If you’re the type of person who contributes the maximum amount to their 401(k) every year, you’ll be able to put away an extra $2,000 before taxes in 2019 compared to 2022. That is an unprecedented increase in absolute terms and as a percentage of the total.
Why it matters:
People who contribute the maximum to their 401(k) are not the ones who need the most help from the government in saving for retirement.
On the other hand, workers in the gig economy have a greater need for retirement security while having virtually no access to government-funded resources for securing it.
The main factor in the news:
The rise in 401(k) contributions due to rising prices is welcome news for wealthy savers and the financial services industries that serve them. These and other critically essential provisions were included in the omnibus bill that finally became law at the end of December:
The age at which you must begin taking distributions from your retirement 401(k) accounts has been raised from 70 (the period in 2019) to 73. It will be 75 in 2033.
The trend toward opt-out 401(k) plans is expected to encourage more people to save for retirement.
If you are over 50, you can pay an additional $7,500 to your 401(k) each year before taxes. With inflation, that amount will rise to $11,250 in 2025 for retirees.
If the numbers are any indication, the retirement tax breaks that favor the wealthy will be further eroded due to these amendments. Even before they were enacted, the top 40% of taxpayers received 87% of the retirement tax benefits.
Overall, the Retirement Savings for Americans Act, proposed by lawmakers from both parties in both houses of Congress, is not ambitious enough to bring retirement security to the 33 percent of Americans who do not have access to any retirement plans at all.
A tax credit can effectively double your 401(k) contribution by up to 5% of your income. When an employee’s salary reaches 150% of the median or 200% for a married couple, their contributions begin to decrease.
Because the government manages the savings plan, employees can move freely between jobs or even hold multiple positions at once while continuing to contribute to a single account.
In conclusion, Congress has done a commendable job of improving the financial security of affluent Americans in their old age. However, poor Americans are still falling further and further behind.