 64 (under one plan) and 60 and 63 (under another) would be eligible for a new type of “catch-up contribution” under the new proposals (under another plan). After that point, people could put away $10,000 in a 401(k) or 403(b) plan. Future years would see this cap increased by inflation.

Adding Roth tax treatment to mandatory basic catch-up contributions is another significant change proposed. As a result, participants’ current income wouldn’t be negatively impacted by the contributions, as they would be made on an after-tax basis. Any and all payouts related to catch-up contributions, however, might be exempt from taxes (if holding period requirements are met).

There is also talk of making catch-up contributions to IRAs inflation-proof. If you’re 50 or older, you can only contribute an extra $1,000 to your IRA each year (above the minimum required contribution).

Says Darr, “the ability to put more income to work in a tax-advantaged retirement savings plan not only boosts retirement savings but also reduces current taxable income.” By deferring a larger portion of their salary and taking advantage of increased catch-up contributions, some individuals may be able to avoid moving into a higher tax bracket.

Final Words

Annual retirement contributions from those with lower incomes can receive a federal match of up to $2,000. More people would be able to take advantage of the so-called Saver’s Credit thanks to the improvements and simplifications made by the new package. A maximum of $1,000 in federal matching funds are available to qualifying filers (e.g., married couples with an annual income of $71,000 or less).

Author

  • Karan Sirari

    I am an author and a public speaker. I was born in India and have travelled to many different countries. I have a masters in public communication from California University and I love to write about famous peoples from different industries.

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