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New spending bill makes it easier for Americans to save for retirement

    The federal spending package unveiled Tuesday includes new provisions that would affect millions of Americans trying to save for retirement, including the elderly who want to stash away extra cash before they retire and those struggling under the weight of student debt.

    Many of the policy changes in the bill, expected to pass this week, will help Americans who can already afford to save or have access to workplace plans. But lower- and middle-income workers will receive a new benefit amounting to a matching contribution — up to $1,000 per person — from the federal government. Another provision will make it easier for part-time workers to enroll in workplace pension schemes.

    “It’s really meaningful progress,” said Shai Akabas, director of economic policy at the Bipartisan Policy Center. “We can’t expect Congress to solve all of our nation’s retirement challenges in one piece of legislation, but this includes a host of provisions that will move the ball forward.”

    The changes were contained in a bipartisan bill known as Secure 2.0, which was folded into the massive federal spending package that will keep the government going.

    The retirement components build on a series of changes made to the retirement system in 2019 that allowed employers to add annuities to their 401(k) retirement plan and raised the age at which retirees must begin withdrawing money from their retirement accounts.

    Some pension policy experts point out that the latest legislation does little to expand access to the tens of millions of Americans not covered by occupational retirement plans, which is, at least for now, the foundation upon which the US pension system is built. . . According to a recent AARP study, nearly half of private sector workers ages 18 to 64, or 57 million people, don’t have the ability to save for retirement at work.

    But there are helpful incremental changes, policy experts said, that are especially noteworthy at a time when Congress is deadlocked on many other issues. As a nod to those struggling with student debt, employees who pay student loans would be eligible for employer contributions even if they themselves do not make qualifying retirement plan contributions.

    Here’s a quick look at some of the changes. Many of them would not take effect immediately, but would be introduced in the coming years:

    Employers can already enroll their employees in workplace retirement plans if they choose, which is known to meaningfully bolster both employee participation and savings rates.

    But this bill would require employers — at least those starting new plans in 2025 and beyond — to automatically enroll eligible employees in their 401(k) and 403(b) plans, paying at least 3 percent, but no more than Set aside 10 percent of their salary. Contributions would increase by one percentage point each year thereafter, until it reaches at least 10 percent (but no more than 15 percent).

    Existing plans do not have to comply with the new rules. Small businesses with 10 or fewer employees, new businesses that have been in operation for less than three years, and church and government plans are also exempt.

    Employers may automatically enroll employees in emergency savings accounts, which are linked to employees’ retirement accounts. They can enroll employees so that they set aside up to 3 percent of their salary, up to $2,500 (although employers can choose a smaller amount).

    The coronavirus pandemic underlined the importance of emergency savings, the lack of which can force younger employees to withdraw money from their 401(k) and related accounts through an existing provision known as hardship. Generally, they must pay income tax and a 10 percent penalty if they do.

    For tax purposes, the emergency savings accounts will work similarly to Roth accounts: Employees contribute to the accounts with money already taxed, and withdrawals of contributions and earnings are tax-free. Employers can match emergency savings premiums just as they can with pension premiums. Once the account reaches the ceiling, excess savings are either credited back to the employee’s Roth retirement plan, if they have one, or stopped.

    Employees could make one withdrawal annually, up to $1,000, from their 401(k) and IRAs for certain emergency expenses — and they wouldn’t owe the additional 10 percent penalty typically imposed on people who make early distributions, usually before the age of 59 years ½. The rule will take effect in 2024.

    Employees could top up their accounts within three years if they wanted to, but if they don’t return the money, they won’t have to make emergency withdrawals.

    Some employers offer a matching contribution on the amount you save in your 401(k) or workplace retirement account — they can match every dollar you contribute, for example, up to 4 percent of your salary. But people with student loans can put off saving for retirement while they focus on getting out of debt, which means they could lose money from their employer for years to come.

    Beginning in 2024, student loan payments would count as retirement contributions in 401(k), 403(b), and SIMPLE IRAs to qualify for a matching contribution to a workplace retirement plan. The same goes for government employers who make matching contributions in 457(b) and related plans.

    Low-to-middle-income workers up to $71,000 will receive a greater benefit — in the form of a matching contribution from the government — when they save within an IRA and workplace retirement plan such as 401(k)s.

    In its current form, the so-called savings credit allows individuals to receive up to 50 percent of their retirement savings contribution, up to $2,000, in the form of a non-refundable tax credit. That means they only get the money back, up to $1,000, if they owe at least that much in tax. If they don’t owe taxes, they don’t receive the benefit.

    But starting in 2027, instead of the nonrefundable tax credit — which is paid out in cash as part of a tax refund — taxpayers will receive a federal matching contribution to be put into their IRA or retirement plan. It cannot be withdrawn without penalty.

    The match is phased out based on your income: For taxpayers filing a joint tax return, it is phased out between $41,000 and $71,000; for single taxpayers, it is $20,500 to $35,500 and the head of household is $30,750 to $53,250.

    Legislation passed in 2019 requires employers with a 401(k) plan to allow part-time employees to participate for extended periods of time, including those with one year of service (with 1,000 hours) or three consecutive years (with 500 hours of service) .

    Beginning in 2025, the new bill would make part-time workers sooner eligible to participate in employers’ 401(k) retirement plans — now two years instead of three.

    People between the ages of 60 and 63 are allowed to set aside extra money for their retirement. Under current law, people who are 50 or older (at the end of the calendar year) are allowed to make catch-up contributions that exceed the pension limits for everyone else. By 2023, that generally means they can set aside an additional $7,500 in most workplace retirement accounts.

    Starting in 2025, the new rule would raise those limits to $10,000 or 50 percent more than the normal catch-up amount that year, whichever is greater, for people in that age group. (Increased amounts will be indexed for inflation after 2025.)

    New rules would allow retirees to delay withdrawals until they are 73, particularly benefiting more affluent households who don’t depend on the money and can afford to leave it.

    Under current law, retirees are generally required to begin withdrawing money from their tax-advantaged retirement accounts at age 72 — before new rules were signed into law in 2019, the age was 70 1/2. These rules help ensure that individuals spend the money and not just use the plans to protect money for their heirs.

    But from next year, these so-called required minimum benefits must start in the year someone turns 73. Later, it would increase to 75 years from 2033.