Secure Act 2.0 attempts to reduce roadblocks to retirement savings
Many Americans, concerned about retirement savings, believe that the Social Security program will run out of money before they retire. Others assume the government will take care of them in their old age because they’ve paid into the system throughout their working lives. The truth lies somewhere in the middle. The need-to-know summary is this: the government will be able to pay a large portion of the established monthly benefit in the future. However, that amount does not equal the amount you need in retirement even today, so don’t rely on it exclusively in the future.
The American government has acknowledged that U.S. citizens are not saving enough for their retirement. To address this fact, legislation was signed into law by President Biden on December 29, 2022 as part of the Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 – which builds on the Secure Act of 2019 – to help individuals save more money to support themselves once they quit working. And, of course, there are some rules to make sure the government gets its taxes before you die.
Among a lengthy list of rule changes having to do with your retirement, here a few that may directly affect you.
Automatic enrollment
Nearly half of U.S. workers, 57 million, have no retirement savings plan available through their job.
Starting after 2024, the new legislation will allow workers to be automatically enrolled in an employer-based retirement plan, where they can choose to save from 3% to 10%. Then, every year after 2025, both figures will rise by 1% until they reach 10% and 15% respectively. Workers will be able to opt out of automatic enrollment if they wish.
This is not a new idea. The U.K. introduced auto-enrollment in 2012. Since then, about 10 million people have been auto enrolled, of the roughly 33 million working adults.
Catch up
If you’re 50 years old, experts say you should have around $360,000 saved for your retirement beginning at age 67.
If you’re just getting to the point of dreaming about retirement, and are facing financial facts for the first time, you’ll appreciate the new ‘catch up’ rules.
Currently, in 2023, you can contribute up to an annual maximum of $22,500 to your 401(k)s, plus another ‘catch-up’ amount of $7,500 if you’re over 50. Starting in 2025, for people aged 60 – 63, the legislation will allow additional contributions of up to $10,000 per year, or 50% of the catch-up amount in 2025, whichever amount is larger.
Required Minimum Distributions (RMDs)
RMDs require people to withdraw money from their retirement accounts, and pay the taxes on that money, starting at a certain age.
They act as a safeguard for the IRS against people using a retirement account to avoid paying taxes. RMDs also prevent the tax advantages of retirement accounts from being passed on to your heirs.
RMDs force savers to withdraw a certain amount from their retirement accounts each year, starting at age 72. However, the new legislation increases the age of the required withdrawal to 73 next year and then to 75 in 2033.
There is a 50% tax penalty if you don’t take the RMD by the annual deadline, or if the amount taken does not meet IRS requirements. The amount of the RMD is also added to the other income received during the year, and will affect the amount of Social Security payments.
Early penalty withdrawal
42% of investors say they want to cash out of their investments, and 29% say they would cash out a 401(k) or IRA if they could avoid paying penalties.
Among all U.S. adults who currently have a retirement account, 51% have withdrawn money prior to retirement. Taking money from a retirement savings account before the age 59.5 incurs a 10% penalty fee in addition to the relevant taxes.
It doesn’t seem like your own money if you can’t withdraw it from your account. But, after so much encouragement to save for retirement, the government doesn’t want you to find different purposes for the money. However, with the current financial stresses on Americans, the new legislation has included a few more exceptions to the 10% penalty for cases of domestic abuse, terminal illness, financial emergency and natural disaster. This provision is set to take effect in 2024.
Student Debt match
Of those with student loans, 79% report that student debt is cutting into their ability to save adequately for retirement.
The new legislation lets employers contribute to workers’ retirement accounts as they make student loan payments, so the employee can pay down their debt and still get the advantages of saving early in life. For example, if a worker made a $100 student loan payment, the company could match it by adding up to $100 to their retirement account.
The program is attractive to many employers as a recruitment and retention tool in the era of tightened labor markets. This option will be available starting after December 31, 2023.
Saver’s Match
The average American under 35 has $13,000 retirement savings.
Currently, if you meet the criteria, you are eligible for a ‘Savers Credit’ on your taxes. The Saver’s Credit gives a tax reduction to low- and middle-wage-earning Americans who contribute to their retirement accounts. In 2023, the tax credit maximum is $1,000 for individuals and $2,000 for married couples filing jointly.
After 2026, the new legislation converts the tax credit into a government matching program called ‘Savers Match’. Instead of having the credit applied to your annual tax bill, the federal government will deposit the money directly into your retirement savings account, where it has the chance to grow alongside your other retirement savings. And, the amount deposited into your account won’t count towards your annual contribution limit.
Lost retirement accounts
There were nearly 25 million forgotten 401(k) accounts worth about 20% of all 401(k) assets in the U.S. at the end of 2021.
In the era of having multiple jobs throughout your life, it can be easy to lose track of each account you’ve signed up for. The new legislation will create a national database for workers to find lost retirement accounts. The Department of Labor will be required to create the database within two years of the legislation becoming law, which happened on December 29, 2022.
The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up-to-date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not accept any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
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