A major new retirement law has been enacted, the second big one in little more than three years.
The Secure 2.0 Act will allow Americans to save more money in tax-sheltered workplace retirement accounts, make the saving process easier through automatic enrollment, provide new incentives, delay the time when withdrawals must begin and set in motion other important changes.
Certain employers would be exempt from this requirement including businesses with 10 or fewer employees, businesses less than three years old and retirement programs run by churches and government entities, according to a recent report from Wolters Kluwer, a company that offers guidance to tax and accounting professionals.
Notably, the act instructs the Treasury Department to increase public awareness of the tax credit, according to Wolters Kluwer. That's a welcome step, as this tax break appears to be poorly understood.Participants are limited by how many dollars they can sock into tax-sheltered retirement plans in a year, though people ages 50 and up may augment that with “catch-up” contributions.
It's debatable whether most people can afford to make big catch-up contributions. Relatively few people invest the max anyway. But the opportunity will be there for those who can swing it.The tax-sheltered growth in retirement accounts was never designed to be permanent. At some point, the government wants investors to make withdrawals and pay the related tax bill. That's why required minimum distributions kick in, eventually.
For example, the law makes permanent a provision that allows taxpayers to withdraw money and avoid the 10% penalty if they’re affected by a federally declared disaster. Such withdrawals can be made within 180 days if a taxpayer’s principal residence is within the disaster area and if he or she has sustained financial losses as a result.
On the flip side, Secure 2.0 will require people to repay penalty-free distributions within three years of the birth or adoption of a child. Currently, participants don’t face a time limit for repaying distributions in those situations.
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