Retirement. It is something that people don’t know how to feel about anymore. Once upon a time, folks looked forward to quitting their 9-to-5 and enjoying a more leisurely life.
However, rising costs, greater longevity, and lack of savings have most of the population a little leery of retirement in the traditional sense. Fifty-five percent of workers plan on working in their 60s and beyond, with the majority doing so because of a lack of savings.
To encourage workers to put away money for their future, the U.S. government has come up with a plan to help: the SECURE Act. Let’s look at some retirement facts, details of the SECURE Act, and recent changes to the plan.
Have you figured out how much you need to retire comfortably? Many times, people will come up with a “guesstimate” rather than base their figures on what they currently spend. It’s true that some expenses decrease as we get older, but things like healthcare and health insurance costs go up.
Financial professionals can help you determine what you will need to retire, set up a retirement savings plan, and put together a roadmap to get you there. Want an overall idea of how much you’ll need? Free online retirement calculators will give you a drone view.
Employers used to fund pensions to provide for employees in retirement. While government employees and others in the public sector still have a pension plan, they are now less common among private businesses. Of those with retirement savings, 82% are self-funded.
Self-funded retirement accounts are just that, funded by employees themselves who contribute to them regularly. Many employers kick in a certain amount to the accounts as well. Currently, among private sector workers, 56% are enrolled in an employer-sponsored retirement plan such as a 401(k).
Although 72% of workers are eligible and have retirement plans available to them, many do not choose to participate. Some potential reasons: they don’t feel they make enough money to contribute, they are depending on Social Security to provide for them, or they haven’t thought that far ahead.
Seeing a potential retirement financial crisis, the U.S. government signed into law the Setting Every Community Up for Retirement Enhancement (SECURE) Act in December 2019.
The impetus behind the SECURE Act was to encourage people to save for retirement and avoid a financial crisis among the aging population. The law made it easier for employees to contribute and for employers to offer plans to workers.
Some of the main tenets of this act include:
● Raising the required minimum distribution (RMD) age from 70 ½ years old to 72, allowing workers to contribute longer into their retirement accounts.
● No more 10% early distribution penalty tax for the withdrawal of $5,000 for the birth or adoption of a child.
● People with 529 plans are able to use up to $10K to pay on student loans.
● Employers are incentivized to offer 401(k) plans to part-time employees. Employers receive tax credits or other tax advantages.
● Allowing small businesses who weren’t previously able to offer retirement plans to collaborate with other small businesses to offer shared 401(k) plans to their employees.
The hopes were that these changes would encourage businesses and employees to take retirement accounts and save for their futures more earnestly.
So, why did the government pass the new SECURE Act 2.0 bill?
SECURE Act 2.0
With the original act just three years old, we may wonder why there was an update called SECURE Act 2.0. The new act is considered a follow-up package to the 2019 version. Additional provisions that were not included previously are now put into play immediately and scheduled for the future.
They designed these changes to affect a larger portion of the population and give people increased flexibility in how to save for and withdraw their retirement savings.
Here are some of the new provisions:
● The required minimum distribution (RMD) age has been raised again. It has increased from 72 years old to 73. In 10 years, 2033, the age increases once more to 75 years old.
● RMD for Roth 401(k) accounts is done away with. It now mirrors the Roth IRA, which has no RMD.
● Automatic enrollment in 401(k) plans starting in 2025 to help increase employee participation in retirement accounts. Instead of employees having to opt in to a plan, now they will be automatically enrolled but can still choose to opt out.
● Higher catch-up contribution limits starting in 2025. The amount will increase to $10K for those 60 to 63 years old.
● Employers can contribute to retirement plans for workers who are attempting to pay off student loan debt. Employees who are saddled with student loans may not contribute regularly to a retirement account, but now their employers can do so on their behalf.
● Extended circumstances for penalty-free early withdrawals from retirement accounts. Those with a diagnosed terminal illness or condition can withdraw from their account penalty-free. Repayment within three years avoids any further penalty.
The SECURE Act 2.0 implements changes starting this year and going forward for the next 10 years. Some of these new provisions may apply to your situation and some may not. It is best to consult with a certified financial planner to see how you can ensure that you make the most of the new changes.
The $1.7 billion SECURE Act 2.0 has changed the retirement landscape. Designed to encourage employers to offer retirement accounts to more employees by tax credits and other incentives, the act also helps workers by making saving and accessing their accounts easier. It’s a good time to figure out how much you need for retirement and come up with a plan to provide for your future self.