Secure Act 2.0 - Big Changes Coming to Retirement Plans

Hey, what's up everyone and welcome to the School of Personal Finance. In this video, we're going to talk about the big changes coming to retirement plans. Now, if you remember back in the year 2000, the Secure Act was passed and this had some big changes for retirement savers. Now, Secure Act 2.0 has just passed the house by a very wide margin. There is a lot of support for this moving forward. So in this video, I'm going to talk about the seven most important takeaways from Secure Act 2.0. All right, let's get to it. All right, so real quick, head over to schoolofpersonalfinance.com. Come join my education center. Start going through the courses, looking at the case studies. All of it has been designed to help you become great with money. Start with the first course, Master Your Family's Finances in 30 Days. I walk you through 10 steps to get you on solid footing, to get your financial house in order so that you can then go ahead and move forward. Then we have the Credit Card Master Class. I'm working on doing a Getting Started in Investing in Real Estate course right now. So go check it out. All right, so Secure Act 2.0, now this is just in addition to or adding on to the initial Secure Act, which was passed back in 2019 and came into effect in 2020. So now Secure, that stands for Setting Every Community Up for Retirement Enhancement. So all of this is built around helping you save more for retirement. So I'm going to go through the seven biggest takeaways that you should be aware of to help you prepare for when this does become law. And now it could change from now to the point where it does become law because it's passed the house. It does have to get through the Senate and then be signed by the President. So here are my seven takeaways. Let's get started. All right, number one, and this is probably my favorite, is an employer match when making your student loan repayments. So a lot of times people have student loans where they have to prioritize and pay down their student loans instead of contributing to their 401k because they just don't have enough money to spread all around. So now when you make your student loan payments, your employers can now give you a match into your 401k so that you're not giving up that free money by having to make those student loan payments instead. And while we're on the topic of student loans, Biden did just announce that they are now extending the pause on student loan repayments through August 31st. It was set to expire on May 1st and now they are extending it once again. And they have threatened a couple of times to stop extending it, but they keep extending it. So we'll have to keep our eye on this and see what happens. There's been talk that he's going to keep extending it until they make a decision around student loan forgiveness and maybe forgiving up to $10,000 per borrower. Some Democrats are pushing for up to $50,000 per borrower in student loan forgiveness. So it'll be interesting to see what happens with that. All right, and then the second thing is auto enrollment in retirement savings plans. So now this would only affect new plans going forward. So for existing 401k or 403b plans, they would be exempt from this. But going forward, new plans, employees would automatically be enrolled in the retirement savings plan for 3% of their salary. And then there would be a 1% increase each year until they reach 10%. Now I do think that this is a good thing because it should default to people saving in retirement plans rather than default to them not savings in retirement plans. And to automatically increase it 1% a year, I also think that that is a great thing. Hopefully you're getting raises, you might as well put 1% more into your retirement account. In reality, people need to be saving a lot more than only 3%. So getting people into the game, automatically enrolling them, I do think that it's a good thing. But again, it does depend on the plan. If you have a very crappy 401k plan with high expenses and not good investment options, then I wouldn't want to be forced into enrolling in that. And with these forced enrollments, you could always change it or you could opt out. You could reduce the amount, you could increase the amount. So you're not stuck to that auto-enrollment. You do have some control over it. But by default, they are going to auto-enroll you. Now considering most plans are already in existence, this is only going to affect future plans going forward. All right, and then the third thing is increased catch-up contributions for individuals ages 62, 63, and 64. So what does that mean? So when you are age 50 or older, you are currently able to contribute an additional $6,500 into your 401k or your 403b plan. So the annual limit is $20,500. Then when you're age 50 or older, you could contribute another $6,500, so a total of $27,000. Now with this, if you're ages 62, 63, or 64, they're going to allow you to have this catch-up contribution of up to $10,000. So an increase from $6,500 up to $10,000. One trick with this that's in this legislation is that all catch-up contributions are going to have to be Roth contributions. So this is actually a revenue raiser in this legislation for them to actually pay for it. So now catch-up contributions, they will have to go into the Roth portion. So if you're making traditional 401k contributions, getting a tax deduction, you could still do that up to your annual limit of currently $20,500, but any catch-up contributions would have to go into the Roth portion of your 401k. So you'd have to pay taxes now, put it into the Roth portion, and then that money would grow tax-free forever. So this, in theory, I mean, it sounds great. It's great that you could save more in your retirement accounts. The downside is at these ages, you might be in your highest earning years, and now you have to do it into the Roth portion where you're paying taxes on that money. You're not getting the deduction on that catch-up contribution, but still overall, it's nice that you could contribute up to $10,000 extra, play catch-up the years right before you're going to be retiring. All right, and then number four is another big one where they're going to be raising the age of your RMDs or your required minimum distributions. Now in the original SECURE Act, they raised the age from age 70 and a half up until age 72. Now if you don't know what RMD means or required minimum distribution, basically what it means is that when you turn that age, the government requires you to start taking distributions, to start taking money out of your retirement accounts, out of your traditional 401Ks or IRAs or 403Bs because they want that tax revenue. So they want to force you to start taking money out. Now a lot of people take money out anyway because they need it to live on, but if you're in the nice position where you don't need to take money out to live on, then it's annoying to have these required minimum distributions because now you're forced to take a percentage of your portfolio out and you have to pay income taxes on that. So by them increasing the age, it is definitely beneficial because you are then able to let that money continue to compound and grow because we're all living longer now and maybe we're even starting to retire later, hopefully earlier, but for most people retiring later and we want that money to continue to be able to grow. It also does offer some unique planning opportunities where if you could continue to defer that money, maybe it opens the door to doing Roth conversions during those years. When you're retired, your income might be low and you're not forced to take these required minimum distributions. So as of right now, it's age 72. If this is passed, then in 2023, the age is going to go to 73. Then in 2030, the age is going to go to 74 for required minimum distributions. And then in the year 2033, the age is going to go to 75. So 75 years old will be the new required minimum distribution starting age in the year 2033. So overall, it's a good thing. All right, so now number five is another one that I'm a big fan of, and that is that they are going to start allowing your company match to go into a Roth account. So the way that it is now, even if you contribute to your Roth 401k, your employer match, that goes into the traditional 401k. So now they're going to allow you to choose to have your match go into the Roth 401k. So what will this do? It's going to increase your taxable income because those Roth matching contributions, they will be taxable to you. So even though you're not going to be getting that money, it will increase your wages that you will have to pay taxes on. It will increase your W-2 income. So it's the same as if you decide to contribute to a Roth 401k, you don't get that income. That money goes into your Roth 401k, but you are taxed on it. There is no tax deduction upfront. So this will allow you to do that for the matches as well. So I do love that. And it just gives you more flexibility and more control and more options. So if you contribute to your Roth 401k, if that's the right decision for you based on your tax brackets and your circumstances and everything, you will now be able to take that match and put that into the Roth 401k as well. So I am a big fan of that. And you've heard me talk before about tax diversification. I love the idea of having money in traditional 401k and IRAs, having money in Roth 401k and Roth IRAs, and then having money in taxable brokerage accounts as well. Going into retirement with money in all three of those buckets and being able to control your tax brackets in retirement, I think is a great strategy. And depending on your income throughout your working years, there's strategy as if you should contribute to your Roth versus your traditional versus putting money in a taxable brokerage account. So all of it comes down to your specific situation and your tax brackets. But I love the idea of having maximum flexibility and options. And this is definitely a step in that right direction. All right. And then number six, which is a quick but a good one. And that is employers are now going to be allowed to offer a financial incentive to get employees to enroll in the 401k plan. So maybe it's just going to be a small gift card or something. But in the past, they were not allowed to do this and now they are. So anybody, you know, everybody likes a nice little incentive to go ahead, a little sign up bonus to get involved in the retirement plan. And then number seven, which I thought was pretty cool, is they're going to create a database of all retirement plans. Now this will actually come in very handy. You don't know how many times I have talked to people and they say, I have this old retirement account at this old employer that I haven't spoken to anybody there in 10 years. And they've gone through a couple of mergers and I have no idea what even the name of the company is anymore or how to track down this money. It happens more often than you would think. So by having this database and being able to, you know, play detective and put the pieces together to figure out where your old 401k is sitting, I think that'll be very beneficial for people. But overall, I think that there's a lot of good stuff in here. Anything that they could do to incentivize people, help people save for retirement, give them more options, more flexibility. I think all of that is good stuff. All right. Well, that's it for this one. 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