The SECURE 2.0 Act was signed into law on December 29, 2022, bringing with it a bevy of changes to retirement savings. The legislation introduced several policies designed to shore up long-term retirement savings for the average American, including rules like automatic enrollment in 401(k) programs for eligible workers. Among the changes are several new incentives for U.S. workers to save for retirement and prioritize long-term financial health.
Retirement savings incentives in the SECURE 2.0 Act include:
— Student loan 401(k) match.
— 529 plan to Roth IRA rollover.
— Gift cards for 401(k) participation.
— Emergency savings accounts.
— Saver’s match.
— Higher catch-up contribution limits.
— Automatic 401(k) enrollment.
Secure 2.0 Bill Retirement Incentives
The provisions in the omnibus spending bill known as the SECURE 2.0 Act were designed to incentivize both businesses and individuals to prioritize retirement savings. This new law builds upon the Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in 2019.
From tax incentives for participating companies to changes to contribution laws, the SECURE 2.0 Act encourages participation in retirement savings. Many new incentives are particularly beneficial to younger investors just getting started planning for retirement or older Americans making up lost ground with their retirement savings.
Student Loan 401(k) Match
Starting in 2024, companies will be able to make 401(k) contribution matches based on an employee’s student loan payments.
“The student loan payments will be identical to regular 401(k) contributions done by any employee to get the company’s match,” says Ohan Kayikchyan, certified financial planner and founder of Ohan the Money Doctor in Culver City, California. “The rules for matching and its amount are different from one employer to another, but in many cases, the employer matches a percentage of an employee’s contributions or so-called elective deferrals up to a certain amount.”
High student loan payments have prevented many people from starting to save for retirement. The new retirement law allows you to get credit for student loan payments toward your 401(k), 403(b) or SIMPLE IRA as determined by your employer.
“Thanks to SECURE 2.0, you no longer have to choose between paying down debt and saving for retirement,” says Rayyan Anees, senior vice president and wealth planning manager at Wells Fargo in Houston.
[READ: How to Get a 401(k) Match for Your Student Loan Payment]
529 Plan to Roth IRA Rollover
The SECURE 2.0 Act includes a provision for tax and penalty-free rollovers of up to $35,000 in eligible funds from a 529 plan to a Roth IRA. This can be a welcome change for those with money leftover in their 529 plans, but no plans to pay for further higher education.
“To qualify, the 529 account must have been in existence for at least 15 years and the amount rolled over to the Roth IRA may not exceed the aggregate amount contributed (plus earnings) before the five-year period ending on the transfer date,” Anees says.
“The amount of the rollover would be limited to annual Roth contribution limits, the 529 beneficiary must have equivalent earned compensation, and the aggregate rollovers are limited to a $35,000 lifetime amount.”
[READ: How to Roll Over Funds From a 529 College Savings Plan to a Roth IRA]
Gift Cards for 401(k) Participation
Employers are currently allowed to encourage their workers to participate in a 401(k) through long-term incentives like contribution matching, but not with short-term financial incentives.
The SECURE 2.0 Act changes this, allowing employers to offer small incentives, such as low dollar value gift cards, to boost employee participation in workplace retirement plans. These incentives must not be paid for by plan assets.
While rewards under this change will likely be small compared to other provisions, employees might welcome a small additional incentive for contributing to a retirement account.
Emergency Savings Accounts
In an emergency, many Americans find themselves unable to cover unexpected expenses and having to tap into retirement savings. In fact, 401(k) hardship withdrawals recently hit a record high. The SECURE 2.0 Act aims to reduce this practice by allowing employers to offer automatic contributions to a separate emergency savings account.
“This option can only be made available to non-highly compensated employees,” Anees says. “Your employer may automatically enroll you for up to 3% of your salary with an annual contribution cap of $2,500.”
Withdrawals for qualifying emergencies are penalty-free. After you leave your job, the emergency savings account can be converted to a Roth account.
Saver’s Match
The retirement saver’s credit currently allows eligible workers to claim a tax credit in exchange for retirement account contributions. The credit is available to employees earning below a certain threshold and is generally equal to 10% to 50% of your retirement account contributions, up to $2,000. The credit is also subject to a phase-out based on income.
The SECURE 2.0 Act replaces the saver’s credit with the saver’s match beginning in 2027. Instead of a tax credit on your annual return, the saver’s match will deposit funds into a qualifying IRA or retirement plan for eligible savers.
Higher Catch-Up Contribution Limit
When Americans reach age 50, they are permitted to make catch-up contributions to their 401(k) plan. “The SECURE 2.0 Act will allow higher catch-up contribution limits for people who are approaching their retirement age,” Kayikchyan says.
Starting in 2025 individuals ages 60 to 63 will be able to make catch-up contributions to their employer-sponsored plans of $10,000 annually or 50% more than the regular catch-up amount. The $10,000 amount will be indexed for inflation moving forward.
“The act has a provision that requires that all catch-up contributions for people over age 50 will need to be on an after-tax basis, except for individuals who earn less than $145,000,” Kayikchyan says.
The current $1,000 catch-up contribution limit for IRAs for people age 50 and over will also be indexed to inflation starting in 2024.
[READ: New Opportunities to Make 401(k) and IRA Catch-Up Contributions]
Automatic 401(k) Enrollment
To encourage all eligible employees to take advantage of their workplace retirement plans and any company match programs, the SECURE 2.0 Act introduced an automatic 401(k) enrollment provision, which will go into effect in 2025 for new 401(k) and 403(b) plans.
“The act promotes automatic enrollment in workplace retirement plans, making it easier for young workers to start saving for retirement from the beginning of their careers,” Brian Colvert, CEO of Bonfire Financial in Colorado Springs, Colorado, says. “However, a downside is that it reduces flexibility. Workers who prefer to make their own decisions about their retirement savings may prefer to opt out of the plan.”
How SECURE 2.0 Will Affect Your Retirement
The SECURE 2.0 Act has a variety of provisions that impact how retirement savings will be incentivized moving forward.
“These provisions have pros and cons but ultimately are designed to make it easier for younger workers to start saving for retirement early and to ensure that their savings grow and are protected over time,” Colvert says.
You should consult with your employer’s human resources department to find out which of these retirement savings incentives are available to you. For instance, if you will have gift cards offered for retirement contributions, you’ll want to know exactly how to qualify and receive your benefit. And if you are automatically enrolled in your company’s 401(k) program, you might want to opt out or adjust your contributions.
Colvert advises seeking professional financial advice as well.
“It is always important to consult a financial advisor who has your best interest in mind when selecting investments, even for your employer sponsored plans,” he says.
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SECURE 2.0 Retirement Bill Offers New Incentives to Save for Retirement originally appeared on usnews.com
