What’s in It for Me? The Secure Act
What’s in It for Me? The Secure Act
Adam M. Grossman | Feb 12, 2023 HumbleDollar
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 shown that 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.
For the self-employed. If you’re self-employed and want to save for retirement, there have typically been three choices, each of which was imperfect:
Standard IRA contributions are easy but carry relatively low contribution limits ($6,500 this year, or $7,500 for those 50 or older).
SEP IRAs offer higher contribution limits, but Roth contributions weren’t permitted.
Solo 401(k)s do permit Roth contributions, but they’re more complex to set up and carry a tricky reporting requirement for larger accounts.
SECURE 2.0 addresses this by allowing for Roth contributions to SEP IRAs. It won’t be appropriate for all self-employed workers. But for those in particular tax situations, it may be the perfect antidote to an imperfect set of options.
For folks in their early 60s. SECURE 2.0 is unusual in that it contains a variety of provisions targeted at narrow subsegments of the population. Case in point are the new rules on retirement “catch-up” contributions, which are the additional amounts workers age 50 and older can contribute to their company plan each year.
This year, the catch-up is $7,500. Starting in 2025, this will be increased to at least $10,000, but only for those ages 60, 61, 62 and 63. This provision won’t help everyone, but it’ll be a useful addition to the playbook for those in their peak earning years.
For those in retirement. The original SECURE Act bumped up the age at which retirees must begin required minimum distributions (RMDs) from tax-deferred retirement accounts—from the endlessly confusing age of 70½ to age 72. Now, Congress has extended that timeline further. Beginning this year, RMDs don’t need to start until age 73. So, if you’re currently younger than 72 or turn 72 this year, you can wait one more year.
The new rule has a twist, though. Beginning in 2033, the starting age will rise again, from 73 to 75. This is a little confusing, so a simple way to think about it is as follows: For those born between 1951 and 1959, the starting age will be 73. For anyone born after 1959, it will be 75.
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