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Bipartisan Retirement Bill Offers Later Withdrawals, Paths to Lost Accounts

October 27, 2020
In The News

Americans would be allowed to wait longer to withdraw money from their retirement accounts and have an easier time finding old, forgotten accounts under a bipartisan proposal that contains a broad mix of measures to encourage retirement savings.

The offering from Rep. Richard Neal (D., Mass.), chairman of the House Ways and Means Committee, and Rep. Kevin Brady (R., Texas), the panel’s top Republican, won’t become law soon. But it builds on bipartisan retirement-policy changes enacted last year and is an example of an initiative that could advance even if control of the government remains divided in 2021.

According to a report the Federal Reserve published in May, about a quarter of Americans surveyed in 2019 who had yet to retire said they had no retirement savings at all. Less than 40% felt their retirement savings were on track.

The proposed law, which was greeted with statements of support from retirement-industry companies and organizations, contains a grab bag of incentives and relaxed restrictions. It would make it easier for employers to offer 401(k)-type accounts by increasing a tax credit that small businesses can get to cover startup costs. And it would offer an additional credit to some small businesses, which would increase based on how much the employers contribute on behalf of employees.

“Covid-19 has only exacerbated our nation’s existing retirement crisis, further compromising Americans’ long-term financial security,” Mr. Neal said. “This bill will help Americans approach old age with the confidence and dignity they deserve.”

The measure also takes aim at the racial gap in retirement savings by making automatic enrollment in plans—which has been shown to boost participation rates for minorities—mandatory for employers who have more than 10 workers, have been in business for three or more years and offer a newly created 401(k), 403(b) or Simple plan. The employees would be able to opt out.

The bill would increase the age at which savers must start taking withdrawals from 401(k)s and IRAs to 75, from 72, for those born after June 30, 1949.

The bill would waive required distributions entirely for people who have cumulative balances of $100,000 or less in their retirement accounts—both IRAs and 401(k)-type plans—on Dec. 31 of the year before they turn 75. It would also reduce the penalty for those who fail to take a required distribution.

“Our legislation will make it easier for folks to save, protect Americans’ retirement accounts, and give workers more peace of mind as they plan for the future,” Mr. Brady said.

The Neal-Brady proposal is different from the main retirement-policy change proposed by former Vice President Joe Biden, the Democratic presidential candidate. Instead of offering the current tax deduction for contributions to retirement accounts, Mr. Biden would create a 26% refundable tax credit, essentially a government matching contribution.

The idea behind the credit is that it would give equal benefits to people across the income spectrum rather than larger benefits for higher-income people in higher tax brackets. It would be structured to avoid raising taxes on households making below $400,000.

The Neal-Brady bill seeks to encourage people with low and moderate incomes to save by raising the saver’s credit, a match of sorts from Uncle Sam that is often underused now.

The measure would permit employers to use matching contributions to help employees repay student loan debt.

It would also raise the extra contributions workers 60 and older can make to retirement plans. Currently, people 50 and older can contribute an extra $6,500 a year to 401(k)-type plans, for a total of $26,000. The legislation would raise that to $10,000 a year for people 60 or older, who would be permitted to kick in a total of $29,500.

The bill would create a national online registry where individuals could search for lost retirement accounts. As Americans jump from job to job, they are leaving more 401(k)-style accounts and pension benefits with ex-employers. Some lose track of the money, forfeiting a piece of their retirement security.

The bill also would expand a popular tax break formally known as a Qualified Charitable Distribution. It currently allows IRA owners age 70½ and older to donate up to $100,000 of assets directly to qualified charities and count the donation toward their required distribution from the IRA. The bill would raise that limit to $130,000 and permit people to make such donations from 401(k)s as well as IRAs.