How the Secure Act 2.0 Will Affect Working Professionals
With the passage of the Secure Act 2.0, there are certain rules and changes that may affect your financial life. Specifically in this blog, I will talk about those changes and rules that generally will affect early-career or mid-level professionals. I’ll be releasing another one later in the month that goes over the changes individuals closer to retirement will find more applicable. But for now, let’s get into it!
1) Employers can now make a contribution directly to your Roth 401(k)/403(b).
While the regulation is in effect now, it will likely take a few months for your employer to update processes and implement changes to allow you to take advantage of this. Your employer has the option to offer that as part of its plan (they are not required to) and you must choose to elect they do that (won’t happen automatically). Still, a pretty large change that I think is very positive.
Previously if you were contributing to your Roth 401(k), your employer would make matching contributions into a Traditional 401(k) on your behalf - which was confusing to some people. Now that has changed but there is one very important thing to note. If you choose for this to happen, ALL EMPLOYER MATCHING CONTRIBUTIONS WILL BE TAXABLE TO YOU. This is not how Traditional matching contributions are treated, which are tax-free to you (until you pull them out) and tax-deductible to the company - it’s a big change that you need to be aware of if you choose to go down this route.
Let’s look at an example:
If you make $100k and your employer offers a 5% salary deferral match into your 401(k) and you choose to have those contributed into your Roth 401(k) - it will now be as if you’ve made $105,000 for that year. Your tax withholding should still be big enough to cover this additional expense but could result in a lower tax refund for the following year. And in rare cases, depending on how big your employer contributions are, it could potentially cause you to owe taxes out of pocket at the end of the year. However, depending on your current tax bracket and future retirement income goals, this is still an awesome route to explore and a welcome change to the tax code.
2) 529 to Roth IRA transfers are available beginning in 2024, but there are some rules to be aware of.
The 529 must have been maintained for at least 15 years
No contributions made within 5 years of the transfer are eligible
The beneficiary of the 529 is the only one eligible for Roth transfers (beneficiaries of a 529 can be changed once every 12 months with no penalty)
It is capped at the regular contribution limit for the year ($6,500 for 2023, we’ll wait to see if they increase this amount again in 2024)
The contribution limit is offset by any contributions the beneficiary makes to their IRAs from their income. In other words, if you contribute $3k to a Roth IRA for 2024, only $3.5k of 529 assets could be transferred in that year
There is a lifetime maximum transfer of $35,000
This is perfect for a young person who did not use all of their 529 money and has now graduated and started working, you can transfer that money with no penalty or tax into your Roth IRA to get a jumpstart on your retirement funding. This could allow for increased contributions into their 401(k)’s or allow them to start saving more for a house or other goals while still saving some for retirement.
3) Roth SEP & Roth SIMPLE accounts are now available.
If you are a 1099 employee, independent contractor, or small business owner, you can contribute to Roth accounts. Previously these accounts were only offered with Traditional tax-deferred treatment. This is incredible news for those folks. The SEP account also has the highest contribution limit of any tax-advantaged account as well so a really great opportunity for those individuals.
4) Creation of Linked Emergency Savings Accounts.
Linked to your 401(k) plan at work, there can now be a new type of account you can contribute to and your employer can make matching contributions. As long as you are not a “highly-compensated employee” defined as someone who owns more than 5% of the business, received more than $135k in compensation for the prior year, or is in top 20% of compensation at the company. This account has a maximum balance of $2,500, but lower limits may be applied at the company’s discretion. It can only be invested in principle-protected accounts (bonds or money market funds) and can be withdrawn at least once per month with no penalties, taxes, or fees.
So a great way to jumpstart your emergency fund with those matching contributions from your employer.
5) Starting in 2024, employers can now match student loan payments into retirement accounts.
You would pay your student loans, bring confirmation to your employer, and they would contribute money into your 401(k) just as if you were making contributions to your 401(k) and they were matching traditionally. When student loan payments do start again, this will be a big help to some people who won’t be able to contribute to their retirement and pay student loans at the same time.
6) One important thing that did NOT CHANGE: Back Door Roth Contributions
This was widely talked about as something they were going to eliminate in the months leading up to the passage of this bill. These are great for individuals over the income limits that still want to contribute to Roth IRAs. These aren’t going anywhere anytime soon, which is a positive.
There is a lot more included in this bill that I did not write about today. These are the things I thought would apply mostly to early-career or mid-level individuals in the workforce. If you have any questions about things you’ve heard about this bill feel free to reach out - I am very well-versed in all the changes made and will have an answer for you.
Will