6 Ways SECURE 2.0 Boosts Retirement Security
Al Waller: In late December, as many people were taking time off to celebrate the holidays, the President and Congress passed new legislation. The SECURE 2.0 Act of 2022 gets its name from Setting Every Community Up for Retirement Enhancement. It’s aptly named 2.0 because it’s a follow up to the SECURE Act of 2019. It has dozens of new provisions aimed at improving retirement security among U.S. workers.
Welcome back to ClearPath – Your Roadmap to Health & Wealth SM. I’m your host, Al Waller. Joining me is Catherine Collinson, founding CEO and president of nonprofit Transamerica Institute® and its Transamerica Center for Retirement Studies to discuss the new legislation.
Before we get started – a reminder that we would love to hear from you and learn what topics you would like us to cover or give us feedback on this episode. Please drop me or Catherine a note at [email protected].
Catherine, how will Americans benefit from the new legislation?
Catherine Collinson: SECURE 2.0 is comprehensive and addresses many of the pressing issues and opportunities within our current retirement system, ranging from expanding retirement plan coverage to increasing ways people can grow and protect their retirement savings.
Al, I’d like to share with you and our listeners six beneficial ways the new law enhances retirement security as illustrated by our research findings at Transamerica Institute and Transamerica Center for Retirement Studies.
Al Waller: Sounds like an excellent plan. Let’s jump right in with the first way ….
Catherine Collinson: On this podcast, we’ve often discussed the importance of workplace retirement benefits and that many workers do not yet have access to such plans. Over the years, our research has consistently found that smaller employers are less likely to offer retirement benefits compared with larger employers. For example, our most recent survey of employers found that only 46 percent of employers with fewer than 100 employees offer a 401(k) or similar plan, compared with approximately nine in 10 employers with more than 100 employees.
SECURE 2.0 will help expand retirement plan coverage in a couple of meaningful ways, so that more workers are offered plans.
First, it makes it easier and more affordable for small businesses to adopt a qualified retirement plan, whether a stand-alone 401(k) or similar plan, or by joining a multiple employer plan (MEP) or pooled employer plan (PEP). Starting this year, in 2023, there are increased tax credits available to small businesses that adopt a new plan. So, hopefully, the new law will prompt more small businesses to offer benefits to their employees.
The other way the new law helps expand retirement plan coverage is by implementing more stringent requirements for employers to extend plan eligibility to their long-term part-time employees. Over the years, our research has found many employers offer retirement benefits to their full-time employees, but they do not extend eligibility to part-time employees. So, these new requirements will also help expand coverage so that more part time employees have access. The law’s new requirements will go into effect in 2025.
Al Waller: Catherine, this is excellent news!! Now, let’s move onto other ways the new law enhances retirement security.
Catherine Collinson: The second way SECURE 2.0 promotes retirement security is by helping mitigate the impacts of financial emergencies on workers’ retirement savings.
Many workers lack adequate emergency savings. Our most recent survey of workers found they have saved just $5,000 (median) to cover the cost of an unexpected major financial setback, and 14 percent of workers have no emergency savings. Moreover, more than one in four workers (26 percent) have taken an early withdrawal and/or hardship withdrawal from a retirement account, often the result of an emergency. While tapping into their retirement accounts may be their best or only alternative, it could severely inhibit the long-term growth of savings that they will need when they retire.
Beginning in 2024, SECURE 2.0 helps address this issue by creating an emergency savings account as a new plan feature for defined contribution retirement plans, including 401(k) plans, to help mitigate the need for workers to tap into their retirement savings.
Additionally, under the new law, withdrawals from retirement accounts that are considered emergency withdrawals will not be subject to a 10 percent early distribution penalty that is generally applicable to those under the age of 59½.
I want to point out, Al, this new exception for emergency withdrawals no longer being subject to the 10% early distribution penalty is huge. This is important and can help workers who have come across hard times navigate a little better without being saddled with the 10% penalty – if they need to take an early withdrawal or hardship withdrawal.
Al Waller: Both of these emergency savings provisions sound very helpful. I’m especially happy to hear about the relief from the 10 percent early withdrawal penalty. If someone is facing dire circumstances and having to resort to this type of withdrawal in the first place, that 10% hit or penalty always seemed like the government was rubbing salt in the wound. So, good for them amending it.
Catherine, moving onto the next way the new law enhances retirement security, I understand that it brings good news for retirement savers of all ages.
Catherine Collinson: Indeed, it does. Looking across generations and age ranges, there are provisions helpful for people during different life phases.
Specifically, the third way SECURE 2.0 enhances retirement security is a provision that can be especially helpful for Generation Z and Millennials. Younger generations are graduating from college with student debt, which competes with their ability to save for retirement, and during a time in life when they can potentially leverage the growth and compounding of investments over a very long-time horizon – until they retire. According to our most recent survey of workers, more than one in five Generation Z workers (22 percent) between ages 18 to 24 and 17 percent of Millennial workers cite paying off student loans as a current financial priority.
Beginning in 2024, SECURE 2.0 enables employers to make matching contributions to 401(k) or similar plans with respect to employees’ student loan payments. So, if workers cannot afford to save for retirement while they are repaying student debt, they can still receive a matching contribution from their employer into their retirement plan account.
This is especially helpful because it helps them start saving and helps them start saving over the long haul, even while they're paying off their student debt.
Al Waller: Wow – that sounds extremely helpful for younger employees and everyone who is paying off student loans. It’s a best of both worlds solution that can help them save for retirement while repaying their debt.
Looking across the age spectrum, let’s move on. How does the new law help older workers?
Catherine Collinson: The fourth way SECURE 2.0 enhances retirement security is by expanding catch-up contributions, which could be especially helpful for Generation X and Baby Boomer workers, the older generations who are nearing retirement.
As we’ve discussed the retirement outlook of four generations of workers on this podcast, many are inadequately saving and, as they grow older, they need to substantially increase their savings before they retire. Our most recent survey of workers found that Baby Boomer workers have saved $162,000 in total household retirement accounts, and Generation X workers have saved just $87,000 (estimated medians).
Beginning in 2024, SECURE 2.0 enables age 50-plus workers to increase their catch-up contributions to a retirement plan account or IRA, allowing them to save more as they get closer to retirement. However, the new law also includes rules requiring higher-income earners who make catch-up contributions to do so on a Roth or after-tax basis.
Beginning in 2025, SECURE 2.0 enables workers aged 60 to 63 to save even more through catch-up contributions.
Al Waller: That’s terrific news that age 50-plus workers have will now have the opportunity to save even more for retirement on a tax-advantaged bases. Catherine, I’ve also heard there’s another provision of the new law that can be especially helpful for older workers and retirees.
Catherine Collinson: Yes, indeed, there is. The fifth way that SECURE 2.0 enhances retirement security is acknowledging longevity and addressing a longstanding issue with required minimum distributions (RMDs). This provision of the new law is somewhat esoteric, so I’ll start by offering some context.
People have the potential to live longer than ever before, and today’s workers envision working beyond the traditional retirement age. Almost four in 10 workers (39 percent) expect to retire at age 70 or older or do not plan to retire. Many expect to do so because they want or need the income and some fear they will run out of savings when they retire.
Under the previous law, with some exceptions, the IRS generally required individuals to begin taking withdrawals or a required minimum distribution – or RMD – annually from their retirement accounts at age 72. The failure to do so came with a steep penalty of a 50 percent excise tax on the RMD amount.
Thankfully, SECURE 2.0 increased the RMD age from 72 in 2022 to 73 in 2023 and up to 75 in 2033, thereby giving workers more time to grow their savings. The new law also reduces the excise tax for failing to take an RMD from 50 to 25 percent, and if the RMD is corrected in a timely manner, the excise tax is further reduced to 10 percent.
Al Waller: That is welcome news!! I’ve known many retired colleagues who were caught off guard by RMDs when they entered their 70s, because they had not factored them in their financial plans, or they missed them because they were unaware of the requirement. For all our listeners, it’s important to understand RMDs and their tax and other financial implications.
Catherine, you’ve promised our listeners six ways the new law enhances retirement security. What is the sixth and final way that you’d like to discuss?
Catherine Collinson: Al, I’m positively thrilled to share that SECURE 2.0 has a provision focused on low- to moderate-income retirement savers.
On this podcast, we recently aired an episode dedicated to explaining the Saver’s Credit for the 2022 tax filing season. As a memory refresher, the Saver’s Credit is a tax credit for low- to moderate-income workers saving for retirement in a 401(k) or similar plan or IRA. However, its success has been limited by its being nonrefundable and due to a widespread lack of awareness.
Beginning in 2027, SECURE 2.0 reimagines and replaces the Saver’s Credit with the Saver’s Match, which is a matching contribution from the government for retirement savers meeting income eligibility requirements. The Saver’s Match will be a 50 percent match of a worker’s contributions to a retirement plan or IRA up to $2,000, representing a maximum match amount of $1,000. Unlike the Saver’s Credit, the retirement saver does not need to have a tax liability to benefit from the Saver’s Match. And the new law also calls for the promotion of the Saver’s Match so that workers who are eligible are aware of it —which is excellent news, too.
Listeners, as a reminder, the Saver’s Credit is still available for tax years 2022 through 2026. In 2027, it will be replaced with the Saver’s Match.
Al Waller: Thank you for your insights about the new law. This has been super helpful. Catherine, where can listeners learn more?
Catherine Collinson: Please visit our website at www.transamericainstitute.org and follow us on LinkedIn and on Twitter @TI_insights and @TCRStudies. And, of course, we’ll be talking more about the new law in future episodes of this podcast.
Al Waller: Thanks, Catherine, it’s been wonderful catching up with you today.
For our listeners, if you have ideas for future episodes, comments, or feedback, please email me or Catherine at [email protected]. Don’t forget to subscribe to our podcast so you don’t miss upcoming episodes.
Until the next time, I’m your host Al Waller. Stay safe, be well and thanks for listening.
ClearPath – Your Roadmap to Health & Wealth is brought to you by Transamerica Institute, a nonprofit private foundation dedicated to identifying, researching, and educating the public about health and wellness, employment, financial literacy, longevity, and retirement. You can find our weekly podcast on WYPR’s website and mobile app, wherever you get your podcasts, and at transamericainstitute.org/podcast.
ClearPath – Your Roadmap to Health & Wealth is produced by the Transamerica Institute with assistance from WYPR.
The information provided here is for educational purposes only and should not be construed as insurance, securities, ERISA, tax, investment, legal, medical, or financial advice or guidance.
