Retirement: New Rules Are Coming For 401(k) and IRA Accounts. Here’s What to Know

Written by orobulletin

retirement accounts such as 401(k) plans, IRAs When Roth IRA As the Senate and House approve a $1.7 trillion federal appropriations bill that includes new rules for retirement planning, you’ll soon be under a new set of rules.

Following the path of the original SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019, the SECURE 2.0 Act of 2022 will give employers more incentives for retirement planning and give investors more options.

The federal appropriations bill is now directed to President Joe Biden, who plans to sign it by the December 30 deadline.

The biggest changes for most Americans with retirement accounts will be an extension of the minimum required distribution age and an increase in the “catch-up” limit for those over 60.

Some of the retirement account changes will go into effect immediately after the bill is passed, while others will begin after 2024.

Required Minimum Distribution (RMD)

Americans now start receiving the required Minimum Distributions (RMD) from their 401(k) and IRA accounts beginning at age 72 (or age 70.5 if they reached that age before January 1, 2020) need to do it. If approved, the SECURE 2.0 Act of 2022 would raise the RMD’s age to 73 from 1 January 2023, and further to 75 from 1 January 2033 (Roth IRA not subject to his RMD).

The new rules also reduce penalties for failing to receive RMDs. The excise tax fine, which was previously 50%, he will be reduced to 25%, and further reduced to 10% if the error is corrected “in a timely manner”. The reduction in penalties will take effect immediately upon passage of the law.

Contribution limit

While the standard limits for contributions to 401(k) plans and IRAs remain unchanged, the measure would increase the “catch-up” limit for Americans over the age of 50 and the “catch-up” limit for people over the age of 60. It adds the possibility of “up” contributions.

Currently, IRS law allows people over the age of 50 to make an additional $1,000 annual contribution to their retirement account over the standard limit. Beginning in 2024, older Americans will be able to contribute an additional, inflation-linked amount instead of a flat $1,000 increase.

People aged 60, 61, 62 and 63 will be able to donate even more catch-up money as soon as the bill is passed. In 2025, these seniors will be allowed to contribute up to $10,000 annually, or 50% more than the standard catch-up contribution for those over 50 (whichever is greater). . These increased contribution limits will also be indexed to inflation starting in 2025.

tax credit

A sweeping appropriations bill, if passed by Congress and signed into law, would eliminate and replace the IRA tax credit, also known as the “savers credit.” In lieu of a non-refundable tax credit, those who qualify for Savers Credit receive federal matching contributions to their retirement accounts. This tax law change will start from the 2027 tax year.

In the proposed bill, Congress would also amend IRS law on retirement account rollovers from 529 plans, tax incentives for higher education. Money withdrawn from 529 plans not currently used for education is subject to a 10% federal fine.

The bill would allow 529 College Savings Account beneficiaries to roll over from their 529 Plan to a Roth IRA for a lifetime total of $35,000. Roth IRAs continue to be subject to annual contribution limits and 529 accounts must be open for at least 15 years.

early withdrawal

The 2022 SECURE 2.0 Act includes several rule changes that benefit Americans who need to withdraw money from their retirement accounts early. A penalty tax of 10% will be levied on previous retirement account withdrawals.

First, Congress plans to add basic exceptions for emergencies. An account holder under the age of 59 1/2 can withdraw up to $1,000 per year in an emergency, with distributions he can pay back over three years if needed. No more emergency withdrawals can be made within 3 years of her unless repayment occurs.

The bill also specifies that employees will be allowed to self-certify emergency situations, meaning no documentation other than personal testimony will be required. The bill also completely eliminates penalties for terminally ill patients.

Americans affected by natural disasters will also get some relief from the proposed changes. can be distributed. Withdrawals are not penalized and are treated as gross income for 3 years. If the bill is passed, the rule will apply to all Americans affected by natural disasters after January 26, 2021.

The new retirement rule changes will also allow account holders to withdraw early from 403(b) plans as well as 401(k) plans. Currently, unlike 401(k)s, difficult withdrawals from 403(b) accounts only include employee contributions, not earnings. After 2025, the hardship withdrawal rules will be the same for his 403(b) plan and his 401(k) plan.

student loan debt

One of the more revolutionary changes included in the SECURE 2.0 Act of 2022 is the ability of employer plans to credit student loan payments with matching contributions to 401(k) plans, 403(b) plans, or SIMPLE IRAs. Optional. Government employers can also contribute the same amount to a 457(b) plan.

This means that even those with large student loan debt can save for retirement by paying student loans without contributing directly to a retirement account.

The new regulation is expected to come into force in 2025.

change of employer

Changes to retirement account rules proposed in the SECURE 2.0 Act of 2022 will affect employers at least as much as employees. The biggest change for businesses is that after 2025, new 401(k) or 403(b) plans will require workers who don’t opt ​​out to be automatically enrolled.

Contributions from automatically enrolled workers start at a minimum of 3% and a maximum of 10%. After 2025, these amounts will increase by 1% each year until he reaches the 10% to 15% range. The same requirements do not apply to retirement plans created before 2025.

Changes to retirement rules also give employers the opportunity to offer employees “pension-linked emergency savings accounts,” which act as a hybrid of emergency and retirement savings. Employers can automatically enroll workers at up to 3% of their salary with a contribution limit of $2,500.

Donations to these emergency accounts are taxable and subject to employer matching in the same way as Roth contributions. The employee was able to withdraw from her account four times a year without penalty or additional taxes. If they leave the company, the emergency account can be withdrawn as cash or carried over to the 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 also provides retirement plan managers with the option to decide not to recover overpayments that were erroneously paid to retirees, and protects and limits retirees should companies decide to refund them. enact.

More information for contributors

If approved as part of a larger spending package, the 2022 SECURE 2.0 Act will introduce some sweeping changes to American retirees in general. One of the biggest is to mandate 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 two years from the passage of the bill to launch the database.

The Employee Retirement Income Security Act of 1974 (ERISA) will also be updated. ERISA establishes minimum standards for private retirement plan administrators, including communication with participants.

The proposed ERISA rule change would require private retirement plans to provide participants with paper statements at least once a year, unless participants opted out. However, the rule will not come into force until his 2026 and will not affect his three other quarterly reports required by ERISA.

Learn more about retirementget all answers Questions about Social Securityinclude If you can receive benefits while working.

About the author


Leave a Comment