Lawmakers Introduce Legislation to Increase Retirement Security by Strengthening 401(k)s and IRAs

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Posted by Alex Hendrie on Tuesday, October 27th, 2020, 4:49 PM PERMALINK

Ways and Means Committee Chairman Richie Neal (D-Mass.) and Republican Leader Kevin Brady (R-Texas) today released the “Securing a Strong Retirement Act of 2020,” legislation that contains numerous provisions that expand defined contribution plans like 401(k)s and individual retirement accounts (IRAs). 

The legislation contains several tax cuts for families and businesses in order to increase the utility of 401(k)s and IRAs. The bill gives Americans increased flexibility over required minimum distributions so that they can continue saving for longer. The proposal also contains several other commonsense provisions to incentivize increased retirement savings such as allowing businesses to provide matching contributions to a retirement account when a worker makes student loan payments.

Members of Congress should support and co-sponsor this legislation.

The legislation expands the saver’s credit making it available to millions of American families. Currently, the credit is available in three different income thresholds:

  • Single filers with AGI of $19,500 or less and joint filers with $39,000 of AGI or less can claim a credit of 50 percent on 401(k)/IRA contributions of up to $2,000. 
  • Single filers with AGI of less than $21,500 and joint filers with AGI of less than $43,000 can claim a 20 percent credit. 
  • Single filers with AGI of less than $32,500 and joint filers with AGI of less than $65,000 can claim a 10 percent credit.

While this credit incentivizes some Americans to save for retirement, the low threshold levels mean that many Americans cannot utilize the saver’s credit. The Securing a Strong Retirement Act addresses this by expanding the credit. 

Under the legislation, the 50 percent credit is available to single filers with less than $40,000 in AGI and joint filers with less than $80,000 in AGI and can be claimed for 401(k)/IRA contributions of up to $3,000. This credit begins phasing down through $60,000 of AGI for single filers and $100,000 for joint filers. This will dramatically increase utilization of the credit and provide another incentive for Americans across the country to save for retirement.

The proposal also increases incentives for small businesses to offer retirement plans. Specifically, the start up credit, which is currently available to businesses with 100 employees or less, is increased from 50 percent of startup costs to 100 percent of costs. Employers with 50 workers or less are eligible for a credit for employer contributions of up to $1,000 per employee. This credit is also available for businesses with between 51 and 100 employees but phases out by 2 percent for every employee above 50. 

The legislation contains several provisions granting savers more flexibility to avoid making required minimum distributions (RMDs). Currently, Americans must begin taking RMDs from their 401(k)s and IRAs beginning at aged 72. RMDs are typically calculated based on a fraction of the total account balance and the individual’s life expectancy.

The legislation increases the RMD age to 75, so that Americans can keep their savings in retirement plans for longer. Individuals with account balances of $100,000 or less would be exempt from RMDs. In addition, the bill makes it easier for annuity payments to count toward the RMD amount and reduces the excise tax for failing to tax RMDs from 50 to percent to 25 percent or 10 percent.

The legislation also contains a number of other provisions designed to increase retirement savings. For instance, the bill would allow employers to make matching contributions to a retirement account when an employee makes student loan payments. This will serve as another way that businesses can help their employees save more for retirement.

In addition, the legislation allows employers to offer their workers small financial incentives to join and contribute to a retirement plan. Lastly, the proposal indexes the $1,000 IRA catch-up contribution to inflation and creates an additional catch-up contribution for employer sponsored plans for Americans aged 60 and above of $10,000 so that those approaching retirement can save more.

The Securing a Strong Retirement Act of 2020 contains a number of important provisions that increase the flexibility and utility of 401(k)s and IRAs including several tax cuts for American families and businesses in order to encourage retirement savings. Members of Congress should support this important legislation.

Photo Credit: Gage Skidmore