While many children are working on their best behavior in eager anticipation of a December 24 visit from St. Nick, financial planning wonks (myself included) are waiting to see if Congress will pass what is known as Secure Act 2.0 before the end of the year. Seven PROPOSED changes to retirement rules will make it easier and less expensive to save for retirement.
- Require automatic enrollment in 401K plans (3%-10% default contribution rate) plus automatic annual escalation of contribution rates up to at least 10% but no more than 15%.
- Allow employers to make matching contributions to employees retirement based on their student loan payments.
- While the RMD (Required Minimum Distribution) for tax sheltered retirement accounts ( Traditional IRA’s, 401K’s, 403B’s, 457 plans) has moved from 70 ½ to age 72, a gradual increase to age 75 has been proposed to allow retirement funds to remain untapped.
- Encourage employees (especially those with lower incomes who might have more urgent priorities than saving for retirement 30+ years from now) to save money in a tax-deferred retirement account while having the ability to make a penalty-free withdrawal in the year that it is earned. While this money is taxable, but avoids the 10% early distribution penalty, they could have their taxes refunded if they repay within 3 years. A second option would let employees contribute after-tax money to a fund to be used explicitly for emergencies.
- Raise the amount older workers can contribute to their retirement accounts as catch-up contributions. For 2022, the annual contribution limit for workers aged 50 and older is $20,500 + $6,500 catch up contributions. Under this proposal workers between the ages of 60 and 64 may be allowed a catch-up of $10,000. A variation on this proposal is that for the catch-up – rather than it be tax-deferred, it be “Rothified” – added to a Roth 401K – taxable when contributed but tax-free in the future.
- Motivate lower-wage workers to save for retirement by simplifying and enhancing the Saver’s Credit. Low-income workers could get a refundable tax credit worth 50% of their savings up to a contribution limit. Refundable credits not only reduce your taxes but can also result in workers getting money with having a tax liability. Currently this credit is worth up to $1,000 for single individuals and $2,000 for joint filers.
- Help part-time workers save for retirement by reducing the number of years of service from 3 to 2 for those who work at least 500 hours a year.
If any of these changes are ratified, it may change how you approach saving and paying for retirement or other financial goals. Reach out to me to see if working together makes sense.