Under a House bill aimed at increasing individual retirement savings, Americans could save more in their 401(k)s and keep their nest eggs for longer.
The bill, which was passed by a vote of 414 to 5, raises contribution limits for older workers and allows employers to offer employees a small cash bonus simply for enrolling in the retirement plan. The bipartisan measure, dubbed Secure Act 2.0 by some, would build on retirement-policy changes enacted in 2019 that, among other things, raised the age at which people were required to begin withdrawing money from retirement accounts from 7012 to 72.
If passed by the Senate and signed into law, the bill would raise the retirement age to 75 over the next decade, benefiting the financial-services industry, which typically earns fees based on the size of retirement accounts. Senators are expected to consider changes to the House bill, which they may then incorporate into a larger piece of legislation later this year.
The plan would provide significant benefits to aging people who have healthy bodies and healthy bank accounts. In the short term, “it feels like a tax cut,” according to Mark Iwry, a senior fellow at the Brookings Institution who oversaw national retirement policy at the US Treasury Department during the Clinton and Obama administrations.
According to the Center for Retirement Research at Boston College, roughly half of all American households are at risk of seeing their standard of living decline after retirement due to a lack of savings.
Rep. Kevin Brady (R., Texas), a co-sponsor of the bill with Rep. Richard Neal (D., Massachusetts), chairman of the House Ways and Means Committee, stated that it serves several purposes.
Among them: “As Americans work longer, we want them to save longer,” he said.
What the bill intends to do
The legislation would gradually raise the age at which savers must begin withdrawing from 401(k)-style and traditional individual retirement accounts to 73 next year, rising to 74 in 2030 and 75 in 2033. People who save money in those accounts must currently begin withdrawing money—and paying any taxes owed on it—at the age of 72. These required withdrawals can be a source of frustration for taxpayers who are still working or trying to stretch their retirement savings.
While the law, if passed, would benefit those who can afford to leave their money alone, it could expose them to higher tax bills in the future. When required distributions kick in, they will be withdrawing more money annually over a shorter time period, according to IRA specialist Ed Slott.
The age for required withdrawals has been raised. “It sounds better than it is,” he commented.
According to Mr. Slott, roughly 80% of people subject to mandatory retirement account distributions withdraw more than the required minimum because they need the money.
The bill would allow older workers to contribute more. People over the age of 50 can contribute an additional $6,500 per year to 401(k)-style retirement accounts, for a total contribution of $27,000. Starting in 2024, the legislation would raise that to $10,000 per year for people aged 62, 63, and 64. After-tax catch-up contributions would be required under the bill. Starting in 2024, the extra $1,000 that people 50 and older can contribute to an IRA would be adjusted to account for inflation, according to the legislation.
According to congressional estimates, the bill would generate approximately $36 billion to help pay for itself over the next decade, in part by requiring workers ages 50 and older who make additional contributions to 401(k)-style plans beginning in 2023 to do so through Roth accounts. These require people to contribute after-tax money, foregoing the tax deductions that a traditional 401(k) would provide (k).
Employers would also be able to offer employees the option of directing matching contributions into a Roth account. Those changes aren’t actually tax increases to offset the costs of tax cuts. Instead, Roth-style accounts simply give the government more money earlier, during the congressional budgeting window, at the expense of future revenue beyond the next decade.
Sign-up incentives
Other initiatives are aimed at increasing retirement savings among part-time workers, 401(k) participants with student loans, and savers with low to moderate incomes.
Automatic enrollment in retirement savings, which advocates say has been shown to increase minority participation rates, would be made mandatory for newly created 401(k) or 403(b) plans beginning in 2024. Employers with ten or fewer employees and those in business for less than three years would be exempt. Those employees would have the option to opt out.
It would allow plan sponsors to provide “small immediate financial incentives” to participants, such as cash or gift cards, in exchange for signing up.
It would also allow employers to make matching contributions to 401(k)-style accounts of employees paying off student loans who do not contribute enough to the 401(k) plan to receive a full match beginning in 2023.
The bill would seek to encourage people with low and moderate incomes to save in retirement accounts by increasing the saver’s credit, which is a sort of match from Uncle Sam that is frequently underutilized. Starting in 2027, the credit would be increased to 50% on contributions of up to $2,000 per year, up from a current, tiered structure of 10% to 50% that varies with income.
Another provision would require employers to allow part-time employees who work at least 500 hours per year to participate in 401(k) plans after two years on the job, up from three years now, beginning in 2023.
Retirement lost and found
The bill would mandate that the Labor Department create an online database where people could search for lost retirement accounts. Americans are leaving more 401(k)-style accounts and pension benefits with former employers as they change jobs. Some people lose track of their money.