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Has SECURE 2.0 been overdone? Or will it turn out to be a game changer? Financial professionals are divided on the issue. But one thing is for sure: there are some things you can 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 Roth’s only opportunity.
“Roth-related changes across the board seem to encourage savers to choose Roth accounts,” says Matt Sampson, a senior investment adviser at Arnerich Massena in Portland, Oregon. “Starting in 2024, Roth 401(k)/403(b) accounts no longer have RMD requirements, and starting in 2023, SIMPLE IRAs and SEPs are now eligible for direct Roth contributions. Both changes are intended to support operating efficiencies, but clearly show a preference for encouraging Roth savings. Perhaps the federal government is looking to shore up its budget in the near term by increasing taxable income now (Roth) instead of later (traditional/pre-tax).”
While most of these Roth benefits don’t take effect until 2024, SECURE 2.0 gives you more immediate benefits.
How SECURE 2.0 lets you start saving more right now
The new law prioritizes what many perceive to be a major problem: not enough people saving for retirement. Previous laws, including the original SECURE Act, also tried to encourage more retirement savings. This latest attempt pulls out all the stops.
“SECURE 2.0 will be a game changer,” says Tamara Telesko, director of wealth planning strategies for TIAA in New York City. “TIAA has conducted surveys that found that only about a third of American workers say they are very confident that they are on track to retire when they want, afford the lifestyle they want in retirement, or live comfortably in retirement without staying penniless. The new legislation will now help people if they work part-time, change jobs, start a job, need to pay off student loans, want to increase how much they save, or want to delay when they have to make withdrawals.”
The legislation defines new ways for you to save more for your retirement. For example, if you’re nearing retirement, SECURE 2.0 increases your contribution limits to catch up. But that’s not all it does.
“There are several provisions that will help new hires and those who may be early 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%. Thereafter, the rate would increase by 1% each year, up to a maximum of 10%. Workers always have the option to cancel, but the structure could help many workers prioritize retirement without having to take any action. Automatic enrollment in 401(k)s and other long-term savings plans has been shown to increase the amount people save for retirement. The TIAA Institute did a study that singled out the South Dakota government. It found that many of the state employees did not participate in supplemental retirement plans. Total participation was less than 3%. But after the state introduced automatic enrollment, that number skyrocketed. Today, if you look at the newly hired employees, more than 90% participate.
SECURE 2.0 also took a common impediment to saving for retirement and rephrased it to induce a savings opportunity.
“The other big game changer is that paying off student loans will actually help people save for retirement,” says Telesko. “Qualified student loan payments will now be eligible for your employer matching contributions in your retirement plans. Those matching contributions are typically 3% to 5% of your salary. So let’s say you make $55,000 a year and use 3% of that to pay off student loans. That’s $1,650 for the loans and another $1,650 from their employers for retirement savings.”
The law also removes another obstacle to saving.
How SECURE 2.0 gives you access to emergency funds right now
Saving for retirement secures your money for the long term. That makes it more difficult and expensive to access your money, even in an urgent situation.
“Facing an unexpected expense can be damaging both financially and personally,” says Eric Levy, executive vice president at Corebridge Financial in Houston. “Some don’t 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 people the ability to withdraw up to $1,000 a year in penalty-free withdrawals from their retirement savings for emergency use,” Levy says. “Employer-sponsored retirement plans can become part of the solution, providing a lifeline in times of financial insecurity while encouraging Americans to save for their financial future. Connecting retirement savings with emergency spending will make it more likely that America’s 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 could also encourage better retirement savings behavior, including higher retirement contributions and higher enrollment in the plan”.
Does your company not offer a 401(k) plan? Feel like you’ve been left out of all the excitement of SECURE 2.0? Relax; the new law will most likely give your employer excellent motivation to create a retirement plan for you and your co-workers this year.
How SECURE 2.0 Offers Business Tax Breaks Right Now
When President Trump signed the original SECURE Act into law in December 2019, much of the conversation focused on helping small businesses start plans by allowing them to join other small businesses through a PEP. The intention was to reduce costs and administrative burdens.
Despite all the enthusiasm, PEPs have been slow from the start. SECURE 2.0 now adds monetary incentives for companies to add employees to existing plans and create new plans.
“There are four important 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 automatic enrollment requirement, coupled with $500 per year already in existence (for the first three years’ tax credit) to offset any additional administrative charges associated with it.
- The now 100%, up to $5,000 (or $250 for each non-owner and non-highly compensated employee for businesses with fewer than 50 employees) small business tax credit to reimburse them for start-up and administrative expenses associated with the setting up and running their 401(k) plans for the first three years—this one is huge—in other words, the government is so serious about getting more people into retirement savings 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 up and running.
- Savers match the credit, with limitations, but up to $1,000 per year per employee to encourage employers to make matching contributions to plans for each employee; Put another way, the government will reimburse the company for the first $1,000 of the matching contribution per employee (again, certain limitations apply and there is a phase-out period).
- The improved approach in Savers Credit, designed to reward low-income people for participating and saving in these plans, trying to overcome the objection that they can’t afford to do so, think of this as a government contribution to low income people.
For all this good news, not everything is rosy with SECURE 2.0. Some of the so-called “advantages” represent more sensation than sensitivity.
