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Congress Debating Seven New Retirement Rules

CNN Business is reporting that there are seven possible changes to retirement plans that Congress is considering.  Both the Senate and the House have passed similar legislation, so we will have to see if they can form it into a cohesive bill to send to President Biden for his signature.

An overview of the proposed changes include having retirement plans and/or employer plans:

1. Require auto enrollment in 401(k) plans

Employers starting workplace retirement savings plans could be required to automatically enroll employees in the plan. (Currently its optional for employers.) It would then be up to the employee to actively opt out if they don't wish to participate.  The provision would likely require a contribution rate (e.g., between 3% and 10%) plus automatic escalation (e.g., of 1% per year up to a maximum contribution rate of at least 10% but no more than 15%).

2. Introduce employer contributions for student loan payments

When you have to pay down student loan debt, it is harder to save for retirement.  The bill could let employers make a matching contribution to an employee's retirement plan based on their student loan payments. That way, it would ensure that the employee is building retirement savings no matter what.

3. Increase the age for required minimum distributions

Recently Congress moved the age at which withdrawals must be made from retirement accounts from 70 years 6 months to the current 72 years. Under the latest legislation, should it make it into law, you likely would not need to tap your retirement savings until age 75 if you did not wish to.

4. Help employees build and access emergency savings

Normally if you tap your 401(k) before age 59-1/2, you must not only pay taxes on that money, but also pay a 10% early-withdrawal excise tax (penalty).

For employees who are dissuaded from saving money in a tax-deferred retirement plan because they are concerned it would be too complicated and costly to access it for emergencies, the new legislation may include one or two options to help set aside that fear.

The first option would let you make a penalty-free withdrawal of up to $1,000 a year for emergencies. While the employee would still owe income tax on that withdrawal, there will be an option to get a tax refund shoudl they pay that money back to the retirement account within three years.  Also, the law might let an employer add a “sidecar account” to an employee's retirement account, where the employee can contribute after-tax money explicitly for emergencies, Spence said. That money could be taken directly from their paycheck, just as their 401(k) contributions are.

5. Raise catch-up contribution limits for older workers

If you are 50 or older, you can contribute an additional $6,500 to your 401(k) on top of the $20,500 annual federal limit. The new provisions would allow those between ages 60 and 64 to contribute $10,000, instead of $6,500.

To help pay for the cost of the retirement package, however, another proposal requires anyone paying over the standard limit to put them in a Roth IRA, which requires the depositor to pay income tax before depositing into that type of account. Funds so deposited would grow tax free and may be withdrawn tax free in retirement.  The government essentially wants the tax revenue from the  contribution up front.

6. Enhance and simplify the Saver's Credit

An underutilized federal match exists for low-income earners' retirement contributions up to $2,000 a year. The new retirement package might enhance and simplify the so-called Saver's Credit so more people could use it. Low-income filers could get a refundable tax credit worth 50% of their savings up to a contribution limit in a given year.

While tax credits reduce your tax liability dollar for dollar, a refundable tax credit pays the tax filer the money even if they had no income tax liability to offset.

7. Make it easier for part-time workers to save

Part-time workers currently must be allowed to participate in a workplace retirement plan if they have at least three years of service and work at least 500 hours a year. Another proposal may reduce that to two years.

Credit to CNN Business for the information provided above.  The full article can be found here.

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