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The $1.7 trillion budget bill that President Biden may sign into law this week has several important parts that make it easier for workers to save for retirement.
As more Americans start working later in life, they frequently find that Social Security and retirement funds are insufficient to cover their expenses, which leads to many looking for work in retirement. According to the Bureau of Labor Statistics, by 2030, 96.5% more persons 75 years of age and older will be working or searching for employment.
According to economist Monique Morrissey of the Economic Policy Institute, only about half of workers have ever had a retirement plan, such as a 401(k). “The ugly reality is that since contemporary recorded history, only around half of workers have ever had a retirement plan,” she says. “More than half of workers have little or none at all.”
Most Americans don’t have access to private retirement savings plans
401(k) balances for Americans 65 and older typically have a balance of $87,700, according to research by the investment firm Vanguard.
The Secure 2.0 legislation, which has provisions that would assist certain employees who cannot access employer retirement programs, would primarily benefit employees who already have access to them.
According to PricewaterhouseCoopers, a third of Americans do not currently have access to private retirement savings plans, such as a 401(k).
The proposed retirement measures aim to assist workers in the following ways:
An emergency fund
According to consumer financial services provider Bankrate, 51% of Americans can’t cover more than three months’ worth of costs out of an emergency fund, and 25% claim they have none.
Under the new regulation, employers would be permitted to automatically enroll employees in an emergency savings account in addition to their retirement plan, up to $2,500, unless employees choose to opt out. In addition, employees would be able to deposit pre-tax funds into the account, and withdrawals would be tax-free.
Employees would not be subject to the standard 10% penalty if their employers allowed a one-time yearly withdrawal of up to $1,000 from their retirement savings for specific emergency costs.
The 2019 Secure Act would eliminate the need for part-time employees to work for three consecutive years to be eligible for their employer’s 401(k) plans. Instead, to qualify for their company’s 401(k) plans, part-time employees would need to work between 500 and 999 hours over two years.
Student loans borrowers
Large student loan debtors frequently decide against investing for retirement in favor of debt repayment. A 2016 Fidelity Investments study indicated that 79% of workers who responded to the poll stated their college debts hindered their ability to save enough for retirement.
Student loan repayments will be treated as retirement contributions under the new law beginning in 2024 and eligible for employer matching contributions.
Additional tax credits are offered.
Only low- and middle-income workers who owe at least $1,000 in taxes are eligible to receive a nonrefundable tax credit equal to up to half of their retirement savings contribution.
According to the new rules, employees who earn up to $71,000 annually will get a matching government contribution when they save money through a workplace retirement plan. The retirement accounts would receive the contribution, which was not withdrawable without a fee.
Starting in 2025, the measure would mandate that companies enroll staff members proactively in 401(k) and 403(b) plans. Automatic employee payments would rise by 1% each year until they achieved a minimum of 10% and a maximum of 15%.
Churches, public pension systems, and small firms with fewer than ten employees would all be excluded.
Required minimum distributions and catch-up contributions
This provision is intended to provide high-income individuals with an additional boost as they near retirement age. Those 50 and older can contribute an additional $7,500 a year to their 401(k)s. That ceiling would rise to $10,000 as of 2025.
The age at which Americans must take money from tax-deferred retirement accounts would also increase under the proposed legislation, from 72 to 73 on January 1 to 75 in 2033.
Failure to take RMDs is now less of a crime thanks to the Secure 2.0 Act of 2022. If the mistake is fixed “in a timely way,” the 50% excise penalty would be reduced to 25% and then to 10%. The reduced penalties went into effect after Biden signed the bill into law.
M. Dutton and Associates is a full-service financial firm. We have been in business for over 30 years serving our community. Through comprehensive objective driven planning, we provide you with the research, analysis, and available options needed to guide you in implementing a sound plan for your retirement. We are committed to helping you achieve your goals. Visit us at MarvinDutton.com . Tel. 212-951-7376: email: [email protected]