How the latest omnibus bill helps the wealthy save more for retirement
If you're the kind of person who maxes out your 401(k), you're saving an extra $2,000 a year of pre-tax money this year, compared to 2022. That's the largest increase ever, not only in dollar terms but even in percentage terms.
Why it matters: The kind of people who max out their 401(k) are not the people who most need a government incentive to save for retirement — they'd most likely be doing that anyway.
- Workers in the gig economy, by contrast, simultaneously are more in need of retirement security and have almost no access to government-funded tools for building it.
Driving the news: The inflation-driven increase in 401(k) contributions is far from the only good news for well-heeled savers and the financial-services firms that manage their money. The omnibus act passed at the end of December included other key provisions, including:
- Retirees can now wait until they're 73 before they need to start withdrawing money from their 401(k) fund; in 2019, that age was 70½. By 2033, it'll be 75.
- Many 401(k) plans will become opt-out, rather than opt-in, nudging workers to save more for retirement.
- Workers over 50 can make pre-tax catch-up contributions of $7,500 a year to their 401(k) — over and above the normal $22,500 maximum. In 2025, that number rises to $11,250 for workers over 60.
By the numbers: These changes will only increase the degree to which retirement tax expenditures are targeted at the rich. Even before they came into law, 87% of retirement tax benefits went to the top 40% of taxpayers.
The big picture: For retirement security to make its way to the 33% of Americans who have no access to retirement plans at all, something more ambitious is needed — something like the Retirement Savings for Americans Act proposed by members of Congress in both houses and from both parties.
- The bill effectively copies the idea I wrote about in March 2021, of automatically enrolling lower-paid American workers into the government's excellent Thrift Savings Plan.
- It includes a tax credit that effectively acts as a government 401(k) match that can double contributions up to 5% of income.
- The contributions phase out once workers start earning more than 150% of the median wage, or 200% for joint filers.
- Because the savings plan is operated by the government, workers can switch from job to job as much as they like, or even have multiple jobs at once, all contributing to a single plan.
The bottom line: Congress has done a good job of boosting the retirement accounts of rich Americans. Poor Americans, however, remain left behind.