Americans could soon change the way they save for retirement thanks to several reforms included in a $1.7 trillion spending bill approved by House lawmakers last week.
Along with funding federal agencies through September 2023, the spending bill also touches on everything from emergency assistance for Ukraine to America’s retirement gap. The latter stems from a retirement bill passed earlier this year in the House with broad bipartisan support — the Secure 2.0 Act, which was wrapped into the omnibus spending bill.
Policy analysts with investment bank Raymond James on Wednesday said the measure “makes the most significant changes to the U.S. retirement savings system in decades.” Those changes come as almost half of older workers have no retirement savings, and many who are socking away money for their golden years are far from their goals. While Americans believe they need savings of $1.25 million to live comfortably in retirement, the typical retirement account holds less than $87,000.
“The fact that this bill encourages retirement savings and will help those individuals who may not have the ability to put the money away is really positive,” Lisa Featherngill, national director of wealth planning at Comerica Bank, told CBS MoneyWatch.
Here are a few of the major changes in store for American retirement savers.
Employers may match student loan repayments
Companies may treat their employees’ student loan repayments as elective deferrals to their retirement accounts, which would then allow the employers to provide a matching contribution to their 401(k). This provision would help workers who are not saving much for retirement because of their college debt.
“This is saying, up to a certain point, the loan payments you make will count as if you put that money in the retirement plan,” Featherngill said.
That will help younger workers struggling with loan repayments to start building their retirement savings earlier, she predicted.
A 50% retirement match for $2,000 in savings
The bill would also expand the Saver’s Credit, a nonrefundable tax credit, by turning it into a direct federal contribution to retirement accounts held by low- and middle-income workers.
Under the plan, workers who earn below a certain income threshold and contribute to a retirement plan could get a
50% match from the government for up to $2,000 in contributions. The income limits are $35,500 for single filers and $71,000 for married taxpayers.
While a $1,000 match may seem like a small benefit, the impact could be powerful over time, experts say. “If you start early, then the impact of compounding interest can be significant,” Featherngill said.
Delay mandatory withdrawals until age 75
The bill would also change the law regarding required minimum distributions, or RMDs, which is the amount of money that retirees are mandated to withdraw each year.
Currently, people need to start taking their RMDs at age 72, but the bill would boost that age to 73 starting in January 2023, 74 in 2030 and 75 in 2033.
That would give older Americans more flexibility to delay when they want to start drawing down their retirement assets, but it has also sparked some criticism from tax experts who say the provision would mostly benefit wealthier retirees.
The change “will mainly help the rich shelter their income from taxes for longer periods and build up more wealth for their heirs,” according to a December 16 letter sent to Congress from 45 organizations including Americans for Tax Fairness.
“Pre-retirees” can sock away more money
Older workers who are just a few years away from retirement, or “pre-retirees,” could boost their retirement savings under the bill.
People in their early 60s will be able to increase their catch-up savings from the current $6,500 to $10,000 per year, starting in 2025.
This provision has also drawn criticism for mainly helping upper-income workers. “This only helps the few workers with enough disposable cash to take advantage of the new higher limits,” the December 16 letter said.
Automatic 401(k) enrollment
Another big change is one that experts say can ensure workers are contributing to their 401(k) or 403(b) plans. Starting in 2025, new retirement plans must automatically enroll workers. The plans must also enroll them for contributions between 3% to 10% of their income, rising by 1% annually (up to 15%) unless employees opt not to participate.
“The participant can opt out and they can change the percentage, but for a plan to qualify as a 401(k) plan they have to have that provision,” Featherngill said.
529 rollovers
Starting in 2024, People with 529 college savings accounts in their name are allowed to move up to $35,000 directly into a Roth IRA account, according to Raymond James. Those rollovers must have been open for at least 15 years and are subject to IRA annual contribution limits.
Yet Tim Steffen of investment bank Baird noted in an email there are “lots of misconceptions” about the impact of the 529 change. “The details aren’t nearly as generous as the headlines would make it out to be,” he said.
