Enacted Bipartisan Bill Encourages Retirement Savings – 10 Key Provisions

Enacted Bipartisan Bill Encourages Retirement Savings – 10 Key Provisions

Americans, particularly workers with lower earnings, are not saving enough for retirement as many live paycheck to paycheck. As part of the spending bill signed by President Biden on December 29, 2022, there are various incentives ranging from emergency savings options to tax incentives and making the accounts more accessible without penalty. Although there are numerous changes, the following are 10 key modifications:

  1. Required Automatic Enrollment:

If an employer establishes a 401(k) or 403(b) after the date of the law enactment, employees will automatically be enrolled in the retirement plan (unless they opt out). Furthermore, there is an automatic escalation provision which starts with an employee contribution percentage of at least 3%, but no more than 10%, and the contribution percentage will automatically increase by 1% each plan year.

  1. Savers Match:

Workers earning less than $71,000 per year would be eligible to get a federal government-funded match of up to 50% of their IRA contribution which is capped at $2,000 (in other words, $1,000 maximum match). The match would be a tax credit (if the employee pays that much in taxes).

  1. Matching Contributions for Student Loan Payments:

As of 2024, employers can make matching contributions to employee’s retirement account based on the employee’s student loan payments. This encourages the employee’s student loan to be repaid.

  1. Emergency Withdrawals:

Employees will be entitled to one withdrawal up to $1,000 per year without penalty (normally there is an excise tax if the withdrawal is made before age 59 ½). The amount withdrawn will be required to be paid back.

  1. Emergency Savings:

As of 2024, employers can create an emergency savings account that is linked to the employee’s retirement account. Non-highly compensated employees can make contributions to a special savings account within the retirement plan. This provision helps employees who live paycheck to paycheck.

  1. Qualified Federal Disaster Withdrawal Amount Increased:

An employee that is a victim of a disaster (as determined by the federal government) can withdraw $100,000 or 100% of the employee’s retirement account balance (if the balance is less than $100,000) without an excise tax. The employee would have 3 years to repay the loan balance without incurring the 10% excise tax (if under age 59 ½).

  1. Reduction of Excise Taxes for those required to make a distribution:

Prior to Secure Act 2.0 (the new law), there was a 50% excise tax if the retirement account holder didn’t timely make the required minimum distribution (which is 70 ½ for those who were that age before January 1, 2020 and 72 for those who were not 70 ½ as of January 1, 2020). The 50% excise tax has now been reduced to 25%.

  1. Increase in Required Beginning Date:

As of January 1, 2023, the Required Beginning Date has changed from age 72 to 73. This will again be increased to age 75 beginning on January 1, 2032. This gives the retirement account owner a longer period of time for tax-deferred growth.

  1. Qualified Longevity Annuity Contract (QLAC) Expansion:

Certain annuities can be purchased as part of a retirement account whereby distributions do not need to be made until age 85. Previously the maximum QLAC purchase was $145,000. That amount is now increased to $200,000 and there is no longer a maximum percentage amount (previously 25%) of the holder’s account.

  1. Penalty Free Withdrawals from Retirement Accounts in Case of Domestic Abuse:

A victim of domestic abuse within the past year will now be permitted to withdraw the lesser of $10,000 or 50% of the participant’s account without penalty.

There are other provisions that encourage increasing retirement savings, give clarifications of plan rules, as well as effect retirement plan distributions.

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