SECURE 2.0 Act new rules create a smoother path to saving
Whether you have student loans, need to catch up in the final years before retirement, are facing taking required minimum distributions in retirement, or want to enact a charitable giving strategy, new rules under the SECURE 2.0 Act makes it easier to save for your retirement. The SECURE 2.0 Act was passed by Congress on December 23, 2022 and signed into law by President Biden.
Keep in mind, preparing for retirement is never a once-and-done proposition rather it’s a continuum during which you dedicate decades of your working years to accumulating retirement savings, and then begin decumulation when you retire. The planning you do during your accumulation years impacts the later stages of your retirement planning journey.
Preparing for your financial well-being in retirement requires a multi-year financial planning strategy to help keep you on track. Some of the new rules under the SECURE 2.0 Act may help move you toward realizing your definition of your great life and the kind of retirement you envision for yourself and your family.
Early Career Stages: Automatic Enrollment, Emergency Savings, and Student Loan Matching
Beginning in 2025, new employer-sponsored plans will be required to automatically enroll eligible employees, with a contribution rate of at least 3%. Automatic enrollment in a retirement plan can mean building up invested savings from the earliest years of a career, which provides the longest amount of time to benefit from the power of compounding. Auto-enrollment is coupled with new rules around portability allowing accounts to be automatically transferred to a new plan in the event of a job change.
Starting in 2024, plans are allowed to add designated Roth accounts for emergency savings for non-highly compensated employees. Contributions are limited to a maximum of $2,500 and the first four withdrawals in a year from the account will be penalty-free. Historically, the 10% penalty on withdrawals from tax-deferred retirement plans often puts saving for retirement in opposition to building up and maintaining an emergency fund. This new rule adds flexibility for non-highly compensated employees to contribute to and make withdrawals from a designated Roth account without penalty for emergency situations.
Student loan payments represents a huge debt for many in their earlier career years. Contributing to retirement savings is often difficult while trying to pay off oppressively high student loans. It becomes a years long choice between saving and paying off student debt. In 2024, the SECURE 2.0 Act mitigates this by allowing an employer to match student loan debt payoff amounts, so retirement savings can still accrue.
Late Career Catch-Up Contributions Increased in 2023
The catch-up contribution for those 50 and above is one of the best ways to increase your retirement savings in the later years of your career. For 2023, the catch-up amount is increasing to $7,500. Beginning in 2025, the catch-up for workers aged 60, 61, 62, or 63 will be even larger. These employees are allowed to contribute the greater of $10,000 or 150% percent of that year’s inflation-indexed catch-up amount.
It’s important to note, however, that the tax treatment of catch-up contributions is also changing. If prior-year earnings are more than $145,000, the age 50+ catch-up contributions must be made with after-tax dollars to a Roth account.
The Decumulation Phase Gets More Flexible under SECURE 2.0 Act
Tax-deferred contributions to retirement accounts lower taxable income in the years when you make them, but the IRS eventually comes looking for their cut. The age to begin required minimum distributions (RMDs) is moving from 72 to 73 in 2023, providing an extra year for retirees that want to take advantage of lower asset values by converting some other of their savings in tax-deferred accounts to a Roth IRA. The amounts converted will lower the value of the account, which will reduce the amount of the RMD.
Beginning in 2033, the age for RMDs will move to 75. This expanded window can provide for significant tax-planning strategies, including the timing of asset sales and more time to convert additional funds to a Roth for income and tax planning.
The Bottom Line
Starting early and taking advantage of the tax benefits – and the power of compounding – are the key features of the years in which you are saving for retirement. The goal is to retire successfully and have enough to live the life you want. But saving is just one piece of the puzzle. Thinking strategically about retirement at every stage can keep your plans on track.
###
This work is powered by Advisor I/O under the Terms of Service and may be a derivative of the original.
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
