Silver Lining: Congress' Spending Bill has Some Shiny Benefits

It’s the holiday season and our elected friends in Congress are on the verge of passing a huge omnibus bill that, among a jillion other things, includes provisions to help us save more for retirement and that will leave certain of our retirement savings untaxed…longer. Not a bad gift if I do say so myself! Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.

The $1.7 trillion government funding package has a multitude of layers, but I'll concentrate on the retirement savings aspect.

For starters, it would raise the age that folks are required to start withdrawing Required Minimum Distributions (RMDs) from tax-deferred retirement accounts. Specifically, from 72 years of age to 73 starting on January 1, 2023, and to 75 starting on January 1, 2033. Many folks won’t enjoy this benefit because 80% of us already need more than the RMD amounts early, but it’ll be beneficial for certain people who can afford to leave their money untouched and untaxed longer. However – and there’s always a however – it could expose this latter group to higher tax bills down the road. Why? Because when delayed RMDs do finally begin, account owners will be withdrawing more money annually over a shorter period of time that matches their life expectancy.

The bill would also increase retirement savings contribution limits for older workers who choose not to - or who were unable to - make adequate contributions earlier in their careers. In other words, the bill would permit older workers to make extra catch-up contributions to 401(k)-style retirement accounts.

Specifically, in 2023 folks who are 50 years and older can contribute an extra $7,500 a year to their accounts. And for folks 60 to 63, the bill would raise the catch-up amount to at least $11,250 a year starting in 2025.

To encourage folks with low and moderate incomes to save in retirement accounts, the bill restructures a tax credit available to certain workers. The government would put up to $1,000 annually into the retirement accounts of eligible workers starting in 2027, regardless of whether they have an income tax liability. Currently, the credit is only available to people with an income tax liability.

For those who recall my rantings about the importance of emergency funds, this legislation would remove legal barriers that currently prevent employers from automatically enrolling employees in emergency savings accounts within 401(k) plans. It would also allow employees to save up to $2,500 in a Rainy Day Roth account (employers could set lower limits if they so choose). Additional employee contributions and any employer match would be invested in retirement savings.

Should an employee need to tap his or her emergency fund, the money would come out free of taxes and free of the 10% penalty that people under age 59 ½ normally owe. Of note, this particular provision would help folks take advantage of an employer’s 401(k) match even if they cannot afford to save for retirement.

Will these provisions become law? Very likely, because they are part of a larger year-end spending blow-out, which increases the possibility of the entire package passing. You know - the usual “don’t shut down the government” package that we’ve all become accustomed to. Congress loves to pass huge "don’t hold me accountable” omnibus bills, largely unread, at the last minute and President Biden loves to sign them.

Still, anything that improves the lot of those preparing for a comfortable retirement is a good thing.

Merry Christmas and a Happy 2023!