Among its many changes to retirement planning, the SECURE 2.0 Act can help people begin saving earlier in life.
American workers in the early to middle stages of saving for their retirement will get added support from key provisions of the SECURE 2.0 Act. Among its 90-plus rule changes, this new law offers more options for employees and employers to contribute to retirement accounts.
Ratified at the end of 2022 as an update to the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, SECURE 2.0 reshapes many aspects of retirement planning and related tax considerations over the next three years. In this post, we’ll explore several features of the law that are designed to help people begin planning for retirement earlier in life and more easily cover short-term expenses without draining their long-term savings accounts.
Beginning in 2025, most employer-sponsored retirement plans will be required to automatically enroll eligible employees. SECURE 2.0 sets the employee minimum contribution rate at 3% of income, with automatic annual savings rate increases of 1%, until an employee reaches at least 10% but not more than 15% of their income. Employees can also choose to opt out of an employer-sponsored plan.
Effective this year, employers are allowed to make matching and non-elective contributions to an employee’s Roth retirement account. Previously, employer contributions could only be made to pre-tax accounts such as a 401(k) or an individual retirement account (IRA).
With a Roth account, contributions are subject to income tax but all distributions in retirement are tax-free for the original account owner. This means that if an employee elects Roth treatment for an employer contribution, they’ll have to report it as taxable income. All future growth will be tax-free, however, as long as the standard conditions for a Roth account are met.
Beginning in 2024, employers are formally permitted to make matching contributions to employee retirement accounts based on the amount of an employee’s student payments. While the IRS historically has allowed this practice, no statutory rule specifically authorized it prior to passage of SECURE 2.0.
For example: If an employer-sponsored retirement plan includes a 5% matching contribution and an employee’s student loan payments total $10,000 during a plan year, the employer can add $500 to the employee’s retirement account. This is in addition to matching other amounts that the employee may contribute to their employer-sponsored retirement plan.
Beginning in 2024, non-highly compensated employees—currently defined as those earning less than $150,000 annually—will be able to contribute up to $2,500 per year (or a lower amount determined by their employer in a dedicated emergency-savings Roth account that’s added to the employee’s retirement plan account. In a year, the first four withdrawals from this emergency savings account would not be subject to fees or charges based solely on making the withdrawal.
Employers may automatically opt employees into the emergency savings account at no more than 3% of their salary. Once the annual cap is reached, additional contributions can be directed to the employee’s Roth-defined contribution plan or stopped until the balance attributable to contributions falls below the cap. Contributions are treated as elective deferrals for purposes of retirement matching contributions. Upon leaving their employer, the employee may take unused emergency savings as cash or roll it into a Roth-defined contribution plan or IRA.
We encourage you to work closely with a trusted financial advisor in evaluating how SECURE 2.0 may influence your overall wealth management strategy. Visit our SECURE 2.0 Act resources page to learn more. You can replay webinars highlighting various benefits of the new law, read additional commentary by Mercer Advisors senior wealth managers, and keep up with the latest news about this important legislation.
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