The $1.7 trillion dollar spending bill that Congress passed includes several significant changes to retirement plans that could help Americans keep their pensions untaxed and untouched for longer.
Close up of a 401(k) statement.
The bill will change the age at which Americans are required to withdraw from tax-deferred retirement accounts: raising the age to 75 from 72, and will increase contribution limits for older workers, and hopefully incentivize low to moderate wage workers to save in retirement accounts.
The age limit — known as required minimum distributions (RMD)—increases from 72 to 73 on January 1, 2023, and then to 75 on January 1, 2033.
The changes to the age are meant to reward taxpayers who have to work as they get older, as the mandatory distributions are to ensure a portion of the retirement savings are spent during one's lifetime and makes the money tax-deferred but not tax free, reports The Wall Street Journal.
Employers who start new retirement plans after 2025 would be required under the new bill to automatically enroll workers into 401(k) or 403(b) plans by 2025 at a rate between 3% and 10% of pay.
For Americans with student loan debt, the bill will allow their loans to be treated as a deferral, and make it possible for employers to offer plans to allow workers to save for retirement while also paying off student loan debt.
The package includes an enhancement for low-income earners’ retirement contributions and is known as the saver’s credit an underutilized federal match of up to $2,000 for eligible filers (e.g. married couples making $73,000 or less) getting a matching contribution from the government up to 50% of their savings.
The package also aims to encourage employers to offer retirement accounts, increasing tax write-offs and incentives for small businesses if they begin to offer 401(k) plans and allowing employers to automatically enroll employees into emergency savings accounts with 3% of their salary, or up to $2,500, set aside.
The 10% penalty employees under the age of 59-and-a-half face when making an emergency withdrawal will no longer be in place for withdrawals up to $1,000 annually, though this rule won’t take effect until 2024.
The $1.7 trillion dollar bill made its way through the Senate Thursday, passing on a 68-29 vote, and cleared the House on Friday, avoiding a potential government shutdown and sending to President Biden’s desk, where he’s expected to sign it into law.
46 million. That’s how many workers making $50,000 or less don't have access to an employer-provided retirement plan, while 11 million workers making $50,000 or more do not have access to a workplace plan, according to a report by the AARP.
One thing that is not addressed in the bill is Social Security, with funds in the trust beginning to run out by 2034 without congressional action. While this does not mean retirees will be left with nothing, they could only receive 77% of their full benefits according to a 2022 Social Security Trustees report.
“Americans deserve dignified retirements after decades of hard work, and our bill is an important step forward," Senate Finance Committee Chair Ron Wyden (D-OR) said Tuesday in a statement. “These are reforms that will make a meaningful difference for workers who have struggled to save.”
The changes to the 401(k) retirement plan were a bipartisan effort by the Senate Finance Committee and are an expansion of a 2019 Secure Act. The previous bill removed the age cap Americans would be able to contribute to traditional IRAs and also incentivized workers to let their employers automatically raise an employee’s annual savings rate to 15% of annual earnings, a bump from the previous 10% cap. The sudden rush to change retirement plans in recent years is meant to combat the financial shape Americans are finding themselves in, as this generation is reaching retirement age not seeing any rise in their median incomes and social security in years, becoming the least prepared in decades, reports The Wall Street Journal.