What changes should you be aware of?
By Jennifer Edwards, CFP®
The Setting Every Community Up for Retirement Enhancement Act (known as the SECURE Act) of 2019 has gotten an upgrade. The SECURE 2.0 Act was passed at the end of December with broad bipartisan support and includes several provisions worth knowing about.
SECURE 2.0 addresses Roth savings, increasing participation in employer-sponsored retirement plans, emergency preparedness, location of lost accounts, Required Minimum Distributions, catch-up contributions, and much more. In this article, we will focus on the topics most likely to affect younger savers.
Roth is Boss
Congress seems to have come around to accepting what 3rd Decade has been teaching from the beginning – that Roth dollars are very powerful, especially in the hands of young people with a lot of time for money to grow. 2.0 allows plan participants to choose that employer contributions be made to the Roth side of a 401k, 403b, or 457b (p. 18). It also allows SEP and SIMPLE plans to offer a Roth option (pp. 17-18), opening up opportunities for employees of small businesses.
For those concerned about overfunding their child’s 529 college fund, 2.0 has some good news. Qualified beneficiaries of 529 college savings plans will be permitted to rollover up to $35,000 over their lifetime from their 529 to their Roth IRA (pg 6).
Retirement Plans for Small Businesses and Part-time Workers
Small business owners and those employed in small business will find it easier to establish, run, and participate in an employer-sponsored plan. Qualifying businesses can now get a 100% tax credit for the cost of starting up a retirement plan. They can also establish a plan with lower contribution limits and no match, making it easier to facilitate employee savings. Automatic enrollment will now be required for administrators of 401k and 403b plans with a minimum deferral rate of 3% (employees can choose to opt out and very small and new businesses are exempt). Qualified part-time workers will also soon be eligible to participate in their employer-sponsored plans (p. 6).
Student Loan Payments and Emergency Savings
For student loan borrowers who find that they have to choose between contributing to their 401k or saving for other goals while paying off their loans, SECURE offers a possible solution. Student loan payments can now count as elective deferrals for the employer plan contribution. Say your company offers a 4% match if you contribute 6% of your salary to your 401k, but you can’t save for all your goals and make your student loan payment, so you choose not to participate. That’s very costly since not only are you not getting free money for retirement, but you aren’t taking advantage of the power of compound interest. Around here, that’s tantamount to high treason! Now you can get the match by paying an equivalent amount of the required deferral rate toward student loans.
The SECURE Act is also trying to help Americans be better prepared for unexpected emergencies (pp. 6-7). Employers can now set up emergency fund accounts for their employees, separate from their retirement accounts. These new accounts won’t have penalties or fees for withdrawals and unused funds can be rolled into the employee’s Roth 401k. Contributions to the emergency fund will also count as elective deferrals for 401k matching.
Required Minimum Distributions and Lower Penalties
Pre-tax retirement savings (not Roth) is subject to Required Minimum Distributions or RMDs. RMDs ensure that taxes are paid in a timely manner since contributions were made pre-tax. The age at which you must start taking RMDs was pushed back. That’s helpful as many retirees continue working into their 70s and may not need substantial withdrawals from their 401k. It also allows more flexibility when it comes to Roth conversions for tax planning purposes. The penalty for not taking the Required Minimum Distribution used to be 50%. Now it’s much lower (p. 9).
Roth 401k’s used to have Required Minimum Distributions, where Roth IRAs never have, so the typical pattern was for people to roll their 401k balances to IRAs when they stopped working. RMDs will no longer be required for Roth 401k balances (p. 13), opening the option of leaving funds in employer plans instead of transferring to an IRA. Most people will still want to roll to an IRA, though for the added control over the investments and to avoid plan maintenance fees.
It’s important to note that not all aspects of the new law go into effect at once (see timeline below). This law was intended to remove many of the impediments people face when planning for their future and includes several more helpful provisions for first responders (p. 10), people who have lost track of old accounts (p. 9), low and middle income savers, those age 50 or older, and others. So take some time learning about the SECURE 2.0 Act. There may just be something in there that makes it easier for you to reach your financial goals.
- RMDs age increase
- No penalty for Qualified Disaster Distribution
- Roth SIMPLE and SEP plans allowed
- Part-time workers eligible for employer-sponsored retirement plans
- 529 to Roth IRA transfers can begin
- Student loan payments may count as elective deferrals for employer matching
- Employer-sponsored emergency savings accounts allowed to be established
- Qualified emergency and domestic abuse withdrawals from 401k plans no longer penalized
- IRA catch-up contribution indexed to inflation
- RMDs in Roth 401k’s eliminated
- Catch-up contributions required to be Roth if over certain income threshold
- Additional catch-up contributions allowed for those age 60-63
- Auto-enrollment required for most employer retirement plans
- Expanded disability eligibility age requirements for ABLE accounts
- Saver’s Credit replaced by Saver’s Match
- Disability pension payments for first responders prior to retirement age become tax-free