3 ways the 'Secure Act 2.0' could change the way Americans save for retirement

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Key Points
  • Experts say that retirement legislation known as "Secure Act 2.0" could pass later this year.
  • The bill's major changes include automatically enrolling workers in retirement plans and allowing firms to match student loan payments in the form of matching plan contributions.

When the House of Representatives recently passed a $1.5 trillion spending bill, one set of provisions was conspicuously missing — to those who follow the rules around retirement savings anyway.

The Securing a Strong Retirement Act of 2021 passed the House Ways and Means Committee in May, but stalled in the House as lawmakers focused on President Joe Biden's Build Back Better proposal. The legislation, colloquially known as Secure Act 2.0, nearly made it into the omnibus bill, but was left on the cutting room floor.

Experts say the bill still may very well pass as part of a different package sometime this year. Ways and Means Committee "Chairman [Richard] Neal and ranking member [Kevin] Brady have pledged to add it to any good legislation it can hitch a ride on," says Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center.

Should some form of the legislation pass, it would come with a raft of changes to rules around saving for retirement. Read on for three prominent provisions experts say would have the biggest impact on retirement savers.

More workers could save for retirement automatically

The legislation includes tax incentives that make it more attractive for smaller businesses to open workplace retirement accounts for their employees. "Essentially, lawmakers are saying, we're not going to require employers to start a retirement plan, but we're going to bribe them if they do," says Josh Gotbaum, a guest scholar at the Brookings Institution.

"On top of that, small businesses would get a tax credit — the government will essentially pay them — to cover initially all and then part of the cost of a matching contribution, up to $1,000 per employee," he says.

Beyond incentivizing businesses to open employee retirement plans, the bill would require them to automatically enroll their employees in plans such as 401(k)s or 403(b)s, unless the employee opts out. Workers' automatic contributions would start between 3% and 10% of their pretax earnings and step up by 1 percentage point per year until they reach 10%.

"I'm a big fan of auto-enrollment because it removes friction," says Jeffrey Levine, chief planning officer at Buckingham Wealth Partners. "There is a sense of paternalism in there, but the evidence is pretty darn impactful that auto-enrollment increases retirement savings."

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Student loan borrowers could get matching contributions

The proposed legislation would allow companies to match an employee's student loan payments in the form of a contribution to that worker's retirement savings plan. The idea here is to provide young people bogged down by high amounts of student debt a way to save for the future.

It's another way for borrowers to access what financial advisors refer to as "free money" while tackling another financial goal.

"I have mixed feelings about it," says Levine. "If that's money you otherwise would have invested for retirement, you could be paying down loans with a 4% interest rate and giving up 7% or 8% you could be earning in your portfolio over time. But it's good to have financial choices. And in fairness, a lot of young people want it."

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You could contribute more to retirement accounts and let the money grow longer

The proposed law would bring good for savers with plenty of cash in their accounts as well as for those who are looking to stash a little extra away as they approach retirement. Currently, if you're 50 or older, you can contribute up to an extra $6,500 for 2022 in the form of "catch-up" contributions to workplace retirement accounts — a number that would expand to $10,000 for workers between ages 62 and 64. That new amount, along with the extra $1,000 savers aged 50 and up can contribute to an IRA, would both be indexed to rise alongside inflation.

Retirees under the new rules would be able to wait longer to begin withdrawing cash. Seniors currently must begin taking required minimum distributions — on which they must pay income tax — from their accounts at age 72. The new bill would raise the age to 73, upping it to 74 beginning in 2029 and 75 starting in 2032.

Changes like these and others largely benefit wealthier taxpayers and do little to alleviate the gap between wealthy and low-income savers, Rosenthal notes. "The big picture here, is that if you have money to save, the Secure Act 2.0 will allow you to contribute even more and delay withdrawals even more," he says.

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