What’s in It for Me?
Adam M. Grossman | Feb 12, 2023
IN THE WANING DAYS of 2019, Congress passed the SECURE Act, a law that delivered a mixed bag of changes for retirement savers. Well, Congress has been busy again. At the tail end of 2022, a follow-up law—known as SECURE 2.0—was signed into law.
The good news: There’s a whole lot included in this new law. The bad news? There’s a whole lot included in this new law. SECURE 2.0 presents a number of new planning opportunities but, with hundreds of provisions, it’s also a lot to digest. Below are the provisions that, in my view, provide the most meaningful planning opportunities for folks at various ages and stages:
For younger workers. Young people, in many cases, are forced to contend with the twin challenges of relatively low salaries and relatively high student loan burdens. SECURE 2.0 provides some relief.
In the past, when an employer matched an employee’s 401(k) or 403(b) contribution, that match could be made only with pretax dollars. That was the case even when the employee’s own contributions were to the Roth side of the plan. SECURE 2.0 lifts that restriction. Now, an employee can opt to receive his or her employer’s match in Roth form. The match will be reported as income, but that’s okay. Folks earlier in their careers tend to be in lower tax brackets, making it advantageous to opt for Roth contributions.
The second provision for young people recognizes that they often face a tradeoff between saving for retirement and making student loan payments. SECURE 2.0 provides a clever solution. Now, an employer can make a 401(k) matching contribution, but the match will apply to student loan payments made by the employee. Research has shownthat the unreasonable price of private college burdens young people in ways that go beyond the financial cost. This provision offers a bit of an offset.Read the rest of the article about Secure Act 2 changes that may affect you on HumbleDollar
SECURE 2.0 – a few thoughts, in response:
Employer match in Roth form: Yes, it becomes current income. It is subject to federal and state income taxes at top marginal rate. It also no longer avoids FICA and FICA-Med taxes – both the taxes the participant pays and the taxes the employer pays. These taxes make the match more expensive to the plan sponsor and potentially less valuable to the participant. Better option? Amend plan to allow for in-plan Roth coversion – allows worker to time conversion at a time when tax rates are lower, avoid FICA and FICA-Med.
Matching student loan payments: Likely lowers the employer match. Take a worker saving $100 per payday, in a 25% marginal tax bracket. Assume a 50% match. A pre-tax contribution of $100 qualifies for a $50 match. Now, take that same $100 of income and use it to pay student loans. Only $75 is left after taxes and used to pay student loans. The match is reduced from $50 to $37.50. The plan sponsor would likely do better for their participants by ignoring this feature and updating plan loan processes to 21st Century functionality – offering liquidity without leakage.
Roth contributions to SEP IRAs. The self-employed could have adopted a “solo” 401k many years ago. Better, the solo 401k can offer “liquidity without leakage” via plan loans, unlike the SEP IRA.
Catch-up for those ages 60 – 63 increased to $10,000 (if adopted by the plan sponsor) – Only a small minority contribute $30,000 (maximum contribution and catch-up in 2023). Likely to be used by even fewer workers.
Beginning this year, RMDs don’t need to start until age 73. The only people who can afford to defer commencement to age 73 are those who have other sources of income. Again, a small minority of American retirees.
QCD’s will be indexed for inflation. Who has the wherewithal to donate $100,000/year from retirement assets?
529 account beneficiary – transfer to Roth IRA after account in place 15 years, up to annual IRA maximum, maximum $35,000 over the years. This isn’t for empty-nest parents as much as it offers an interesting opportunity for empty-nest grandparents.
A new vehicle for employers to help their lower-paid employees build emergency funds. Almost every worker who does not have monies set aside for emergencies is either buried in debt or living paycheck to paycheck or both. So, this account is only available as a sidecar to the 401k plan. Obviously, any saving in emergency accounts is most likely going to divert saving from the 401k plan. Today, 20% of eligible workers in plans with voluntary enrollment don’t save. And, over a third of workers who do contribute to their 401k don’t contribute enough to get the full employer match.