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Congress Just Passed New 401(k) Plan Rules
The 8 biggest changes made and how they will affect you
One of the most common investment vehicles used to save for retirement in the US is a 401(k). It’s estimated that around 34% of Americans have one.
Congress just recently made some big changes that will affect 401(k) plans everywhere. Let me break down some of the biggest changes they made and how it will affect your 401(k).
1. Requiring Automatic Enrollment in all 401(k) plans
One of the most significant changes to 401(k) plans is the requirement for automatic enrollment. This means that employers must automatically enroll employees in their 401(k) plan, and employees must opt-out if they do not want to participate. This change is designed to increase retirement savings rates and make it easier for employees to start saving for retirement.
2. Allowing Employer Contributions for Student Loan Payments
Another change that has been made to 401(k) plans is the ability for employers to make matching contributions to an employee's 401(k) plan when the employee is paying down student loan debt. This change recognizes the growing burden of student loan debt and provides an incentive for employees to pay off their loans while still saving for retirement.
3. Increased the Age for Required Minimum Distributions (RMDs)
The required minimum distribution (RMD) age for 401(k) plans has been increased from 70 ½ to 72. This change allows employees to delay taking distributions from their 401(k) plans and continue to grow their retirement savings.
To be clear, this age isn’t when you gain access your 401(k) funds (that remains 59 ½). This is the age where its mandatory to withdraw from your plan even if you don’t want to.
4. Help Employees Build and Access Emergency Savings
Many employees struggle to save for emergencies, such as unexpected medical bills or car repairs. To help address this issue, some 401(k) plans are now allowing employees to contribute to emergency savings accounts within their plans.
Employees can now make penalty-free withdraws of up to $1k per year for emergency expenses. You’d still owe income tax on the amount borrowed, but the tax could be refunded if the money taken out is replaced within 3 years.
5. Raising Catch-Up Contributions for Older Workers
For employees age 50 and over, catch-up contributions to 401(k) plans have been increased from $6,000 to $6,500. This change allows older workers to save more for retirement and catch up on any retirement savings they may have missed earlier in their careers.
6. Enhancing the Savers Credit Rule
The savers credit is a tax credit for low- to moderate-income individuals who make contributions to their retirement accounts. The recent changes to 401(k) plans have enhanced the savers credit rule, making it easier for more individuals to qualify for the credit and receive a tax break for their retirement savings.
Starting in 2027, eligible filers (married couples making $71k or less) will get a federal match of their own contributions worth up to 50% of their savings (cannot exceed $1,000).
7. Improving Part-Time Worker Benefits
Some 401(k) plans are now offering benefits to part-time workers who may not have previously been eligible. Current rules state that part-time workers must be allowed access to 401(k) plan rules if they have at least 3 years of service and work at least 500 hours per year. Starting in 2025, the required time employed will drop to only 2 years.
8. Increased Annual Contribution Limits
You can now contribute up to $22,500 per year into your 401(k) account. This is up from $20,500 in 2022. Catch-up contribution limits for those age 50 or older is now up to $30,000 per year.
I still think that more can be done to help the average person prepare for retirement, but these recent changes to 401(k) plans are at least some steps in the right direction.
It’s important to stay in-the-know with all of these changes and to understand how they could affect you. I hope this weekly newsletter can be your way of staying informed and confident with your financial plan.
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