The SECURE Act 2.0 Explained
For many Americans, the notion of retirement seems…unattainable. We’ve been told our entire lives not to count on Social Security being around by the time we retire. And it seems like people are working later into their lives than in previous years.
Whether that’s due to poor planning, or factors that are beyond control is a debate for another blog post—but what we do know is that there’s currently a bill being proposed that aims to make retirement more attainable for us all.
What is the Secure Act 2.0?
The original SECURE act was passed in 2019 and you can read more about the changes that it afforded to the retirement system here.
The SECURE Act 2.0 is a bill that proposes changes to make it easier to participate in employer plans and access retirement savings.
Key proposals in the bill center around three categories: employee savings, use of retirement funds, and employer responsibilities. Below is a brief explanation of some changes and their potential impact on retirement savings.
Employer-retirement matching and student loans — Student loans are a hot-button issue, and their burden prevents many Americans from saving and reaching other financial goals.
The SECURE Act 2.0 would allow employees to benefit from employer retirement contributions by allowing employers to count funds put towards student loan payments as retirement contributions to qualify for employer match programs. This change would make employer-sponsored retirement programs accessible to more people sooner, and more importantly — the compounded interest growth.
Catch-up contribution increases — This legislation also increases the limit on catch-up contributions for people between the ages 62 and 64, allowing people to save more as retirement nears. Currently, these contributions can be made to a 401(k), or pre-tax. However, the SECURE Act 2.0 would make these contributions in a Roth account, or post-tax.
Part-time employee eligibility — The SECURE Act 2.0 shortens the number of years before a part-time employee becomes eligible to participate in an employer’s retirement program from 3 years to 2 years. This change reduces an access barrier to employer-sponsored retirement plans for part-time employees.
Saver’s Tax Credit — More people would qualify for the Saver’s Credit with this legislation. The Treasury would also raise awareness around it, which could encourage low- and middle-income families to start saving for retirement.
Retirement Fund Use
Lost Retirement Accounts — A national database would be created to help people find old retirement accounts. This database would help people track down and benefit from retirement savings, especially if they’ve had multiple employers and left their retirement account with their former employer.
Required Minimum Distributions (RMDs) — The SECURE Act 2.0 increases the ages when people are required to take a certain amount from their retirement accounts: 73 in 2022, 74 in 2029, and 75 in 2032. This change would give retirees more time to let their investments grow, and more flexibility with retirement financial planning.
Automatic plan enrollment — Employers would be required to automatically enroll employees in their retirement plan starting at 3% of the employee’s pay. The savings rate would increase each year up to a maximum of 15%. Employees could still make changes to the new default enrollment as needed or wanted.
While many employers have automatic enrollment for employees currently, it would become standard practice and the guidelines would be the same.
Participation incentives — The SECURE Act 2.0 would allow employers to use incentives like gift cards to encourage retirement plan participation.
Administrative and start-up costs — This legislation would also offer tax credits for small businesses (up to 100 employees) to cover plan start-up costs and help cover administrative fees. This change would help make it easier for employers to offer retirement plans to their employees, which would increase access to retirement savings opportunities.
These new responsibilities would not apply to all employers equally. For example, there are exemptions for churches, businesses with up to 10 employees, and businesses with retirement plans in place.
The SECURE Act 2.0 has bipartisan support and makes some significant steps in increasing access to employer-sponsored retirement plans, particularly with the ability to count student loan payments for employer retirement contribution match programs.
However, the legislation leaves some groups out.
Taylor Tepper, a finance journalist, writes, “One of the biggest reasons behind the ongoing American retirement crisis is that there isn’t a universal coverage by personal retirement savings plans. Workers can go long stretches without having access to a retirement savings plan, as many employers choose not to offer them or unemployment puts them out of reach entirely.”
Indeed, more could be done to address funding retirement, especially as concerns around the longevity of the Social Security system continue.
However, even with its short-comings, the SECURE Act 2.0 is a positive step. It would help people paying student loans benefit from compounded interest as employer matching contributions grow. It would make it easier to find forgotten retirement accounts with a national database. It would also make it easier for small employers to offer employees a retirement plan by providing tax credits to help cover costs.
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