The New Retirement-Savings Landscape
The recently passed SECURE Act 2.0 can benefit your savings strategy.
Stretching your retirement income and assets can be challenging as our average life expectancy increases. Today, spending 20 or more years in retirement is becoming the norm rather than the exception!
In order to help ease the financial strain on current and future retirees, Congress recently passed the SECURE Act 2.0, which includes some sweeping changes to the retirement-planning landscape going forward. Some of these updates could change the way you retire.
To take full advantage of the legislative provisions in the “Setting Every Community Up for Retirement Enhancement” (SECURE) Act 2.0, there are a number of deadlines and time frames you need to keep in mind to avoid missing out on some key opportunities.
A SECURE Act 2.0 Overview
The SECURE Act 2.0, which was part of the massive $1.7 trillion omnibus spending package signed into law by President Joe Biden late last year, is an attempt to build on previous initiatives intended to help a wide range of Americans achieve retirement security. Some of the highlights of the SECURE Act 2.0 include:
- The conversion of the “saver’s credit” from a traditional tax credit to a direct government contribution of up to $2,000 into an Individual Retirement Account (IRA).
- Requirements that (except for small plans) newly created employer-sponsored 401(k) plans must automatically enroll their employees in a plan.
- The ability for employers to treat their employees’ student-loan payments as if they were 401(k) contributions for the purpose of employer matching contributions.
- An increase in the age at which required minimum distributions (RMDs) must begin from traditional IRAs and retirement plans—up from the current age 72 to age 73 in 2023, and to age 75 by 2033.
- The ability to make tax-free transfers of unused 529 college savings plan funds into Roth IRAs.
- Expanded eligibility for long-term part-time workers to contribute to their employer’s 401(k) plan.
Beginning in 2023, small businesses with fewer than 50 employees can qualify for a “credit” that is equal to 100 percent of the administrative costs for establishing a workplace retirement plan. Businesses with up to 100 employees may also be entitled to a tax credit, based on their employee-matching or profit-sharing contributions. This credit, “capped” at $1,000 per employee, will gradually phase down over five years, and it is subject to additional reductions for companies that have between 51 and 100 employees.
Starting in 2025, the SECURE Act 2.0 also requires automatic enrollment into new 401(k) or 403(b) employer-sponsored retirement plans. The initial default rate must be between 3 and 10 percent, with an annual auto-escalation of 1 percent (up to at least 10 percent, but not more than 15 percent).
Automatic enrollment into a retirement plan is designed to make it easier for employees to set aside money for the future. However, employees who prefer not to participate in the plan are allowed to opt out.
There is, however, an exception for small companies that have 10 or fewer employees, as well as for new businesses that are less than three years old. Such companies may integrate this automatic enrollment into their payroll system.
And starting in 2023, the minimum age to begin taking required distributions from traditional IRAs and retirement accounts will gradually increase from the current 72 to 73 in 2023, and then to 75 in 2033. This will give investors more time to grow their nest egg before taxable withdrawals must begin. Further, the penalty for not taking some or all of one’s required minimum distribution will drop from 50 percent to between 10 and 25 percent.
Starting in 2024, parents who opened 529 college savings plans at least 15 years ago for their children will have the ability to make tax-free and penalty-free rollovers of up to $35,000 total from unused 529 college savings into a Roth IRA.
Also, note that many provisions of the SECURE Act 2.0 take effect at different times. Taking required minimum distributions from traditional IRAs and retirement plans must begin at age 72 if you were born in 1950 or before, at age 73 if you were born between 1951 and 1959, and at age 75 if you were born in 1960 or later.
Taking advantage of these retirement savings perks—and thinking about retirement preparedness in general—can be particularly important for those in the LGBTQ community, many of whom tell researchers that they are falling behind in this area. Competent financial support and guidance can make the difference between simply getting by and creating a secure retirement in the future.
Staying On Track with SECURE 2.0
Financial legislation such as the SECURE Act 2.0 always contains a myriad of “fine print” that can oftentimes be overwhelming. With that in mind, it is important for you to discuss your objectives with a financial-planning professional who can help you develop financial and retirement strategies that are right for you.
In addition, working with a professional who is well-versed in financial and retirement planning for LGBTQ individuals and families is key to making sure that safeguards for same-sex couples are part of your plan.