The Secure 2.0 Act... 2.0

Last month our blog covered the Secure 2.0 Act with a focus on Americans near or in retirement. However, Secure 2.0 also has some important changes that will impact individuals years away from retirement. In this month’s post, we’ll focus on the new legislation's effect on the younger generation.

1. Automatic enrollment and automatic plan portability.  The legislation requires businesses adopting new 401(k) and 403(b) plans to automatically enroll eligible employees starting at a contribution rate of at least 3%, beginning 2025. It also permits retirement plan service providers to offer plan sponsors automatic portability services, transferring an employee's low balance retirement accounts to a new plan when they change jobs. The change could be especially useful for lower-balance savers who typically cash out their retirement plans when they leave jobs, rather than continuing to save in another eligible retirement plan.
2. Emergency Savings.  Defined contribution retirement plans can add an emergency savings account that is a designated Roth account, eligible to accept participant contributions for non-highly compensated employees starting in 2024. Contributions would be limited to $2,500 annually (or lower, as set by the employer) and the first 4 withdrawals in a year would be tax and penalty-free. Depending on plan rules, contributions may be eligible for an employer match. In addition to giving participants penalty-free access to funds, an emergency savings fund could encourage plan participants to save for short-term and unexpected expenses.
3. Student Loan Debt.  Starting in 2024, employers will be able to "match" employee student loan payments with matching payments to a retirement account, giving workers the ability to save while paying off educational loans. For example, assume an employee making $60,000 a year is eligible for a 10% employer match if they contributed $500 a month to their retirement plan ($5,000 monthly salary x 10% = $500).  However, the employee currently pays $500 per month towards their student loan and cannot afford the additional retirement contribution.  Under Secure Act 2.0, the employee's student loan payment would 'count' as a retirement contribution, thereby letting the employer add $500 a month to their retirement account.
4. 529 Plans.  529 plan assets can be rolled over to a Roth IRA for the beneficiary, subject to a few limitations.  One, the 529 plan must be open for at least 15 years.  Two, the rollover is counted towards the annual Roth IRA contribution limit, meaning a maximum rollover of $6,500 under the current 2023 limit.  Three, there is an aggregate lifetime limit of $35,000 for the rollovers. 

While Secure 2.0 Act provides increased opportunities to save for retirement, everyone’s financial situation is different.  As always, consult your financial advisor to understand how this new legislation may apply to you.

Source:  https://www.fidelity.com/learning-center/personal-finance/secure-act-2

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