Retirement savings contribution credits and more: How Congress can help retirees save

·6 min read

Congress has several proposals in the works that could make retirement savings more worthwhile — or encourage you to get started if you haven't yet. Just know this: Waiting for these possibilities to come to fruition may require some patience.

A bill known as the Secure Act 2.0, or the Securing a Strong Retirement Act, passed a key House committee in early May. Momentum seems to have bogged down, even though there's broad bipartisan support and little controversy for most of these measures, as seen in passage of the original Secure Act two years ago by a lopsided margin.

"Due to the packed congressional calendar, there are other legislative priorities vying for time on the Congressional floors," said investment firm Nuveen in a recent commentary. Those other priorities include the infrastructure spending bill and even another possible scuffle in coming weeks over the debt ceiling.

Action on retirement seemed imminent after the House Ways & Means Committee passed Secure 2.0 nearly six months ago. Now Nuveen deems enactment in 2021 as less likely, and that might spill over into 2022, when midterm-election issues could distract Congress further.

Here's a refresher on what some of the key proposals are about and how they might narrow the retirement-savings gap by boosting participation among lower-income and younger workers:

Mandatory auto enrollment

Workplace 401(k)-style plans currently have the option to sign up employees automatically, but that could become mandatory for new plans under Secure 2.0. Auto enrollment is considered vital for nudging reluctant employees to start saving for retirement. Though workers can always opt out, auto enrollment counts on inertia — once signed up in a retirement plan, most people stay.

The auto-enrollment provision would start by having employees save 3% of their paychecks, raising that by 1% annually until hitting 10% (again, with the opt-out provision). This could make a notable impact for the many retirement have-nots, by encouraging broader participation. Auto enrollment would remain an optional choice for existing workplace retirement programs.

A related measure would allow long-term yet part-time workers to join workplace retirement plans after two years rather than the current three. This one also could help many people in the retirement have-not group.

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Higher catch-up contributions

Secure 2.0 would allow older employees to sock away more money beyond the current annual contribution limits for workplace plans. Investors 50 and up now may contribute an additional $6,500 each year. Under the proposal, individuals in their early 60s would be able to invest an extra $10,000 annually into 401(k)s and certain other plans, and those extra contributions would adjust for inflation.

This provision could help a lot of people who regularly and actively contribute to retirement plans. But for lower-income individuals, including those lacking coverage, it might prove largely irrelevant. Lower-income workers typically can’t afford even to meet the normal annual contribution limits, assuming they invest at all.

Employer matches for student debts

Another provision would encourage employers to contribute matching funds for workers who can’t afford to save for retirement because they’re paying off student loans. Employers could match a portion of a worker’s student loan payments and deposit that in the person’s retirement account, even for people who aren’t saving on their own.

Student debts have placed an unusually high burden on many recent graduates (or worse, on people who amassed student loans but didn't earn a degree). This provision could get these employees off the launching pad when it comes to retirement planning. Many employers might be willing to offer this benefit.

The legislation also would allow employers to offer gift cards or other modest-dollar incentives to encourage retirement-plan participation. Though not tied to student loans, this could usher in new types of incentives that could prove especially popular among younger employees.

Boosting the retirement credit

Secure 2.0 also would increase the retirement saver’s credit, which in a sense provides government matching funds for low-income workers. Currently, individuals may receive a credit of 10%, 20% or 50% (depending on income) of what they contribute to a retirement plan. The maximum eligible contribution is $2,000 a year, making for a top dollar benefit of $1,000.

A Secure Act provision would change this to a flat 50% credit, for people with low-enough income to qualify, and increase the maximum value to $1,500 while simplifying certain rules.

Notably, the credit would be made refundable, meaning it could be taken even by people who don't have an income-tax liability. So far, the credit is viewed as an underutilized tax break, in part because it's not refundable like, say, the Earned Income Tax Credit.

“The catch is that the credit is subtracted from the taxes owed, and low-income people usually pay little or no taxes to the IRS after they take the standard deduction given to all taxpayers,” noted the Center for Retirement Research at Boston College in a recent blog. “If they don’t owe taxes, they don’t get the credit.”

More leniency on required withdrawals

Another Secure 2.0 provision would gradually give investors more time before they must start withdrawing money from workplace plans and traditional IRAs from 72 currently to 75 by 2032 (required minimum distributions don't apply to Roth IRAs). Another would waive the required distributions, known as RMDs, completely for people with relatively low retirement savings, perhaps below $100,000.

These proposals likely would prove popular among people in or nearing retirement age, especially those with high account balances. But it could prove largely irrelevant among retirement have-nots with little or nothing saved up.

In essence, this provision assumes that low-dollar retirees would leave their money untouched for longer. That's a debatable point, especially since so many people claim Social Security benefits as soon as they can, at age 62 or shortly thereafter.

Automatic IRAs for some companies

This proposal could be part of the budget-reconciliation package now under review in Congress, rather than Secure 2.0, having won approval from the Ways and Means committee in September. It would give a green light to “automatic” IRAs, which could help people in the retirement have-not group who currently lack any savings.

“Self-employed and gig workers could also save this way,” stated the Brookings Institution, which supports the idea and recently commented on the issue.

Companies with more than five employees that don’t currently offer retirement plans would have to establish these IRAs, helping workers set aside money from each paycheck for investment. Critics complain the measure would impose regulatory burdens on small businesses and could penalize employers that don’t comply.

Employees would retain control of their accounts and could, for example, opt out or change their contributions or investments. The accounts would be modeled as Roth IRAs. Employers wouldn’t need to contribute money on behalf of workers and wouldn’t face fiduciary liability or other plan-sponsor responsibilities, according to Brookings.

A few states including Oregon, Illinois and California have established auto IRA plans. Brookings estimates 55 million Americans could be helped with a national program.

Reach the reporter at russ.wiles@arizonarepublic.com.

This article originally appeared on Arizona Republic: Retirement savings credit and more: What Congress has in the works