Changes are coming to our 401(k) plans. Sure, the House passed Secure 2.0 (in a bipartisan fashion with a vote of 414 to 5) last March. But, now the Senate is finally getting into the act. The Senate Finance Committee just advanced their version of the bill to the full Senate. The odds are the reconciled bill will be part of a larger fiscal bill to be passed around the November elections.
In 2019, the Congress altered the retirement rules by change the required start date for retirement withdrawals from 70 ½ to 72 years of age. The Senate version of the new bill raises that to 75 by 2032; the House passed bill raises the age in increments- 73 in 2023, 74 in 2030, and 75 in 2033.
The Senate bill also allows emergency withdrawals up to $1000- without penalty. But that withdrawal must be repaid before any other such withdrawals within 3 years of the first. (The House bill has no such provision.)
Another set of discrepancies is the Senate will allow penalty-free withdrawals by the terminally ill, victims of domestic abuse, those residing in federal disaster regions- and to pay for long-term-care insurance. The House bill lacks all of those provisions.
There’s also a “saver’s credit”- which, of course, differs between the Senate and the House fills. The Senate version stipulates that for those lower and middle income workers who contribute to a 401(k), the government would ante up an additional $ 1K into their plans (beginning in 2027). This benefit disappears for single folks earning $ 35,500 or more (it begins phasing out at $ 20,500) and for married folks at $ 71K income tax liability- which is covered by this saver’s credit. (It is not deposited into the 401(k) plan.)
Another change is the “catch-up” provision. Right now, folks over 50 can contribute $6500 more a year (for a total of $ 27K). The Senate would allow those between 60 and 63 y of age to add in $ 10K more; the House bill gives that right to those between 62 and 64 y of age. And, the catch-up contributions are made using AFTER TAX dollars!
The House makes enrollment mandatory for new 401(k) or 403(b) plans. The Senate, instead, encourages automatic enrollment by providing a tax break to small employers.
Another difference- the Senate creates an “emergency savings account” feature. The employer can offer these, which are linked to the retirement plan, but it’s limited to 3% of compensation. The emergency savings are capped at $ 2500, but an employer can choose a lower amount. These are also made with AFTER-TAX dollars, treated as elective deferrals. Once the cap is met, the funds are transferred to the normal retirement plan.
Looks like we are in for some interesting times.
It sounds like, at this point, everything is up in the air. Many of the House of Reps, as well as the Senators, are attorneys – and like all attorneys, they can never agree on anything and need to make changes.
ANy idea on tax penalties for withdrawals on any of these plans? I heard a doomsday forecast that the government is going to heavily tax withdrawals in this bill.
I listed all the penalties that have been discussed- so far that’s the lot of them, Paul.
I knew this was being worked on, and knew about some of the potential changes,like the increase in the mandatory withdrawal start age to 75 and the possible mandatory enrollment, and some of these other proposals sound like reforms we need to the current law. I hope the final bill has many of these features.
I am not against changing the mandatory age- but want 65 to be available for those that need it.
I guess this is when it pays to be born early LOL
Or not- if yhou don’t need the money and can let it accumulate longer, that’s a plus!