If you or someone else in your family has individual retirement accounts (IRAs) or workplace retirement plans, you’ll want to follow legislation that is currently moving through Congress. The Securing a Strong Retirement Act of 2022 has already passed in the House—almost unanimously. A similar bill, the Enhancing American Retirement Now Act, has been drafted in the Senate but will have to wait for further work until Congress is back in session in November. If the Senate passes its bill, the House and the Senate would need to reconcile the two bills, and then each would vote on the reconciled bill. In other words, the House and the Senate will need to literally get their acts together. In the meantime, here are some key elements under consideration that may significantly affect your retirement planning.
Catch-Up Contribution Limit
The $1,000 IRA catch-up contribution limit for individuals aged 50 and older would be indexed for inflation, starting in 2024. The Senate’s draft would start in 2023.
Workplace Retirement Plans
For workplace retirement plans such as a 401(k), the catch-up contribution limit would be increased to $10,000 (indexed for inflation) for eligible participants aged 62 to 64, starting in 2024. The Senate’s version wouldn’t start until 2025, but the age of eligibility would be lowered to between 60 and 63.
SIMPLE Plans
First, SIMPLE stands for Savings Incentive Match Plan for Employees Individual Retirement Accounts. For SIMPLE plans, the catch-up contribution limit in the House plan would be increased to $5,000 (indexed for inflation) for eligible participants aged 62 to 64, starting in 2024. In the Senate’s version, the ages and starting year would change in the same way as the Workplace Retirement Plans explained above.
Employee Plan Matching
In the House plan, an employer would be able to make matching contributions to a defined contribution plan such as a 401(k) on behalf of an employee who is making qualified student loan payments, starting in 2023. The Senate would start this in 2024 instead.
Starting Age for RMDs
The House would raise the starting age for required minimum distributions (RMDs) from retirement accounts from 72 to age 73 starting in 2023, age 74 starting in 2030, and age 75 starting in 2033. The Senate’s approach would simply increase the starting age 75 for all calendar years after 2031.
RMD Penalties
The penalty for failing to make an RMD (Required Minimum Distribution), in the House’s plan, would be reduced from 50% to 25%, starting in 2023. In addition, the penalty would be reduced to 10% if the taxpayer corrects an RMD shortfall and submits a corrected tax return before the earlier of (a) when the IRS demands payment or (b) the end of the second taxable year after the taxable year in which the penalty is imposed. Believe it or not, the Senate’s version is exactly the same!
QCDs (Qualified Charitable Distributions)
Qualified charitable distributions (QCDs) for individuals aged 70 1⁄2 and older would be expanded to allow a one-time election to be made for a QCD of up to $50,000 (to be adjusted for inflation) to a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity. Again, the current draft in the Senate is the same as in the House.
Exception for Early Distributions
An exception to the penalty for early distributions from a retirement plan would be available for up to $10,000 of distributions to a domestic abuse victim after the date of enactment. The Senate’s plan is the same.
SIMPLE and SEP Roth IRAs
In the House plan, SIMPLE and SEP Roth IRAs would be allowed starting in 2023. The Senate would delay this until the following year.
Treatment of Employer Matching
If a retirement plan permits it, an employee would be able to elect to have employer matching contributions treated as Roth contributions, starting with contributions made after the date of enactment. The only difference in the drafted Senate plan is that it would apply to contributions made in 2023 and beyond.
The Takeaway
Since compromise has been in such short supply in Washington, it’s too soon to predict what this legislation will look like in its final form. At a glance, most differences so far seem to be in the ages and years involved. It’s never too soon to understand what effect such changes might have on your retirement plans. Your financial advisor will be able to walk you through the implications for your specific situation.
Source: “Retirement Legislation Awaits Further Action,” Broadridge Advisor Solutions, October 18, 2022
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