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Big Changes to 401(k) Retirement Plans Get Closer With Senate Vote

Roughly half of American households haven’t saved enough, according to Boston College’s Center for Retirement Research, and risk seeing their standards of living decline after retirement.
Photo: Zack Wittman for The Wall Street Journal

Americans could wait longer to start emptying retirement accounts and face fewer restrictions on emergency withdrawals under a bill advanced unanimously Wednesday by the Senate Finance Committee. 

The bipartisan bill is broadly similar to a measure passed by the House on a 414-5 vote in March, though it contains larger retirement-savings subsidies for low-income and middle-income workers. The Senate’s move this week increases the chances that Congress will make changes to U.S. retirement law this year. 

“It…

Americans could wait longer to start emptying retirement accounts and face fewer restrictions on emergency withdrawals under a bill advanced unanimously Wednesday by the Senate Finance Committee. 

The bipartisan bill is broadly similar to a measure passed by the House on a 414-5 vote in March, though it contains larger retirement-savings subsidies for low-income and middle-income workers. The Senate’s move this week increases the chances that Congress will make changes to U.S. retirement law this year. 

“It is a testament to the power of bipartisanship,” said Sen.

Mike Crapo
(R., Idaho), the top Republican on the committee. “When we work together, we can create impactful and lasting work.”

Paul Richman,
chief government and political affairs officer at the Insured Retirement Institute, which represents the insurance industry and supports the bill, said the legislation could be included in a larger fiscal bill after November’s midterm election. The House and Senate must also resolve their different approaches.

The bipartisan measure would build on retirement-policy changes enacted in 2019 that, among other things, raised the age people were required to start withdrawing money from retirement accounts to 72 from 70½. 

According to Boston College’s Center for Retirement Research, roughly half of American households haven’t saved enough, and risk seeing their standards of living decline after retirement. 

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The new legislation tries to balance the core tension in federal retirement tax incentives between encouraging long-term savings with rules that lock money up and the need to allow flexibility for emergencies and other financial goals. 

One discrepancy between the House and Senate bills is over the timing of an increase in the age at which savers must start taking withdrawals from 401(k)-type accounts and traditional individual retirement accounts. The Senate bill raises the age from 72 today to 75 in 2032, while the House bill would increase it to 73 next year, 74 in 2030 and 75 in 2033.

The Senate bill would allow withdrawals of up to $1,000 annually to cover emergency expenses without paying the 10% penalty that people under age 59 ½ typically owe, although the money must be repaid before the person could take another such distribution within three years. The House bill has no such provision. 

The Senate bill also includes provisions for some penalty-free withdrawals for the terminally ill, victims of domestic abuse, those affected by federally declared disasters, and the payment of long-term-care insurance premiums—all measures that aren’t in the House version.

The House and Senate bills also differ over the saver’s credit, a government match of sorts for lower-income and middle-income workers who put money into retirement accounts. Under the Senate bill, 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. Eligibility phases out for individuals earning $20,500 to $35,500 and married couples with income between $41,000 and $71,000.

“Workers of modest incomes will get an additional boost to their savings that they didn’t get before,” said Senate Finance Committee Chairman

Ron Wyden

(D., Ore.), who said the changes would double the number of people eligible for the credit.

Under the House version, the credit is available only to people with an income tax liability and isn’t deposited into the individual’s retirement account. It phases out at higher income levels. 

So-called refundable tax credits like this one often draw objections from Republicans and may become a sticking point as lawmakers negotiate. 

The House and Senate bills also differ over the age at which older workers could make extra catch-up contributions to 401(k)-style retirement accounts. 

Currently, people 50 and older can contribute an extra $6,500 a year to these accounts, for a total of $27,000. The Senate bill would raise the catch-up amount to $10,000 a year for people 60 to 63, versus 62 to 64 under the House version. Catch-up contributions would have to be made after taxes.

The House version would create mandatory automatic enrollment in retirement savings starting in 2024 for many newly created 401(k) or 403(b) plans, and advocates say that would boost participation rates for minorities. The Senate version instead would seek to encourage employers to use automatic enrollment with provisions including a tax break for small employers, according to Mark Iwry, nonresident senior fellow at the Brookings Institution and former senior Treasury official responsible for national retirement policy.

Other provisions of the Senate bill would allow people with Roth 401(k)s to skip required distributions and permit employers to make matching contributions to the 401(k)-style accounts of workers paying off student loans who don’t contribute enough to get the full match.   

Some lawmakers, academics and policy analysts have criticized some of the provisions, including the move to raise the age of required retirement account distributions to 75. They argue much of the legislation benefits the wealthy and the financial-services industry, which typically earns fees based on the size of retirement accounts. 

While enhancing the saver’s credit would help lower- and middle-income households, “it would still leave them with far less than the new incentives for the wealthy in the bill,” said a statement from Americans for Tax Fairness, a coalition of progressive groups that favor raising taxes on high-income people. 

Both bills purport to pay for themselves with retirement policy changes that accelerate revenue into the 10-year congressional budgeting window used to account for the cost of the legislation, at the expense of future revenue beyond the next decade.

One would require workers ages 50 and older who make extra contributions to 401(k)-style plans to do so through Roth accounts, which require people to contribute after-tax money, forgoing the tax deductions they would get with traditional accounts.

Write to Richard Rubin at richard.rubin@wsj.com and Anne Tergesen at anne.tergesen@wsj.com

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