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Changing the rules for 401(k) and IRA accounts: What’s in Congress’ new bill?




Many rules for retirement accounts such as 401(k) plans, IRAs and Roth IRA will soon change, after the Senate and House last week both approved a $1.7 trillion federal spending bill that includes new regulations collectively known as the SECURE 2.0 Act of 2022.

These new retirement laws follow in the footsteps of the original SECURE (Setting Every Community Up for Retirement Enhancement) Act of 201[ads1]9, which incentivized employer retirement plans and gave investors more options for saving for retirement.

The spending bill now goes to President Joe Biden to sign into law. It previously had to be signed by midnight on Friday 23 December to prevent a partial shutdown of the federal government, but both the House and Senate passed resolutions extending the deadline to Friday, March 30. December.

The biggest changes for most Americans with retirement accounts will be the expansion of the age for required minimum distributions and increased “catch-up” limits for people over 60, but there are more than 90 different pension changes included in the bipartisan spending bill.

Some changes to the pension account will take effect immediately after the passage of the bill, while others will start in 2024 or beyond. Read on to learn everything you need to know about the new rules for retirement accounts.

New pension rule will help Americans with student loan debt

One of the more revolutionary changes included in the SECURE 2.0 Act of 2022 would be the ability for employer plans to credit student loan payments with matching donations to 401(k) plans, 403(b) plans or SIMPLE IRAs. Public employers will also be able to contribute matching amounts to 457(b) plans.

This proposed new rule would mean that people with significant student loan debt could still save for retirement just by paying off their student loans and without paying directly into a retirement account. The rule will enter into force for pension schemes starting in 2025.

What are the new pension rules for mandatory minimum distributions (RMDs)?

Currently, Americans must begin receiving required minimum distributions (RMDs) 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 for RMDs to 73, beginning January 1, 2023, and then further to 75, beginning January 1, 2033. (Roth IRAs are not subject to RMDs. )

The new pension rules will also reduce the penalty for not taking RMDs. The previously high tax penalty of 50% will be reduced to 25%, and further lowered to 10% if the error is corrected “in time.” The criminal laws will enter into force immediately after the adoption of the law.

How are the limits for pension account contributions changed?

While the standard limits for contributions to 401(k) plans and IRAs would not change, the bill would increase the “catch-up” limit for Americans over 50 and introduce additional potential “catch-up” contributions for those older than 60.

IRS law currently allows people 50 and older to contribute an additional $1,000 to their retirement accounts each year above the standard limit. Starting in 2024, instead of a flat $1,000 more, older Americans would be able to contribute an additional amount indexed to inflation.

For people aged 60, 61, 62 or 63, they will soon be able to contribute even more catch-up money, if the bill is passed. In 2025, these seniors will be allowed to contribute up to $10,000 per year or 50% more (whichever is greater) than the standard catch-up contribution for those 50 and older. These increased contribution limits will also be indexed to inflation from and including 2025.

How will the new rules for pension accounts affect tax?

If the sweeping spending bill passes Congress and is signed into law, the law would repeal and replace the IRA tax credit, also known as the “Saver’s Credit.” Instead of a nonrefundable tax credit, those who qualify for the savings credit will receive a federal matching contribution to a retirement account. This change in the tax law will start with the tax year 2027.

In the proposed legislation, Congress also changes IRS rules for rollbacks of retirement accounts from 529 plans, which are tax-advantaged higher education savings accounts. Currently, any money withdrawn from a 529 plan that is not used for education is subject to a 10% federal penalty.

In the bill, beneficiaries of 529 college savings accounts would be allowed to rollover up to $35,000 total over their lifetime from a 529 plan into a Roth IRA. Roth IRAs will still be subject to annual contribution limits, and the 529 account must have been open for at least 15 years.

How will early withdrawals from retirement accounts be affected by the new law?

The SECURE 2.0 Act of 2022 includes several rule changes that will benefit Americans who need to withdraw money early from their retirement accounts. Normally, withdrawals from pension accounts that are made before the account owner reaches the age of 59 and a half will be charged a 10% penalty tax.

First, Congress plans to add a basic emergency exception. Account holders younger than 59 1/2 can withdraw up to $1,000 per year in an emergency, and have three years to repay the distribution if they want. No further emergency withdrawals could be made within this three-year period unless repayment is made.

The bill also specifies that employees will be allowed to self-certify their emergency situations, i.e. no documentation beyond personal testimony is required. The bill would also eliminate the penalty entirely for people who are terminally ill.

Americans affected by natural disasters will also receive some relief with the proposed changes. The proposed new rules would allow up to $22,000 to be distributed from employer plans or IRAs in the event of a federally declared disaster. The withdrawals would not be penalized and would be treated as gross income over three years. If passed, the bill would apply to all Americans affected by natural disasters after January 26, 2021.

The new pension rule changes will 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 will be the same for 403(b) and 401(k) plans.

What will be the changes in the pension account for employers?

The proposed changes to the retirement account rule in the SECURE 2.0 Act of 2022 will affect employers at least as much as employees. The biggest change for companies will be that any new 401(k) or 403(b) plans starting in 2025 must automatically enroll workers who don’t opt ​​out.

Contributions from automatically enrolled workers will start at a minimum of 3% and a maximum of 10%. Each year after 2025, these amounts will increase by 1% until they reach a range of 10% to 15%. Pension schemes established before 2025 will not be subject to the same requirements.

The pension rule changes will also give employers the opportunity to offer employees “pension-linked emergency savings accounts” which will function as hybrids between emergency and pension savings. Employers can automatically enroll workers up to 3% of their wages with a contribution cap of $2,500.

Contributions to these emergency accounts will be taxed as Roth contributions and will 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 account as cash or roll it over to a Roth account.

Other changes for employers would allow companies to automatically transfer a participant’s IRA to a retirement plan with a new employer unless the participant explicitly opts out. The SECURE 2.0 Act would also give pension plan administrators the ability to decide not to recover overpayments to retirees by accident, and it enacts protections and limitations for retirees if companies decide to claw back money.

What systemic changes would Congress make to pension plans?

If approved as part of the larger spending package, the SECURE 2.0 Act of 2022 would introduce several broad changes to retirement in America in general. One of the biggest would be a mandate for the Department of Labor to create a national, searchable database of pension plans to help people find lost or misplaced accounts. The agency would be required to launch the database within two years of the bill being passed.

The Employee Retirement Income Security Act of 1974 (ERISA) will also get an update. ERISA establishes minimum standards for private pension plan administrators, including communications with participants.

The proposed ERISA rule change would require private pension plans to provide participants with at least one paper statement annually, unless the participant opts out. However, the rule will not take effect until 2026, and will not affect the other three quarterly statements required by ERISA.

For more information on retirement, get answers to all your questions about social securityincluding whether you can receive benefits while still working.



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