The Secure 2.0 Act of 2022 packs a big punch, and I’m still reeling from the 2019 Secure Act’s elimination of the use of stretch IRAs for most folks. However, this latest version carries promising provisions that will be implemented over the next 10 years.
It looks like the bipartisan effort yielded a product that will — yes, here it comes — offer the potential to enhance your retirement. The legislation is hundreds of pages, but here are seven provisions likely to affect the lives of many Americans.
1. Auto Enrollment and Auto Escalation
Beginning in 2025, big employers will be required to have at least a 3% auto enrollment feature in their plans and an auto escalation of participants’ contribution by 1% per year, up to a maximum in the 10% to 15% range as you save for retirement. Behavioral finance experts have long touted these two plan design features as ways to increase retirement plan participation and contributions. The numbers don’t disagree.
2. Saver’s Match
For those who qualify, the new law calls for the government to step in and directly contribute matching contributions equivalent to 50% of the first $2,000 a worker contributes to a retirement account. I’m a huge fan of the saver’s credit. The current program provides non-refundable tax credits for low- to moderate-income folks who contribute to a retirement plan at work or an IRA. It is a bit complex and has not driven the results our government would like to see. So, in 2027, this program will be replaced by a new simplified “Saver’s Match” program. It will be interesting to see how the new program is implemented. The devil — and perhaps the fraud — will be in the details.
3. More Retirement Plan Access for Military Spouses?
It’s cool to see military spouses called out in Secure 2.0. The law is designed to make it easier for them to participate in retirement plans at work. It offers tax credits to small employers that make military spouses eligible for their plans within a couple of months of hiring. There is also provision for part-time workers to be eligible to participate in retirement plans sooner. While not designed for military spouses, along with the tax credits, these features should give military spouses more opportunities to build for retirement.
4. Required Minimum Distributions and Catch-Up Distributions
The age by which you have to start pulling money out of IRAs and retirement plans is pushed back to 73 effective this year, and at 75 in 2033. In the future, catch-up contributions for those 50 and older ($10,000 in 2023) will track inflation. A new, bigger catch-up contribution, for those ages 60-63, is also part of the legislation.
5. Roth Matching
I’ve often been asked, “Why do the matching contributions my employer makes when I contribute to my Roth 401(k) go into my traditional account at work?” Prior to Secure 2.0, the answer was simply, “They have to.” However, beginning in 2025, employers will be able to offer the option of adding the matching money into the Roth account. Of course, the match would then be taxable income, so discuss this with your tax adviser.
6. 529 for Retirement
I haven’t witnessed a big “over-saving for college” problem. But beginning in 2024, money in 529 college savings plans that you haven’t spent can be rolled into a Roth IRA for the 529 beneficiary. Rules designed to keep this from being abused include a lifetime cap of $35,000; no more than the Roth annual contribution in any one year; and a requirement that the money has to be in a 529 for five years before it can be rolled over. Still, it’s a nice feature that rewards those who save for their kids’ college.
7. Student Loans as Elective Deferrals
To me, this was the most interesting provision in the new law. Over the years, I’ve pounded home the idea “Don’t leave free money on the table” and encouraged contributing at least enough to a work plan to get your full employer match. Beginning in 2025, student loan payments made to your lender will qualify as an “elective deferral” and qualify for a matching contribution from your employer in your workplace plan. Pretty cool.
A lot remains to be revealed. In fact, when I had this article proofed by one of my USAA advice group friends, he said, “You left out the various provisions carving out emergency savings options and access within employer plans.” Yes, that’s true, but as I told him, if you’re taking your time to read this, I’ll bet you have that covered. Still, be on the lookout for those options to roll out in 2024.
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