The Initial Prospero Take on Secure 2.0

Secure 2.0 is part of the omnibus appropriations bill that made it through the Senate and House last week. It's going to Biden for signature and looks to be going through.

TL;DR

If you blur your eyes and just look for what these policies are trying to do, they boil down to:

• The automation of better savings behavior for employees and ensuring that plan limits do not become too much of a constraint going forward

• Removing planning complexity - Roth contributions will be treated similarly regardless of account type; overfunded 529s can be converted to Roths, etc.

• Making it easier to get started for low income individuals or those saddled with student debt.

  
  

So what's in this thing?

The Headline News (In Our Opinion)

• Automatic 401(k) enrollment. Employers (with more than 10 employees and who have been around more than 3 years) will be required to automatically enroll employees in the company 401(k) at no less than 3% and no more than 10% of the employee income.

  • The Prospero Take: This is a very good thing. The research in this area is pretty conclusive (check out the 2021 data from Vanguard if you want the data). Turns out if you make retirement savings an "opt-out" activity rather than an "opt-in" activity, more people save for retirement and outcomes improve.

    
    

• No more Roth Account Required Minimum Distributions (RMD) after 2024. Hip hip hooray!

  • The Prospero Take: A very good thing. As an advisor, this is very welcome. It was always weird that the withdrawal of Roth Account contributions (in a qualified plan, like a 401(k)) were different than distributions from a Roth IRA. For our clients, this just means less complexity to manage when weighing tradeoffs at job transitions, etc.

  
  

• Creating larger "catch-up" contributions for older savers.  Today, if you are over 50 years old,  you are allowed to put an extra $6,500 into your 401(k). That number goes to $7,500 in 2023. Secure 2.0 adds an additional tier (for those aged 60 to 63) where you can contribute up to $10K in catchup contributions starting in 2025 and indexed annually to inflation from thereon. In addition to this, all catch-up contributions will be subject to Roth treatment (i.e. not pre-tax) except for workers making less than $145k.

  • The Prospero Take: Awesome-sauce. A non-debatable mechanism for indexing these contributions to inflation and more latitude for employees to make up for lost time.

  
  

• Broadening usability of unused college savings. This would allow for tax and penalty-free rollovers of unused savings from 529 plans to Roth IRAs when those 529 plans are more than 15 years old (lifetime limit of $35k and only in the name of the beneficiary of the 529).

  • The Prospero Take: This is great. We'll take it. Today, we constantly have to caution savers about over-funding a 529. This will add some flexibility. The 15 year requirement is a little wild. Why not 5 or 10? 15 is harsh. Basically, if you start saving for your child's education too late, it seems punitive to disallow this.

Nice and necessary

• Raising the age for Required Minimum Distributions (RMD). RMDs are how the  government starts to reap the benefits of the tax deferral it has given you during your working years. This proposal will raise the age for RMD from tax-deferred from 72 to 73 in 2023, and then to 75 in 2033.

  • The Prospero Take: This is a minor but good thing. This will give employees more possible time to grow their tax-advantaged savings prior to the government getting their taxes back. Acknowledging the reality that many of the us are living longer and are "on our own" with regards to retirement savings, this helps.

• Raising the amount of that be put in a qualified longevity annuity contract (QLAC). A QLAC supplies income in your later years and has attributes that can reduce RMD, when guidelines are followed. The limits on these are currently $135k or 25% the value of your retirement accounts, whichever is less. Secure 2.0 nukes the 25% number and raises the limit to $200k.

  • The Prospero Take: A very cool thing. People glaze over when you use the word annuity. Look at you. You're probably asleep already. The truth though, is that QLACs can be super valuable to lower and middle classes as a way of preserving income into later life. The only befuddling thing is why the $200k isn't something higher. Oh well.

  
  

• Increasing employer 401(k) matching options. Employers in certain scenarios will be able to contribute on behalf of employees who may be paying for student debt rather than retirement.

  • The Prospero Take: A minor good. We still have the runaway costs of higher education to tame and the predatory lending from cutthroat actors, but I guess this helps around the edges?

Interesting ephemera (but meh)?

• Improved access to emergency savings.  There's a couple things in there. One would allow employees to auto-deduct from payroll and fund an emergency savings account up to $2,500. Another would allow employees to withdraw $1,000 without a 10% early-withdrawal penalty (for people under 59 1/2).

  • The Prospero Take: Meh. Not harmful and will help people just getting started but probably doesn't go far enough to allow for real emergencies.

    
    

• The guv'ment will match contributions for lower-income savers. A current tax credit for low and moderate income employees will become a small matching contribution from big brother.

  • The Prospero Take: Meh. This shifts around the assistance but isn't really doing anything net new.

  
  

• Military spouses get accelerated access to retirement plans. Tax credits for small businesses that let military spouses enroll right away in a retirement plan and qualify for immediate vesting of employer matches.

  • The Prospero Take: Tough to argue with incentives for the families of our service workers but this will not impact a single one of our clients and seems weirdly anachronistic in implementation. Why not broaden this benefit to first responders, nurses, etc.?

  
  

So, uh, yeah, that's a lot of stuff, mostly unmitigatedly positive improvements. I like this. We could go further. Be bolder. Upset some apple carts. Leave less people behind. But if incrementalism is what's offered, I will take it over atrophy.

As always, we're hear to help you maximize your unique scenarios. Reach out if you'd like to chat.