Congress has taken two giant steps toward beefing up retirement planning for Americans in recent days. What comes next is make-or-break.
Two Senate committees advanced proposals that matched or, in some case, surpassed proposals passed in March by the U.S. House to make retirement saving easier.
Altogether, the three packages contain well over 70 individual proposals. Which are best for you? Are there some provisions you should root for? Which should you tell your senator and representative to vote for?
Highlights of the retirement planning proposals include a delay in the starting age of withdrawals, or required minimum distributions (RMDs), from retirement accounts. But there's also talk of higher caps on catch-up contributions for older workers. Also on the table: enabling employers to make matching contributions to workers' retirement accounts. They would base them on workers' student loan repayments. Finally, penalties would be eliminated on early withdrawals for people who meet certain exemptions.
In some key cases, details among the three proposals differ. To help you keep track, here is a summary of the proposed new rules. All the key features are spelled out.
Retirement Planning Upgrades
The changes are important. And they stand to change the rules governing what you can do with your retirement savings accounts.
It's wise to tell your senator and rep about pending legislation that can directly affect your retirement planning. Below you'll find information to help you make your points more knowledgeably and clearly.
Who are the players? The three legislative players are the House, the Senate Finance Committee and the Senate Health, Education, Labor and Pensions (HELP) Committee.
The Senate Finance Committee's package is the Enhancing American Retirement Now (EARN) Act. A week before, the HELP Committee approved a package dubbed the Rise & Shine Act. That's shorthand for its full name, the Retirement Improvement and Savings Enhancement to Supplement Health Investments for the Nest Egg Act.
We'll refer to them in this report as the House bill, the EARN proposal and the HELP proposal.
All of these proposals aim to beef up retirement savings rules in the Secure Act of 2019. For that reason, they are each informally called Secure 2.0.
Here are highlights of key proposed new retirement planning rules. This will spell out the main differences among their details.
Required Minimum Distributions (RMDs)
RMDs. If enacted, the Senate and House proposals would delay the age at which workers must start withdrawals, known as required minimum distributions (RMDs), from retirement savings accounts. Currently, account owners generally must begin RMDs once they reach age 72.
- The Senate EARN Act would raise the mandatory starting age to 75, effective in 2032.
- The House bill would raise the mandatory starting age to 73 in 2023, 74 in 2030 and 75 in 2033.
Retirement Planning With Your 401(k)
Catch-up contributions. New retirement planning rules would allow higher annual catch-up contributions to certain retirement accounts. For company plans like 401(k)s, the limit now for workers age 50 or older is $6,500. That's in addition to regular annual contributions. Those are now capped at $20,500.
- The EARN Act would raise the annual limit to $10,000 for plan members who are age 60 to 63. After age 63, the cap reverts to whatever the regular limit is at that time.
- The House version would raise the catch-up cap to $10,000 for people age 62 to 64. After age 64, the cap reverts to whatever the regular limit is at that time.
IRA Catch-Up Contributions
Retirement planning for IRAs. For IRAs, the catch-up contribution limit now is $1,000. Contributions are made pretax. For most IRAs, both the Senate and House would let that limit rise, based on cost-of-living adjustments. For Simple IRAs, the new cap would be $5,000, up from $3,000. Both the House and Senate would require catch-up contributions to be made as Roth contributions (that is, after-tax). The reason for doing that is to raise revenue to offset costs of other new tax breaks proposed by the packages, says Aliya Robinson, who tracks legislation for T. Rowe Price.
- The Senate version would take effect in 2024.
- The House version would take effect after the bill is signed into law.
Retirement Planning For Student Debt
Student-loan debt. To ease the burden of student load debt, employers would be allowed to make matching contributions to 401(k) accounts and to Simple IRAs equal to the amount the worker pays toward their student loans. The retirement planning rationale: the match would enable graduates to save for retirement even if their student loan payments prevent them from contributing to their own retirement account.
- The Senate would let this happen starting in 2024.
- The House would allow this relief beginning in 2023.
Expanded Saver's Credit
Saver's credit. The so-called saver's credit is like a government match for lower- and middle-income workers who contribute to retirement accounts. All three versions of the proposed new saver's credit would simplify its rules. Eligibility can phase out as your income rises.
- The Senate proposal would make the saver's tax credit fully refundable for lower-income families. That means if the credit is larger than the tax you owe, you will receive a refund for the difference. That's a big retirement planning perk.
- The House version would be nonrefundable.
Next Legislative Steps
What's next for the three proposed rewrites of retirement planning rules? The two Senate bills will be combined to make up the Senate's Secure Act 2.0 package.
Then Senators and Representatives will try to hammer out differences between the two bills. That process is reconciliation. After that, a final bill will be voted on by both chambers. "Key policymakers in the House and Senate will be working to bring the bills together and work out any differences," said Chris Spence, who keeps on eye on Congress for TIAA, in his role as a managing director of federal government relations for the financial services giant.
Once reconciled, a bill is likely to be passed as part of a lame-duck end-of-year spending bill, Spence says.
Robinson says legislators have been careful to work in a bipartisan fashion and include retirement planning ideas endorsed by members of both parties. But Congress may simply run out of time to reconcile remaining differences, she warns.
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