Laurence Hale, AAMS®, CRPS®
Principal/Managing Partner, Investment Advisor & Chief Investment Officer
Whether you’ve just started saving for retirement, you’re nearing retirement, or you’re already retired, there could be new legislation passed in the coming months that will offer long-awaited positive changes for your retirement savings and security.
In late March, the U.S. House of Representatives passed “SECURE 2.0,” legislation that would improve the retirement savings system for U.S. workers in several ways. Then in late June the Senate Finance Committee approved the EARN Act along with other proposed legislation that together form the Senate’s version of SECURE 2.0.
Though there are differences between the House and Senate versions of the legislation that must still be resolved, legislative leaders and pundits are optimistic that a final version of SECURE 2.0 could be passed by Congress and signed into law by the President this year.
There are many proposals that could benefit your retirement savings and current finances in various ways, but here’s a look at just a few of the key proposals that could have the biggest impact on your overall financial plan and retirement savings if they’re passed…
Increase Your Catch-Up Contributions
If you’re 50 or older, you can make “catch-up” contributions to your retirement plan – that is, contributions over and above the usual maximum amount allowed each year. Currently, you can contribute an additional $6,500 to a 401(k) or $1,000 to an IRA, on top of the standard annual contribution limits ($20,500 for 401(k)s and $6,000 for IRAs in 2022). Both the House and Senate versions of the SECURE 2.0 legislation would increase the catch-up contribution amount for 401(k)s to $10,000, though they differ slightly on the age ranges that would be eligible for that increase (62 through 64 in the House’s version, and 60 through 63 in the Senate version).
Let Your Retirement Funds Grow Untouched for Longer
If SECURE 2.0 passes, the age at which you must take a Required Minimum Distribution (RMD) from your 401(k) will rise to 75 by either 2032 or 2033 (depending on whether the House or Senate’s version of this provision is passed), up from the current RMD age of 72. The penalty for failing to take the RMD would also be reduced to 25% rather than the current 50% penalty – and if the missed RMD is corrected quickly, the penalty could even be reduced to 10%. (It’s important to note that a surviving spouse who becomes the account owner of a Roth IRA is not required to take distributions at all.)
Improved Access to Funds for Emergencies
There are two proposals in the Senate that would allow workers to tap into retirement savings in the case of an emergency. One would allow you to withdraw up to $1,000 from your 401(k) or IRA without having to pay the usual 10% early withdrawal tax penalty if you’re under age 59 ½. In the other proposal, employers would be allowed to automatically enroll employees in emergency savings accounts at 3% of pay. Those accounts can then be accessed by employees up to once per month for emergency needs. The emergency account would be allowed to accrue up to $2,500, with any excess funds being automatically diverted to a linked 401(k) account.
Of course, you’ll want to be sure you weigh the pros and cons with your financial advisor before tapping into your retirement savings. The short-term benefit may not be worth the potential loss in savings over the long-term.
Employer Contributions to Your 401(k) While You Pay Off Student Loans Instead
To help ease the burden on younger workers who are still paying off student loans, both the House and Senate have proposed legislation that would allow employers to contribute to an employee’s retirement account on their behalf while the employee is paying off student loans rather than contributing to a retirement account themselves. While it’s always best to start saving for retirement yourself as early as possible, this provision could help bridge the gap for young workers whose budgets are stretched thin during those first few years of employment, ensuring that at least some funds are being saved for retirement.
If SECURE 2.0 Legislation Passes, Consult With a Financial Advisor Before Making Any Changes
While the retirement savings legislation proposed by both the House and Senate could offer a variety of new benefits and options in general, it’s important to remember that what’s beneficial for one person may not necessarily be the most beneficial choice for another. Decisions regarding retirement contributions and distributions can have big impacts both in the short-term (with regard to your annual income tax filing) and over the long-term (with regard to how much you’re able to ultimately save and how you can maximize those dollars).
It can be challenging to balance the needs of today with the goals of tomorrow, and to keep up with always-changing laws and regulations surrounding retirement savings, taxes and finances. That’s why it’s so important to work with a financial advisor who can help you determine how these decisions may affect your overall financial planning strategy and guide you in making the right decision. Contact us to learn more about how our strategic Plan Well, Invest Well, Live Well™ financial planning process here at Weiss, Hale & Zahansky Strategic Wealth Advisors can help you.
Presented by Principal/Managing Partner Laurence Hale, AAMA, CRPS®. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. 697 Pomfret Street, Pomfret Center, CT 06259, 860.928.2341. http://www.whzwealth.com These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your financial advisor. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice.