Americans saw a number of changes to their retirement savings plans when the SECURE Act was passed two years ago. Get ready for more in 2022.
For those approaching retirement age, a lot will be changing in the coming year. Social Security is getting a major revamp with some updates that will impact the country’s estimated 70 million recipients. These updates include adjustments for COVID-19 and common retirement accounts.
Here’s a look at how retirement will be different in 2022.
1. SECURE Act 2.0
The 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act brought key changes to laws governing retirement plans. Among other things, the Act eliminated the age cutoff for traditional IRA contributions and increased the age for required minimum distributions (RMDs) from 70.5 to 72. The proposed changes to 2022 would further adjust retirement laws to make saving more accessible for Americans.
Nicknamed the SECURE Act 2.0, the legislation was introduced by Reps. Richard Neal, D-Mass, and Kevin Brady, R-Texas, and aims to encourage Americans to save more for retirement, in part by making that process easier, while keeping burdensome reporting requirements off plan sponsors. It’s widely expected the bill will pass in Congress either later this year or in 2022, given its strong bipartisan support and the nearly unanimous backing of the original SECURE Act.
Key provisions of the SECURE Act 2.0 include the following:
- Increase the Required Minimum Distribution Age: In the new bill, the age for RMDs would initially increase to 73 starting in 2022, then to age 74 in 2029 and age 75 in 2032.
- Expanding Automatic Enrollment/Escalation for New Plans: The legislation would require defined contribution plans established after 2021 to automatically enroll eligible workers at a pre-tax savings rate of 3% of pay — although workers always have the option to opt out or opt to save less or even more, up to annual contribution limits.
- Catch-Up Contribution Limits: The proposed provisions would keep the catch-up age at 50 but increase the limit by an additional $10,000 per year for employees at ages 62, 63 and 64 beginning in 2023.
- Expanded 401(k) Eligibility: The 2019 SECURE Act allows part-time workers who log at least 500 hours over three consecutive years to join their employer’s 401(k) plan. Under SECURE Act 2.0, they’d still need 500 hours but they could earn them over two consecutive years instead of three.
These provisions are subject to change as they are almost always modified as they move through the legislative process.
2. Increase in Social Security Checks
Social Security recipients will enjoy the biggest increase to their benefits since 1982. The Social Security Administration (SSA) announced a 5.9% cost-of-living adjustment (COLA). This is the largest increase in decades, and it is based on the Consumer Price Index (CPI), which tracks inflation. This raise will kick in for 62 million Americans who receive Social Security benefits in January 2022.
The 2022 COLA was significantly bigger compared to previous years because the prices of goods and services have significantly increased — due in part to extreme weather and COVID-19 outbreaks, which have driven up energy prices and strained the world’s supply chains.
3. Higher Earners Will Receive More
The SSA is also increasing the maximum monthly payout from $3,148 per month in 2021 to $3,345 in 2022. That’s an extra $197 per month for the highest earners. The wealthiest retirees have to meet several strict criteria to be eligible for the maximum payout, including having worked for at least 35 years until full retirement age and having hit or passed the maximum taxable earnings for all 35 of those years.
Any income over $142,800 will be exempt from the payroll taxes that fund Social Security. In 2022, the maximum amount of taxable income will increase by $4,200 to an even $147,000. It’s estimated that 6% of the workforce will hit that limit. This was designed to help prevent potential funding downfalls around the year 2035.
4. Social Security Income Test
With accepting permanently reduced payments when claiming Social Security, comes something called the Social Security income test. In 2021, the SSA temporarily withholds $1 in benefits for every $2 you earn above $18,960 in annual income or $1,580 in monthly income. Those who filed early in 2021 but who will hit their full retirement age later in the year can earn as much as $50,520 annually or $4,210 a month. After that, $1 in benefits will be withheld for every $3 in earned income.
In 2022, the Social Security income test thresholds will increase to:
- $19,560 per year or $1,630 per month for early filers who claim Social Security before the year of their full retirement age
- $51,960 per year or $4,330 per month for early filers who claim Social Security in the year of their full retirement
Essentially, early filers will be able to earn a little more income in 2022 before their payments are reduced. Those who file at or after their full retirement age are never subjected to the Social Security income test.
5. You May or May Not Be Able To Contribute More to Your Retirement Fund
Lastly, the IRS will potentially increase the maximum contribution limits on the most common types of retirement accounts. While it hasn’t yet been confirmed, it’s something to keep on your radar. 401(k)/403(b) and IRA/Roth IRA contributions are projected to be increased.
This can’t be confirmed until the IRS updates their rules, which will be announced in early November of 2021. As of now, the IRA/Roth IRA contribution maximum is $6,000 — $7,000 if over age 50 — and the 401(k)/403(b) maximum contribution is $20,500 — $25,500 if over age 50 — per year.
For many Americans, retirement may look different in 2022 than it has in years past. With just over 8 weeks of 2021 left, now is the time to review where you stand for the year ahead. Once you have estimated the amount of money you may need for retirement, a sound approach involves taking a close look at your potential retirement income sources.
Whether your retirement is decades away or just around the corner, the retirement income advisors at Johnson Wealth and Income Management can provide you guidance every step of the way, and help you fill out all the right tax forms necessary.
Contact us here today to learn more.
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