Boost For Savings Plans as New Retirement Bill Clears House
A new retirement bill received an overwhelming 414-5 bipartisan vote on March 29 in the House of Representatives. If it clears Senate and is approved by President Biden, this bill will usher in retirement security legislation that will make it easier for businesses to offer tax-qualified retirement savings plans to their employees. It will also enable individual retirement account holders to keep their retirement savings longer before being mandated to withdraw them.
About the legislation
The Securing a Strong Retirement Act, or simply the Secure Act 2.0, aims to improve the retirement system. As tax professionals, we are always telling our clients to take advantage of retirement plans to save on taxes while building a retirement nest egg. This legislation will bring some changes that make this even better. You could retire with more money. And you will no longer be forced to withdraw early through the Required Minimum Distributions as with the current legislation. I will explain this later in this article.
This new legislation builds on the original Secure Act of 2019, which introduced changes aimed at improving retirement security. The bill will improve how Americans save for the future and help reduce dependency on social services by retirees and their families. But what are the changes that this bill brings?
Changes you should look forward to
Expansion on employees enrolled in 401(k) plans
The Securing a Strong Retirement Act proposes that employers automatically enroll eligible employees in 401(k) plans. They should do this at a 3% salary rate, which will increase annually until the employee contributes 10% of their wages. Nevertheless, employees can still opt out of this enrollment and make their own preferred contribution. More so, if your business is less than 3 years old or you employ less than 10 people, you will be exempt from this mandate. Overall, this provision expands the number of employees that can opt into workplace retirement plans. This is also on the back of the relaxation or reduction of service requirements for part-time employees to participate in an employer retirement plan.
Positive changes for employees nearing retirement age
The new bill also provisions that savers nearing retirement can contribute more and delay withdrawals. Employees aged 62, 63, and 64 could make $10,000 catch-up payments to their 401(k) and other workplace retirement plans. This will be an improvement from the current $6,500.
The starting age for required minimum distributions (RMDs) will be raised too. If the bill is passed, that age for RMDs will be raised to 73 in 2022, 74 in 2029, and 75 by 2032. Currently, the age to start withdrawing RMDs is 72 or 70 ½ if you reached 70 ½ before January 1, 2020. This new provision will allow individuals to save more money without being mandated to withdraw it.
Some good news for the young people
Young people usually suffer the burden of student loans. It prevents them from saving money or buying assets at a young age. But this new bill will allow employers to match student loan payments as retirement contributions. Therefore, instead of only paying the student loans back to lenders, you will now receive them back. Your employer will match this as a retirement contribution. It can boost student loan recipients massively in terms of retirement income.
More so, the bill potentially has more that the working young may benefit from. There is a provision that will allow young employees to direct all or a portion of their employer’s match to a Roth 401(k). This provision will provide a tax benefit when these young employees retire.
Other important changes likely to come
Finally, the bill will likely include benefits for domestic violence survivors, small business owners, and low-wage employees. It will make them eligible for some tax credits for them. My team and I will keep an ear on the ground for you so that if anything comes out that can help our clients and other individuals, we will share the details. Moreover, there will be a national database established to help Americans who lost their retirement accounts claim them. This is excellent news, given the pain of losing the money you would have been saving for years.
In conclusion, let me remind you that this new bill has only cleared the House of Representatives. It will now head for the Senate, and it is likely to pass therein. If you have any questions about how you will benefit from this, keep following our social media pages for updates.
If you need help with 2021 taxes, get in touch as soon as possible using our office number (202)618-1297. Please note, we have stopped taking extension clients as of Friday, April 8, 2022. Contact us if you are our client and have questions after we did an automatic extension for you. Also, call us if you are not our client but need help preparing taxes after being granted an extension to file.
Frequently Asked Questions
- What is a safe retirement income?
No retirement income is safe. It all depends on your lifestyle and responsibilities. Therefore, financial planners usually assess every worker’s situation and recommend a safe contribution towards retirement each year to reach a certain retirement income limit when they eventually retire. You might also want to consult me or any financial professional about your own retirement plan.
- How can I secure my retirement?
There are many tools to secure your own retirement. You can use individual retirement accounts and double-up on employer-provided retirement plans to boost your retirement savings. Other employees invest part of their salaries in the stock market, keep investments until they retire, and start slowly withdrawing them to fund their daily lifestyles.
- What is a retirement plan?
A plan designed to take care of your financial needs when you retire. This is the income that will replace your wage income. There are many retirement plans that are provided by employers, insurance companies, the government, etc. An example of a retirement plan is a 401(k) plan.
- How do I create a retirement plan?
The first step to creating your retirement plan is to define your retirement goals. Your retirement saving plan should follow – that’s when you will know how to create suitable retirement plans.
