Remember the Secure Act of 2019 that made the first big changes to the U.S. retirement system in more than a decade? (Among other things, it made it easier for small businesses to set up retirement plans, gave part-time workers access to employer-sponsored plans, pushed back the age at which retirement plan participants need to take required minimum distributions, and gave 401(k) plans the ability to offer annuities.)
Well, fast-forward three years later, and “Secure 2.0” just received House and Senate approval, and was signed into law by President Biden. In many ways, Secure 2.0 was the gift all Americans needed, and we couldn’t be happier about the provisions that have made it easier to save and plan for a successful retirement. Here’s a rundown on the 10 most important things included in the $1.7 trillion bill that may positively impact your financial future:
1. Businesses starting new 401(k) plans would be required to automatically enroll employees in the plan. (Yes, employees can opt out, but obviously we’re hoping they stick with it!) This would take effect in 2025.
2. Employers would be allowed to make a contribution to an employee’s retirement plan that matches the employee’s student loan repayment. So, even if an employee isn’t yet able to contribute to their 401(k) plan, employers can still kick in those matching dollars as long as their employee is paying back their student loans. (Essentially, while you pay your student loan debt, your employer would kick in matching dollars for you, in a retirement account.) This would happen in 2024.
3. Employers can automatically enroll employees to set aside up to $2,500 in a separate emergency savings account, alongside their retirement accounts. (The emergency fund contributions would happen via automatic payroll deduction, just like a retirement plan contribution.) This would essentially make it much easier for workers to save for an emergency, and access those funds when they need them.
“The emergency savings provisions lay the groundwork for a new generation of savings tools at the workplace that will help workers build financial resilience,” says Tim Shaw, Associate Director of Policy for the Aspen Institute Financial Security Program.
4. People are working longer and living longer — which means we need our money to last longer. With that in mind, the age for mandatory 401(k) or IRA withdrawals would be raised from 72 to 73 by 2023, and up to 75 by 2033. (The original Secure Act of 2019 raised the age from 70½ to 72, so Secure 2.0 is just pushing it a bit further to keep up with the fact that Americans are living and working longer every year.)
5. Individuals could make a penalty-free withdrawal of up to $1,000 from a tax-deferred retirement plan before the age of 59½, in case of an emergency. Granted, it’s not that much given how expensive some of life’s emergencies can be, but if this provisions helps prevent even one person from charging that $1,000 to a credit card, then it will serve its purpose. This would take effect in 2024.
6. Workers aged 60-63 would be allowed to make a catch-up contribution of $10,000, a 50% hike over the current catch-up contribution limit of $6,500. And while we LOVE this, we have to note that far and away the best way to grow your money is to start early. (Although a catch-up contribution made at age 60 would see serious growth by the time you hit 90, so go for it — and eat some more veggies while you’re at it.) This would take effect in 2025.
7. Lower-income earners, already hurt by their lower salaries and their inability to save more for retirement, will be eligible for a federal retirement match up to $1,000 if they save up to $2,000 on their own, in a qualified retirement account. This program needs a longer runway to be established and would be active in 2027. Of note: This would replace the current existing nonrefundable tax credit for lower-income retirement savers, with a matching contribution to a retirement account instead. (Essentially, we’re swapping a tax credit with a direct contribution to a retirement account — love it.)
8. A part-time worker would only have to work for two years to be eligible to participate in an employer-sponsored retirement plan, down from the current three years. They’d need to work at least 10 hours a week to make it happen. We love this, because we know so many people who now have 10-hour-a-week jobs post-pandemic. (If this is you, don’t be shy about asking your employer how to make sure you qualify and get established — just note that the law doesn’t take effect until 2025.)
9. You can put more into a qualified longevity annuity contract, known as a QLAC. (These accounts are deferred annuities that have been funded from a qualified retirement account, like a 401(k) or IRA… Most people use them because they allow you to defer taxes that you have to pay when taking your required minimum distributions (RMDs)). Essentially, Secure 2.0 has changed the maximum you can put into a QLAC, which was $135,000 — it’s now $200,000, thus enabling more people to save more when using this vehicle. This will take effect in 2024.
10. Lastly, there’s also a change to the required minimum distribution rules for Roth 401(k)s. Unlike Roth IRAs, Roth 401(k)s have previously mandated required minimum distributions, meaning that with a Roth 401(k), the account owner has to take distributions in their lifetime. But Secure 2.0 changes that — Roth 401(k)s will now function like Roth IRAs in that no RMDs will be mandated during the original account owner’s life. What does this mean? Well, it’s great news for people who want to use a Roth 401(k) as an asset to pass to their surviving spouse or heirs, or for those looking to use these accounts as a savings vehicle for charity that doesn’t have to be touched during their lifetime. This change will take effect in 2025.
“The Secure Act 2.0 will help Americans better prepare for a comfortable retirement. Our research shows that a growing number of retirement savers face a vortex of unique and significant financial challenges throughout their working years that can derail their retirement savings,” says Greg Wilson, Partner and Head of Institutional Client Business for Goldman Sachs Ayco Personal Financial Management. “Provisions in the Secure Act 2.0, which range from expanding automatic enrollment for employees joining 401k and 403b plans, to allowing employers to make matching contributions based on qualified student loan payments, and reducing the eligibility requirement for part-time workers to join 401k plans, are key changes that can help working Americans overcome expected and unexpected obstacles to saving.”
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