Everyone agrees taking money out of a 401(k) hurts workers’ chances of saving enough for retirement. And now new legislation may help prevent workers from tapping those funds before retirement.
A new bill that was just introduced in the Senate would limit workers’ ability to use their 401(k)s as rainy-day funds.
It’s called the Savings Enhancement by Alleviating Leakage in 401(k) Savings Act (SEAL). It was introduced by Senators Herb Kohl (D-WI) and Mike Enzi (R-WY).
Here’s a rundown of what it would do:
- It would limit the number of loans that participants can take from their 401(k) to no more than three at a time. Currently, workers may borrow from their accounts for any reason and pay back the loan with interest — unless their employer sets more strict limits.
- It would give loan recipients until the tax deadline in the year the loan was received to repay the loan amount. Currently, those with outstanding loans who lose their jobs only have 60 days to repay the loan. When loans aren’t repaid on time, they get counted as taxable income.
- It would allow participants to continue to contribute funds to their accounts immediately following a hardship withdrawal. Currently, loan recipients must wait six months before being able to contribute again.
- It would ban the use of 401(k) debit cards.
If passed, the Internal Revenue Service and Treasury Department would need to issue guidance on how these processes would work.
The reason for the legislation? To prevent workers from using retirement accounts like piggy banks and give participants more time to repay loans, according to Kohl, the chairman of the Senate Special Committee on Aging.
Info: Click here to read the bill.
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