Retirement Planning with Secure 2.0
Red lights are flashing, and alarms are ringing in when it comes to the future of retirement planning. My new book, What Should I Do with My Money?, highlights the issues surrounding America’s two largest entitlement programs—Medicare/Medicaid and Social Security. These programs are the cornerstone of a 21st century retirement, and the math of tax inflows versus benefit outflows is not in their favor. On December 29, 2022, the “Enhancing American Retirement Now” legislation, commonly referred to as SECURE 2.0, was enacted (SECURE 2.0 full text). It certainly won’t solve the crisis, but there are several new provisions to lessen the burden, particularly geared at helping part-timers, gig workers, and both young and old professionals to start saving for retirement.
Lower- and middle-income Americans may currently take advantage of the Saver’s Credit. This can be up to a $1,000 tax credit ($2,000 for married couples) available to those contributing to retirement accounts who have an adjusted gross income (AGI) of $36,500 or less ($73,000 for those married filing jointly). SECURE 2.0 will convert the Saver’s Credit to the “Saver’s Match”. Beneficiaries of the plan will no longer have to wait for a credit against their tax liability, but rather the federal government will deposit a “matching contribution” directly to their retirement account (Roth contributions count, but the government’s match cannot go into a Roth account). This can be a great incentive for eligible freelancers and contractors who feel they miss out on company matches but can now get something similar from the government. The Saver’s Match will not take effect until 2027, so the current Saver’s Credit still has a few years left.
Long-term, part-time workers will see some assistance even sooner. The original SECURE Act required employers to allow these workers to participate in their 401(k) plan if they completed at least one year of service (1,000 hours) or three consecutive years of service (at least 500 hours annually). SECURE 2.0 will reduce the three-year rule to two years for plan years beginning after December 31, 2024.
People burdened with student loans, especially young professionals who make up the bulk of the $1.6 trillion debt, will be happy to hear their student loan repayments could qualify for matching retirement contributions by their employers. Employees who are not saving in their retirement plan but are making student loan repayments can be eligible to receive employer matching contributions as if these repayments were employee retirement contributions.
For savers on the other end of the spectrum, those between the ages of 60-63, higher catch-up contributions are on the way. Currently, employees over age 50 can make catch-up contributions to their retirement plans, in 2022 it was $6,500 toward workplace retirement plans. SECURE 2.0 increases these limits to the greater of $10,000 or 50% more than the regular catch-up limits in 2025 for individuals ages 60-63. However, for individuals making over $145,000, any catch-up contributions must be made on a Roth basis. While this provides the advantage of potentially tax-free distributions in retirement, it limits the employee’s flexibility to choose more tax deferral in high earning years.
Retirement savers in their 70’s and older will see some relief too. The Required Minimum Distribution age has been increased from 72 to 73 effective January 1, 2023, and will increase to 75 in 2033. Furthermore, the excise tax for failure to take an RMD was a staggering 50% of the missed RMD amount. SECURE 2.0 reduces the penalty from 50% to 25%. If this is corrected in a timely manner, the penalty can be further reduced to 10%.
Here is a breakdown of some more important SECURE 2.0 provisions:
- Automatic Enrollment
For plan years beginning after December 31, 2024, SECURE 2.0 will require 401(k) and 403(b) plans to automatically enroll employees. The initial enrollment amount will be between 3%-10% and must increase 1% annually until reaching 10%, but not more than 15%. Employees can opt out of this.
- Starter 401(k) Plans
Employers with no existing retirement plan can offer a starter 401(k) plan for plan years beginning after December 31, 2023. Starter 401(k) plans have fewer regulations and reporting requirements. It also does not require matching contributions from the employer, thus reducing their cost. However, there is a $6,000 deferral limit.
- Withdrawals for Certain Emergency Expenses
- Generally, an additional 10% tax applies to early distributions before age 59.5 on tax-preferred retirement accounts. SECURE 2.0 will provide an exception for distributions for emergency expenses that are unforeseen and relating to certain personal or family emergencies. Ordinary income tax will still be owed on such distributions.
- Small Employer Tax Credit
For employers with under 50 employees, a 100% tax credit may be available to offset retirement plan costs.
- 529 College Savings Plan to Roth IRA
SECURE 2.0 will allow for tax- and penalty-free rollovers from 529 accounts to Roth IRAs for the same beneficiary.
- Long-Term Care Contracts Purchased with Retirement Plan Distributions
Retirement plan participants may distribute up to $2,500 per year before Age 59.5 penalty-free to pay premiums for certain specified long-term care insurance contracts.
Bryan M. Kuderna is a Certified Financial Planner™ and the founder of Kuderna Financial Team, a New Jersey-based financial services firm. He is the host of The Kuderna Podcast. His new book,“WHAT SHOULD I DO WITH MY MONEY?: Economic Insights to Build Wealth Amid Chaos” is available wherever books are sold.