In our last blog post, we talked about changes impacting those that are already retired, or close to taking the plunge. In this post, we will talk about additional changes that will impact younger people who are saving for retirement in the future.
Financial planners typically say that Americans need at least $1.25 million to live comfortably once they stop working, yet retirement accounts only hold $87,000 on average. These changes – which some are calling the most significant in decades – could encourage people at all income levels to save more money for their golden years.
Automatic Enrollment and Plan Portability
Businesses that offer 401(k) and 403(b) plans will be required to automatically enroll eligible employees, starting at a contribution rate of at least 3%, in 2025. That starting percentage will rise by 1% annually (up to 15%) unless the employee opts to change it or not to participate in the program. It also permits retirement plan service providers to offer plan sponsors automatic portability services, transferring an employee’s low balance retirement accounts to a new plan when they change jobs. The change could be especially beneficial for lower-balance savers who typically cash out their retirement plans when they leave jobs, rather than transferring it into another eligible retirement plan.
Emergency Savings
Defined contribution retirement plans will be able to add an emergency Roth savings account for lower paid employees starting in 2024. Limited to $2,500 annually (or lower, as set by the employer), the first four withdrawals in a year will be tax- and penalty-free. Depending on plan rules, contributions may be eligible for an employer match. In addition to giving participants penalty-free access to funds, an emergency savings fund could encourage plan participants to save for short-term and unexpected expenses, reducing their need to pull from retirement accounts.
Savers Credit Expansion
The bill also expands the Saver’s Credit, allowing low- and middle-income workers to make direct federal contributions to their retirement accounts. Under the plan, workers who earn below $35,500 (single) or $71,000 (married) and contribute up to $2000 to a retirement plan could get a 50% match from the government. An additional $1000 in funds, with compound interest accumulating over time, can be significant and serve to encourage greater retirement savings for those that have a hard time doing so.
Student Loan Debt
Starting in 2024, employers will be able to “match” employee student loan payments with payments to a retirement account, giving workers an extra way to save while paying off educational loans. Basically, employers that currently match employee contributions made to retirement plans can now “match” the amount the employee pays toward their student loans to their 401(k). This will help younger workers straddled with student loan debt start building retirement saving earlier, since many put off saving for retirement until their student loans are paid off.
529 Plans
Starting in 2024, money currently in 529 college savings accounts can be rolled over into a Roth IRA account, as long as the 529 account has been open for at least 15 years. These transfers are subject to annual IRA contribution limits and an aggregate lifetime limit of $35,000.
Since those retiring after 2037 can expect less social security benefits (using current projections), it is more important that ever for individuals to save as much as they can toward retirement. These changes should make that a bit easier.