Many business owners are eager to see how SECURE 2.0 will increase retirement security for millions of workers now that it has become official law.
In their studies, “Emerging From the COVID-19 Pandemic: Four Generations Prepare for Retirement” and “Emerging From the Pandemic: The Employer’s Perspective,” Transamerica Institute and TCRS created a list of eight ways the new law advances retirement security.
1. Introducing a government match for retirees who qualify based on their income.
51% of workers believe they don’t make enough money to put money away for retirement. A tax credit known as the “Saver’s Credit” is currently available to low- to moderate-income workers who invest in 401(k) plans or other retirement accounts (IRA). It hasn’t done as well as it could because people don’t understand it and because it can’t be returned. SECURE 2.0 reimagines and replaces the Saver’s Credit with the Saver’s Match, a matching contribution from the government for retirement savers who fulfill income qualifying standards, starting in 2027. The worker’s employer will match 50% of the first $2,000 they put into a retirement plan or IRA, up to a maximum of $1,000. According to the new regulation, the Saver’s Match must also be promoted.
2. Increasing the coverage of occupational retirement plans.
Only 46% of businesses with fewer than 100 employees have a 401(k) or comparable plan, compared to 89% of businesses with 100 to 499 employees (89%) and 92% of businesses with 500 or more employees (92%). Employers’ top excuses for not offering a plan and not likely to do so in the next two years are that their business needs to be bigger (79%) and cost-related concerns (31%). By making it simpler and more economical for small businesses to implement a qualifying retirement plan, whether a stand-alone 401k or comparable plan or by joining a multiple employer plan (MEP) or pooled employer plan, SECURE 2.0 begins addressing these challenges in 2023. (PEP).
3. Allowing part-time workers to participate in retirement plans.
Few firms make part-time workers eligible for retirement benefits, compared to how many do for full-time employees. Compared to 77% of full-time employees, only 51% of part-time employees receive an employer-sponsored 401(k) or comparable plan. SECURE 2.0 introduces stricter criteria for companies to provide long-term part-time employees retirement plan eligibility beginning in 2025.
4. Improving the convenience of saving in relation to automated enrollment and escalation.
Together, these plan elements raise employees’ contributions to their retirement savings and plan participation. 75% of employers use automatic escalation, but only 23% of plan sponsors use automated enrollment. Automatic enrollment and automatic escalation will be required of firms implementing new 401(k)k) plans to start in 2025 under SECURE 2.0.
5. Reducing the effects of monetary emergencies to cover the cost of an unforeseen big financial setback.
Workers have only saved $5,000 (median), while 14% have no emergency savings. Also, 26% of workers have taken money out of a retirement plan early or in a hard way, usually because of an emergency. In order to lessen the need for employees to withdraw funds from their retirement accounts, SECURE 2.0 will add an emergency savings account as a new plan feature for defined contribution retirement plans, such as 401k plans, starting in 2024. The 10% early distribution tax, which typically applies to persons under the age of 59 1/2, will not be applied to emergency withdrawals from retirement accounts under the new law.
6. Matching contributions for the repayment of school loans.
Younger generations are leaving college with student debt, which hinders their capacity to save for retirement at a time when they would be able to take advantage of investment growth and compounding over a long period of saving. Paying off student loans is listed as a current financial priority by more than one in five Generation Z employees (22%) and 17% of Millennial employees, who are between the ages of 18 and 24. Employers will be able to match employee-eligible student loan payments made to 401(k) or comparable plans starting in 2024, thanks to SECURE 2.0. Therefore, even if employees are struggling to pay off student loans and prepare for retirement, their company will still make a matching contribution to their retirement plan account.
7. Increasing Catch-Up Contributions.
Many workers don’t save enough for retirement, and as they age, they will need to significantly increase their savings before retiring. For instance, Baby Boomer employees have saved $162,000 in household retirement accounts, compared to just $87,000 for Generation X employees (estimated medians). SECURE 2.0 permits employees 50 and older to raise catch-up contributions to an IRA or retirement plan account starting in 2024, enabling them to save more as they approach closer to retirement. The new law includes provisions that mandate that higher-income workers make catch-up contributions on a Roth or after-tax basis. Starting in 2025, SECURE 2.0 permits employees ages 60 to 63 to make catch-up payments, allowing them to save even more.
8. Recognizing longevity and establishing necessary minimum distributions (RMDs).
People today anticipate working past the usual retirement age because they believe that people will live longer than they ever have. Nearly 40% of workers (39%) either do not plan to retire or expect to retire at age 70 or beyond. According to 38% of workers, one of the biggest retirement worries is outliving their investments and savings.As of now, the IRS usually requires that people take the RMD from their retirement funds every year at age 72. 50% excise tax on the amount of the RMD.If you don’t follow the rules, you will have to pay a harsh penalty of a 50% excise tax on the amount of the RMD. SECURE 2.0 gives workers extra time to develop their savings by raising the RMD age from 72 to 73 in 2023 and up to 75 in 2033. The new law now cuts the excise tax for failing to take an RMD to 25%, and if the RMD is promptly repaired, the fee is further decreased to 10%.
If you have questions regarding SECURE 2.0, we would be happy to help answer them. Contact us today.
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