A federal law signed in December may have a significant impact on your retirement.
Summary
The federal government has made several changes to how retirement plans work, and many of these changes provide savers with greater flexibility. The changes include:
- Delaying mandatory withdrawals from retirement accounts until age 73 instead of 72.
- Increasing additional contributions for workers over the age of 60.
- Automatically enrolling young employees in an employer-sponsored retirement savings plan.
Delaying Mandatory Withdrawals
You can now wait until age 73 before you start withdrawing money from your retirement accounts. In the past, you had to start taking withdrawals when you turned 72. This means that if you don’t immediately need your retirement funds for living expenses, you can leave them in your retirement account longer, allowing it to continue to earn returns. Most importantly, you won’t have to pay the taxes you would incur if you withdrew the funds. Lauren Wybar, a certified financial planner and wealth advisor at Vanguard, said this is one of the most significant provisions of the new retirement rules.
Automatic Enrollment in Retirement Savings Plans
In many workplaces, setting up a retirement account requires some initiative from the employee. Starting in 2025, if your job offers a retirement plan, you will be automatically enrolled to contribute between 3% and 10% of your income to retirement, with the amount increasing by one percent each year until it reaches at least 10% and a maximum of 15%. Instead of opting in to save, you will be “required to save.” This automatic enrollment does not apply if the company you work for has fewer than 10 employees or has been in business for less than three years. Not participating in retirement plans is a major reason why many people lack savings as they approach retirement age. In 2021, 29% of workers with a defined contribution plan like a 401(k) did not participate in retirement plans. Now, you will automatically have to contribute to your retirement account, unless you take the time to opt out of the plan. In other words, saving has become the easier option.
Using Retirement Savings as a Small Emergency Fund
If you are wondering whether to place your savings in a retirement account or an emergency fund, the provisions of the new law make this decision less stressful. Starting in 2024, you can use up to $1,000 per year from your retirement account to cover emergency expenses without incurring the usual 10% penalty on early withdrawals. Borrowers will have up to three years to pay back the withdrawal. These provisions can encourage people to save for retirement even if they are worried about having enough cash to cover unexpected expenses.
Creating a “Lost and Found” for Retirement Accounts and Plans
The new law directs the Department of Labor to create a central database for retirement plans to reunite lost 401(k) accounts and retirement plans with their owners. Transferring retirement accounts linked to an employer to a new job can be cumbersome in the best circumstances, and more difficult if the old company has shut down or has been acquired. This may be why it is remarkably common to leave retirement plans behind when people change jobs. As of 2021, there were 24.3 million abandoned retirement accounts with an average balance of $55,400 per account, according to analysis by Capitalize, a company that helps locate and consolidate retirement accounts. Under current law, if they have a balance of less than $5,000, an old employer can cash out an employee’s retirement plan and transfer the funds to a new IRA account in the employee’s name or send a check to the employee if the funds are less than $1,000. Abandoned 401(k) accounts will remain there until claimed. It is common for people to leave a collection of retirement accounts when moving from one job to another, which complicates saving for retirement and also means leaving a lot of money on the table, as old 401(k) accounts may have higher fees and lower returns. Capitalize estimates that the average employee with multiple accounts will be worse off by $700,000 over their lifetime than someone who consolidates into a single account with lower fees.
Conversion
401(k) Transition Between Jobs
The new law allows retirement plan service providers to offer “automatic portability,” meaning they can transfer your retirement plan from your old job to your new job without any action required on your part, unless you tell them not to. This service can be particularly beneficial for individuals with low-balance retirement accounts, who typically cash out their retirement plans when changing jobs, according to a comment from Fidelity.
Increased Catch-Up Contributions for Older Workers
If you are between the ages of 60 and 63, you will be able to make catch-up contributions up to $10,000 to your 401(k) starting in 2025, instead of the current catch-up contribution limit of $7,500 available to workers over the age of 50. This new limit is tied to inflation, meaning it will increase with the cost of living over time. For those earning $145,000 or more, contributions must go into a Roth IRA account.
Employer Matching of Student Loan Payments
Many employers match retirement savings contributions for their employees, and starting in 2024, they may also match student loan repayments if they choose to do so. This new type of benefit is designed to help workers who are hindered by student loan payments from saving for retirement and taking advantage of employer contributions.
Your Education Savings Account Can Become Your Retirement Fund
Under the new law, starting in 2024, you can transfer up to $35,000 over your lifetime from a 529 education savings account to a Roth IRA without paying any taxes or penalties. Currently, you face a hefty penalty if you use funds from a 529 account for anything other than education, and that money is considered income for tax purposes. “The ability to convert at least some to a Roth IRA gives the investment a little comfort, knowing that if I don’t use all this money for education, I have that option,” said Wybar.
Source: https://www.thebalancemoney.com/here-s-how-the-rules-of-retirement-are-changing-this-year-7092444
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