PENSION savers could get up to $1,000 in extra cash a year thanks to a new proposal in the Senate.
Known as the Encouraging Americans to Save Act, the legislation is an aim to help working and middle-class families save for their older years.
It was introduced by Senate Finance Committee chairman, Ron Wyden, and includes a 50% government match on savings of up to $2,000 a year.
The credit would be available if you save at work through an employer-sponsored plan, such as a 401k-type plan.
The legislation would also offer matching contributions to those not covered by an employer-sponsored plan, and those who save in an IRA.
Currently, savers get a $1,000 non-refundable credit but under the proposals, this would change to a refundable one worth $1,000.
What is a 401k?
A 401k allows you to dedicate a percentage of your pre-tax salary to a retirement account.
Employers can also choose to match some or all of the contributions, but this isn’t required so it’s not guaranteed.
There are two basic types of 401ks – traditional and Roth – with the main difference being how they’re taxed.
In a traditional 401k, employee contributions reduce their income taxes for the year they are made, but they’ll pay tax when they withdraw cash.
With a Roth, employees make contributions with post-tax income but can make withdrawals tax-free.
Since it was launched in 1978, the 401k plan has become one of the most popular types of employer-sponsored retirement plans in the US.
It means Americans who don’t owe any federal income tax will still get the cash boost in their retirement accounts.
Under the proposals, individuals must have an income of less than $32,500 while couples can earn up to $65,000.
The amount of the match would then phase out over the next $10,000 of income for individuals and $20,000 for couples.
As part of the legislation, eligible retirement savers would also get a Covid recovery bonus credit of up to $5,000.
You’d get the 50% in credit on the first $10,000 in retirement savings made during a five-year period starting from 2023.
The bill has been referred to the Senate Committee on Finance, which may make changes to it before it needs approval by the House or Senate.
After this, President Joe Biden will consider whether to sign it into law.
In other words, it’s not guaranteed that it’ll come into effect but it could be a welcome retirement boost if it gets the green light.
Mr Wyden said: “Low- and middle-income workers, who are far less likely to have adequate retirement savings, need help.”
“Addressing our retirement crisis demands a comprehensive approach, and my bill is an important piece of the puzzle that would deliver meaningful federal retirement contributions year after year.”
We explain how much you can contribute and withdraw from a 401k.
We also reveal how a simple trick can boost your social security payments by $600 to help in retirement.
Plus, check out these 20 ways to live comfortably off your social security checks.