April 25, 2023
“Much of the revised legislation in SECURE 2.0 addresses the financial concerns people are grappling with today,” said Joel Dickson, principal and head of enterprise advice methodology at Vanguard. “For many accumulators, retirement feels a long way off. More pressing are their nearer-term financial goals like paying student loans, buying a house, or making monthly ends meet.”
A lot of financial advice is written for investors progressing through life and tackling goals in sequence. But for many young wealth accumulators, that’s not the way life unfolds. Instead, young careerists often choose between competing priorities like paying down student debt, building an emergency cash cushion, and saving for retirement.
A new federal law may help change that. The SECURE Act of 2022 (SECURE 2.0) may make it easier for workers to cast a wider savings net. The following provisions were designed to meet accumulators where they are and to help them take their next best step when reaching for financial goals.
(Look for forthcoming content that focuses on what those nearing retirement and what high net worth investors should know about SECURE 2.0.)
Starting in 2024: Employers will have the option to make contributions to an employer-sponsored retirement plan—i.e., 401(k), 403(b), SIMPLE IRA, 457(b), and similar plans—that match an employee’s qualified student loan payments, even if the worker doesn’t directly contribute to the retirement plan.
This provision requires an employer to opt in; those who do can help cash-strapped early careerists straddle that hard-to-navigate line between paying down debt and saving for the future.
Starting in 2024: Employers may choose to add the following new options that grant employees access to emergency cash.
This provision can help workers get through a near-term emergency while maintaining progress on long-term goals.
The new legislation has expanded the availability of penalty-free withdrawals for those under age 59½, including during a wide range of hardship situations, when cash is often needed most. The following scenarios may allow for penalty-free (but not income tax free) retirement plan withdrawals:
Distributions are subject to ordinary income tax. All or part of these distributions may be repaid during the three-year period that starts the day after the distribution is received, so long as certain employer plan conditions apply.
Effective immediately: 401(k), 403(b), and 457(b) plans may offer a Roth option for an employer match or nonelective contribution, so long as those contributions are fully vested.
For participants, this adds another financial planning consideration when deciding which tax treatment is most appropriate for a long-term financial plan.
Starting in 2024: A new auto-portability provision will automatically move a participant’s retirement plan balance that was automatically rolled into an IRA—so long as it’s valued at under $5,000—to a new employer’s retirement plan, unless the employee opts otherwise. Millions of Americans lose track of 401(k) accounts during a job switch but those assets, if held until retirement, could compound into substantial balances.
Starting in 2025: New plans established after 2024 will be required to initiate an automatic saving program where newly hired employees are enrolled at a savings rate of at least 3% of pay, unless the employee opts out. The plan must automatically increase the employee savings rate by at least 1% each subsequent year, up to at least 10% but not to exceed 15% (again, unless the employee opts out). Vanguard research shows that automatic enrollment programs increase both saving and participation rates.
For young wealth accumulators, the provisions available in SECURE 2.0 offer additional opportunities to balance competing financial goals, get through unexpected life events, and save additional retirement assets over the span of a career.
“There are a lot of minor provisions within the legislative package that, when aggregated, will create significant change to the retirement landscape,” said Dickson. “In addition, many of the additions demonstrate recognition that sometimes life happens—and that access to assets can help smooth troubled periods—at least from a financial standpoint.”
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We recommend that you consult a tax or financial advisor about your individual situation.