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The SECURE 2.0 Act Should Help Mitigate the Shortfall of Retirement Savings

By , with Annuity FYI

The federal SECURE 2.0 Act provides scores of changes that could help strengthen the retirement system and Americans’ financial readiness for retirement.

Ask people who are not yet seniors what they think about retirement, and you’re likely to hear a dual outlook. Virtually everybody wants to retire comfortably. But many – the majority, no doubt– aren’t counting on it. They fear they won’t have the savings they will need to retire anywhere near on time.

Unfortunately, they are not pessimists. They are realists. 

According to recent U.S. Census Bureau data, 50% of women and 47% of men between the ages of 55 and 66 have no retirement savings whatsoever. It doesn’t help, either, that retirement savings are further undermined by inflation and the rising cost of living. This makes it harder for people to make ends meet, much less save for retirement. 

At this juncture, it’s questionable whether younger generations will be any better off. The full age for Social Security benefits – 66 for many Baby Boomers – has risen to 67 for younger folks. Moreover, the Social Security retirement trust fund is projected to be depleted by 2033. This probably will be avoided, but perhaps not without benefit cuts and perhaps another increase in the Social Security retirement benefit age.

At least there is some good news: The federal government is more aggressively addressing this troublesome scenario. While well short of nirvana, the federal SECURE 2.0 Act, signed into law a few months ago, provides scores of changes that could help strengthen the retirement system and Americans’ financial readiness for retirement. The law builds on earlier legislation that, among other things, increased the age at which retirees must take required minimum distributions (RMDs) from tax-deferred retirement accounts. The new law increases the age even further. 

Some Baby Boomers will not benefit from the SECURE 2.0 Act, but younger ones will, as, too, will all earlier generations, including, of course, their children. The scope of positive changes is widespread, ranging from helping small businesses create retirement plans if they don’t already have them and an effort to help younger people continue saving while paying off outsized student debt.

Here are the most attractive changes in the new law for people in or near retirement, as well as additional improvements for younger people who think about retirement long-term, as they should.

+ Additional easing on RMDs. The age at which owners of retirement accounts must start taking RMDs is 73, effective this year, up from 72 in recent years and 70 1/2 before that. Since the funds are withdrawn from retirement savings, this means seniors have longer to let retirement funds percolate on a tax-deferred basis. Also, the age at which RMDs must start is pushed out to 75, starting in 2033. (Those who turned 72 in 2022 or earlier need to continue taking RMDs as previously scheduled.) 

In addition, the steep penalty for failing to take an RMD when required decreases to 25% of the RMD amount not withdrawn, effective this year, down from 50% previously. And the penalty will be reduced to 10% for IRA owners if the account owner withdraws the RMD amount previously not taken and submits a corrected tax return in a timely manner.

+ Higher catch-up contributions. Starting in 2025, individuals at ages 60 through 63 will be able to make catch-up contributions of up to $10,000 annually in a tax-deferred workplace investment plan, up from $7,500 for people at least age 50.

+ Qualified longevity annuity contracts (QLACs) have gotten a boost, starting this year. QLACs are deferred income annuities purchased with retirement funds typically held in an IRA or 401(k) that delay tax payments to as late as age 85. The dollar limitation for premiums has increased from $145,000 to $200,000.

+ Automatic enrollment in 401(k) and 403(b) plans (for public education organizations and some non-profit employers) among entities that newly adopt these plans. Starting at a contribution rate of at least 3% and escalating at the rate of 1% a year, this starts in 2025. The rationale behind this: Automatic enrollment in these plans has been shown to increase participation. 

+ New efforts to help small businesses encourage employees to save for retirement. One fresh rule increases the credit for the administrative costs of setting up a new small business retirement plan from 50% to as much as 100% in some cases, a nice additional benefit for a small business owner. A “starter” 401(k) has also been created for small businesses that can be set up without putting in their own money. In addition, there is a match of savings of up to $1,000 from the government that will go into an individual’s retirement account, which is required, replacing a credit that comes at tax time. The idea is to move the current tax credit to a retirement account to encourage more people to save for retirement.

+ For younger folks, a break of sorts on onerous student loan debt. Starting in 2024, employers will be able to match employee student loan payments with matching payments to a retirement account, providing workers an extra incentive to save while paying educational loans. Some employers are likely to do this to attract and retain top talent.

Will these developments have a significant impact on retirement savers over time? 

A number of retirement planning specialists believe they will.

In particular, they say, the new rules will benefit a substantial segment of underserved savers. Among other things, substantial tax credits for small businesses will finally make it economically feasible for them to start a company retirement savings plan. As it stands now, according to SCORE, the nation’s largest network of volunteer business mentors, barely more than half of small businesses with up to 24 employees have retirement plans today.

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