In light of recent legislation aimed at overhauling portions of the nation’s retirement savings system, Americans will need to reconsider their approach to saving. The retirement reform is included in a broader plan that Congress enacted just before the holidays. It contains hundreds of retirement policy modifications that will be implemented over the following decade.
However, many of these measures take effect immediately after the bill’s passage, requiring Americans to reassess their financial planning now, according to financial consultants. Immediate changes include incentives for more companies to provide retirement plans and to encourage workers to participate, as well as new restrictions for withdrawing funds and receiving lifetime payments.
Here is a summary of the most significant changes and what you may need to do:
New Rules for Withdrawing Money
Beginning in 2023, the new law raises the age at which taxpayers must draw RMDs, or required minimum distributions, from their retirement accounts from 72 to 73. Therefore, if you turned 72 in 2022, you have until April 1, 2023, to take your first RMD for 2022 and until December 31, 2023, to take your second RMD for 2023. If you turn 72 in 2023, your first RMD is due in 2024, the year you turn 73.
The measure does not affect the uncertainties surrounding the new 10-year payment requirement for inherited IRAs after 2019.
The 50% penalty for missing RMDs will be reduced to 25% of the amount that should have been withdrawn. The penalty is reduced to 10% if the error is rectified promptly.
New exclusions to the 10% early withdrawal penalty
Withdrawing funds from 401(k)s or other pretax retirement plans before age 59 1/2 incurs a 10% penalty. The new legislation strengthens several existing exclusions, including those that apply to certain private-sector firefighters and public safety personnel. It includes additional categories that let terminally ill patients make restricted penalty-free withdrawals.
In 2024, a blanket exception will allow anybody with a personal or family emergency to withdraw up to $1,000 per year without penalty. A penalty exemption for persons impacted by catastrophes announced by the federal government is retroactive to January 26, 2021. There are other exclusions for domestic violence victims and the payment of premiums for long-term care.
New Rules to Encourage Savings Tax Credit for establishing small-employer retirement plans.
Start-up and small companies may be eligible for an additional tax credit if your employer has less than 50 workers that do not provide a retirement plan. As of January 1, your employer is eligible for an additional tax credit to establish a retirement plan. Depending on the number of qualified employees, the new credit pays 100% of initial expenditures up to $5,000 for three years. Employers employing 51 to 100 workers receive a reduced credit, and the extra credit is available for five years if a company matches employee contributions.
The existing law stipulates that self-employed persons who wish to form an individual or solo 401(k) retirement plan must do so by December 31 to make contributions for that year. Under the new rule, they have until they submit their tax return the following year to open and fund the account, allowing sole proprietors to establish plans for the 2022 tax year during the next tax season.
Accounts for emergency savings of $2,500.
The measure permits companies to automatically enroll non-highly compensated employees who earn up to $150,000 in 2023 in 401(k)-linked emergency savings accounts. Employees may save up to $2,500 with tax and penalty-free withdrawals.
The law permits companies to offer a small cash bonus or gift card to encourage employees to enroll in and contribute to a 401(k)-style retirement plan. Mark Iwry, a former Treasury Department official, suggests that even a couple hundred dollars as a sign-up incentive may entice certain employees.
Roth employer contributions.
The new law authorizes firms to make Roth 401(k) matching contributions to their employees. Currently, employer match funds are deposited pretax into employee accounts. Employees can now take the Roth match, which allows them to pay taxes upfront and then withdraw contributions and potential returns tax-free in the future.
Lifetime Income Provisions
IRA Donations Rollover
The Act includes a provision that permits IRA owners aged 70.5 or older to make a one-time withdrawal of up to $50,000 for a charitable gift annuity or charitable remainder trust. This is a tax victory for IRA owners, as the withdrawal is not considered income and may be applied to the required minimum distribution for the year.
The IRA owner receives a minimum payout of 5% yearly, taxed as regular income, and the charity gets the remainder upon the donor’s death. The only permitted beneficiaries are the owner and their spouse.
Conrad Teitell, a tax attorney in Stamford, Connecticut, who publishes Taxwise Giving, predicts that charities would inform all their contributors about this. Date of effect: January 1, 2023
Mr. Iwry, who led the Treasury’s 2014 development of qualified longevity annuity contracts (QLACs), explains that the retirement legislation permits more individuals to take advantage of eligible longevity annuity contracts (QLACs) for retirees seeking a guaranteed income in old age.
A QLAC is a delayed annuity that you can purchase, for example, in your 60s, with guaranteed lifetime payouts beginning at age 80 or 85. Under the new guidelines, 401(k) participants or IRA owners may utilize up to $200,000 from their accounts to purchase an annuity that provides lifetime payments. Current regulations limit the QLAC to $145,000 or 25% of the account balance, whichever is smaller.
Mr. Iwry states that QLACs mitigate the danger of outliving your retirement resources. Date of implementation: when the Act is signed into law.