Changes to 401(k) Rules Allows People That Work Longer to Save Longer
A bipartisan bill passed the House of Representatives on March 29 that would raise 401(k) contribution limits for older workers and raise the Required Distribution age in stages over time, allowing Americans that work longer, to save longer. You may hear the bill referred to as the “SECURE Act 2.0” because it builds on the retirement policy changes made in the 2019 SECURE Act. The bill still needs to pass the Senate, of course, but all indications suggest that it will pass this year or possibly be rolled into a larger piece of legislation relatively soon.
Below is general overview of the legislation. To read the entire bill, go to: H.R.2954 – Securing a Strong Retirement Act of 2021.
Required Distribution Age and Tax Implications
If the bill passes the Senate, it will gradually raise the RMD age to 75 over the next decade – from the current 72 to 73 in 2023, 74 in 2030, and then capping at 75 in 2033. This is an advantage for healthier and wealthier workers who can afford to live without the distributions. The tax implications in the longer term, however, could expose them to higher bills once their RMD kicks in because they will be withdrawing more money over a shorter period. It would also negatively affect “semi-retired” individuals that choose to work lower paying or part-time jobs as they age and rely on their RMD to make up the difference.
Contribution Limits
The bill will allow individuals 50 and older to contribute an additional $6,500 a year to retirement accounts, capping at $27,000, and then raise it to $10,000 a year starting in 2024 for people ages 62 to 64. Catch-up contributions could be made after taxes. Individuals 50 and older could contribute an additional $1,000 annually to an IRA beginning in 2024, and employers would be able to give employees the option of directing matching contributions into a Roth account.
Other Measures
- Mandatory enrollment in retirement savings starting in 2024 for newly created 401(k) or 403(b) plans. Employers with 10 or fewer workers and those in business for less than three years would be exempt and employees would be able to opt out.
- Permit employers to make matching contributions to the 401(k)-style accounts of employees paying off student loans who don’t contribute enough to the 401(k) plan to receive a full match.
- Raise the Saver’s Credit to 50% in 2027 so individuals with low and moderate incomes can save in retirement accounts on contributions of up to $2,000 annually.
- Allow plan sponsors to offer financialincentives (like cash or gift cards) to participants for enrolling in a retirement plan.
- Require employers, starting in 2023, to allow part-time employees who work at least 500 hours a year to participate in 401(k) plans after two years on the job (down from the current three years).
- Require the Labor Department to create an online database through which individuals could search for lost retirement accounts.