Retirement plans could see some major changes if proposed new legislation is approved by Congress. “They have so many bills,” says Ed Slott, president and founder of Ed Slott and Company. “Some people call the whole batch SECURE 2.0. There’s an EARN Act (Enhancing American Retirement Now). One is the Retirement Protection Act. There’s a bunch of different acts here.”
These retirement bills would:
— Increase the maximum annual contribution for retirement accounts by $4,000.
— Increase the age when you must begin required minimum distributions.
— Require automatic enrollment and escalation for employer-sponsored plans.
— Increase the amount for the catch-up provision for those 50 and older.
— Allow employers to help those who are burdened with student debt save for retirement.
Many of the changes are intended to encourage employees to prepare for retirement. “For the most part, what they’re trying to do is get people really to save,” says Eric Bond, a wealth advisor with Bond Wealth Management in Long Beach California. “They feel that people don’t have enough money in their retirement accounts.”
Here’s a look at some of the proposed changes to retirement accounts.
Increase the Annual Contribution Limit for Retirement Accounts by $4,000
The annual limit for tax-deductible contributions for people under 50 is currently $6,000 for an individual retirement account and $20,500 for a 401(k). “Basically, they’re proposing raising the limit for one year, and I say they’re proposing because this may go nowhere. Whether it’s a Roth IRA or the traditional IRA, the proposal is to increase the contribution limit by $4,000 to $10,000,” Slott says. “The 401(k) contribution limit would move up to $24,500, which is a lot you could put in, if you have the money.”
Increase the Age for Required Minimum Distributions
Money typically goes into traditional retirement accounts tax deferred, but you have to take distributions and pay the taxes in retirement. It was required that participants begin withdrawals at age 70 1/2. The SECURE Act raised the required minimum distribution age to 72. Now the House has passed SECURE 2.0, which would increase the age for RMDs to 73 in 2022 and 75 in 2032. However, it must still be passed by the Senate and signed by the president before it would become law.
The formula that sets the amount of your required minimum distribution considers life expectancy. “Now that we’re living longer, it makes sense to start it later,” Bond says. “People who need it take it anyway. People who don’t need it keep deferring it and deferring it. The whole goal of the IRA is to make sure people in retirement have enough (savings) throughout their lifetime.”
Increase the Catch-Up Provision for People Age 50 and Over
There are several proposals to allow increased catch-up contributions to retirement accounts. Catch-up provisions permit people 50 and older to catch up on saving for retirement during their peak earning years. The catch-up contribution limits for 2022 are $6,500 for 401(k)s and $1,000 for IRAs.
Some proposed legislation would allow people between ages 62 and 64 to put an additional $10,000 into retirement accounts via the catch-up provision. However, the money would not be tax-deferred, making it a Roth contribution. A separate Senate bill limits the new catch-up contributions to those ages 60 to 63. “They’re all over the place,” Slott says. “They’re not even in agreement with the House and Senate yet. That’s why I say that Congress is thinking about these things, but they really haven’t solidified everything.”
Automatic Enrollment and Escalation in 401(k) Plans
Employees might increasingly be automatically enrolled in workplace retirement accounts. “They really want to have the employers create these 401(k) plans for the employees and automatically enroll them in it starting at 3%,” Bond says. “If you make it mandatory, the only way they cannot be part of it is for them to opt out of it.”
A 401(k) Match for Student Loan Payments
If you have student loan debt and an employer-sponsored retirement plan, one proposal will allow your employer to match your monthly payment up to a certain amount and put that directly into your 401(k). “They don’t want people to say they can’t save because they have a student loan,” Bond says.
These legislative proposals are not current law and are subject to change. “It hasn’t come together yet,” Slott says. “The bottom line is more people will be able to put more away for their retirement, especially older people who need to catch up.”
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