Has SECURE 2.0 been over-hyped? Or will it prove to be a game-changer? Financial professionals are split on the issue. But there’s one thing for sure: there are a few things you can expect to take advantage of sooner than you think.
Much has been made of the ability to create a “Backdoor” Child IRA by rolling over excess 529 savings into a Roth IRA. That’s not the only Roth opportunity.
“Roth-related changes across the board seem to encourage savers to elect Roth accounts,” says Matt Sampson, Senior Investment Advisor at Arnerich Massena in Portland, Oregon. “Effective in 2024, Roth 401(k)/403(b) accounts no longer have RMD requirements, and effective in 2023, SIMPLE & SEP IRAs are now eligible for direct Roth contributions. Both changes are intended to support operational efficiencies, but clearly show a preference toward encouraging Roth savings. Perhaps the federal government is looking to shore up their near-term budget by increasing taxable income now (Roth) as opposed to later (traditional/pre-tax).”
While most of these Roth benefits don’t take effect until 2024, SECURE 2.0 offers more immediate benefits to you.
How SECURE 2.0 Allows You To Begin Saving More Right Now
The new law prioritizes what many perceive as a major problem: not enough people save for retirement. Previous laws, including the original SECURE Act, also tried to encourage more retirement savings. This latest attempt pulls out all stops.
“SECURE 2.0 will be a game-changer,” says Tamara Telesko, a TIAA director of wealth planning strategies in New York City. “TIAA has done surveys that found only about a third of American workers say they’re very confident they’re on track to retire when they want, afford the lifestyle they want in retirement or live comfortably throughout retirement without running out of money. The new legislation will now help people if they work part time, switch jobs, start jobs, need to repay student loans, want to increase how much they save or want to delay when they must make withdrawals.”
The legislation defines new ways for you to save more for your retirement. For example, if you’re approaching retirement, SECURE 2.0 increases catch-up contribution limits. But that’s not all it does.
“There are several provisions that will help new employees and those who may be earlier in their careers,” says Telesko. “SECURE 2.0 will allow employers to automatically enroll new employees in 403(b) or 401(k) savings plans at a minimum rate of 3%. From there, the rate would bump up by 1% every year, maxing out at 10%. Workers always have the option of canceling, but the structure could help lots of workers prioritize retirement without having to take any action. Automatic enrollment in 401(k) and other long-term savings plans has been shown to increase the amount people save for retirement. The TIAA Institute did a study that highlighted the government of South Dakota. It found that many of the state employees were not participating in supplemental retirement plans. The total participation was less than 3%. But after the state introduced automatic enrollment, that number soared. Today, if you look at the newly hired employees, over 90% participate.”
SECURE 2.0 also took a common impediment to retirement saving and reframed it in a way to induce a savings opportunity.
“The other big game changer is that repaying student loans will actually help people save for retirement,” says Telesko. “Qualified student loan payments will now be eligible for your employer’s matching contributions in your retirement plans. Those matching contributions are often 3% to 5% of your salary. So, let’s say you make $55,000 a year and use 3% of that to repay student loans. That’s $1,650 for the loans, and another $1,650 from your employers toward retirement savings.”
The law also removes another savings obstacle.
How SECURE 2.0 Gives You Access To Emergency Funds Right Now
Saving for retirement ties up your money for the long term. That makes it more difficult and more costly to access your money, even in an urgent situation.
“Being faced with an unexpected expense can be both financially and personally disruptive,” says Eric Levy, Executive Vice President at Corebridge Financial in Houston. “Some do not have the resources to pay for a financial emergency and then have to make difficult decisions to find a way to cover an unexpected expense.”
For this reason, people are reluctant to save for retirement.
SECURE 2.0 removes this reason.
“The emergency savings provision will give individuals the ability to take up to $1,000 a year in penalty-free withdrawals from their retirement savings for emergency use,” says Levy. “Employer-sponsored retirement plans can become a part of the solution—providing a lifeline during moments of financial insecurity while also encouraging Americans to save for their financial future. Connecting retirement savings to emergency expenses will make it more likely that American workers will be able to cover unexpected expenses and prepare for their financial future. Retirement plans that give plan participants the flexibility to access their retirement savings to pay for unexpected expenses might also encourage improved retirement savings behavior, including larger retirement contributions and increased plan enrollment.”
Does your company not offer a 401(k) plan? Do you feel as though you’re left out of all the SECURE 2.0 excitement? Relax; there’s a good chance the new law will give your employer excellent motivation to create a retirement plan for you and your coworkers this year.
How SECURE 2.0 Offers Business Tax Breaks Right Now
When President Trump signed the original SECURE Act in December 2019, much of the talk focused on helping small businesses start plans by allowing them to join other small companies through a PEP. The intent was to reduce costs and administrative burdens.
For all the enthusiasm, PEPs have been slow out of the gate. SECURE 2.0 now adds monetary incentives for businesses to both include employees in existing plans as well as create new plans.
“There are four major tax credits on the table for small business owners and their employees,” says Chad Parks, Founder and CEO of Ubiquity Retirement + Savings in Puerto Rico. “Parks offers the following breakdown:
- The Auto-Enrollment requirement, accompanied by an already existing $500 a year (for the first three years’ tax credit) to offset any extra administrative burden associated with that.
- The now 100%, up to $5,000 (or $the lesser of 250 per non-owner non-highly compensated employee for companies that are under 50 employees) tax credit to the small business to reimburse them for startup and administrative expenses associated with establishing and running their 401(k) plans for the first three years—this one is huge—said another way, the government is so serious about getting more people into the retirement savings system that they are willing to pay most, if not all, the fees associated with a small business plan for the first three years to get people going!
- The savers match credit, with limitations, but up to $1,000 per year per employee to encourage employers to make matching contributions into the plans for each employee—said another way, the government will reimburse the business the first $1,000 of the match per employee (again certain limitations apply and there is a phase down period).
- The enhanced focus on the Savers Credit—designed to reward lower income earners for participating and saving into these plans, trying to overcome the objection that they cannot afford to do so—think of this as a government match for low-income earners.
For all this good news, everything is not all sunshine and roses with SECURE 2.0. Some of the so-called “advantages” represent more sensation than sensibility.
Source: Fox Business
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