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There Are Changes Ahead for Retirement Saving

Like nagging knee pain, inflation and volatility get worse before they get better. When you pay more at the gas pump and at the grocery store, fewer dollars go into your savings or toward your credit card debt, two road blockers to enjoying a secure retirement later on.

In a note to investors, Economist David Rosenberg said, “I refuse to hyperventilate over inflation.” He wasn’t minimizing the effects of inflation – consumer prices jumped 4.2% in April, the biggest jump since 2008 – Rosenberg appears simply confident in his forecast calling for slower growth, inflation peaking out and rolling over, and a bull flattening of the yield curve. “The bond market is sniffing out a slowing economy,” he added.

Meanwhile, despite bitcoin’s erratic leaps and dives, Rosenberg avoided any sugarcoating of his opinion of the cryptocurrency: “I don’t own it. I have never recommended anybody to buy it. It is a speculative trade and I don’t see it as a bonafide investment. “Buy the gold.”

Simpler is Better

Following up on the SECURE Act 2.0 blog, posted in November on this Hefren-Tillotson site, the Act pointing the way to saving for retirement becoming law is closer to becoming a reality. The House Ways and Means Committee unanimously passed the bill and it must move on to the House.

The anticipation and hope is the Act will be showing positive impacts on workers by next year, especially for those private sector workers between the ages of 25 to 64, or 61 percent, who have not had access to employer sponsored retirement plans.

In California, that works out to be 7.4 million workers, according to McClatchy Washington Bureau (TNS). However, change takes time slow, and is usually done in increments.

How it Works

It could not get much better than automatic enrollment for newly created plans, the key feature of the Act, and one that people have talked about having for years. Automatic enrollment would be a requirement.

Most new employers would enroll employees if the 401(k) or 403(b) plans were new. That’s the upside. The downside is the employee could opt out. Not all businesses are eligible either.

Those with 10 or fewer employees, those in business for less than three years, and church and governmental plans. However, employees would automatically contribute at least 3 percent of their income in the first year.

The second major provision is tax incentives to small businesses starting retirement plans for employees from 50 percent to 100 percent of administrative costs up to $5,000.

Eligibility begins with up to 50 employees. Small employers receive a credit that makes contributions on behalf of employees to a retirement plan.

Employers cannot offer incentives to people who contribute to a retirement plan. However, the bill would allow small incentives, like gift cards.

From Accumulation to Distribution

For older workers, taking required minimum distributions in the year they turn 72 moves from age 72 to age 73 in 2022, then to age 74 in 2029 and age 75 in 2032. The new policy clearly benefits wealthier retirees in this regard. 

Included in the SECURE Act 2.0 is a catch-up savings provision for those aged 62 through 64 to $10,000.

All of these provisions are important. When someone turns 50, they can increase their IRA contributions each year by $1,000. They would be allowed an inflationary increase to their contribution starting in 2023. The current annual limit for people over 50 is $6,500. The bill would increase it to $10,000 annually, inflation adjusted, for most people ages 62, 63 and 64.

Part-time workers finally get a break too. If their companies currently offer a 401(k), they permit employees working at least 500 hours a year for three consecutive years to participate in the plan. The SECURE Act 2.0 would lower the requirement to two years.    

Student Loan Debt and More

Student loan debt is huge in America today. And that $1.71 trillion in total U.S. student debt is clearly not going away anytime soon. The new SECURE Act 2.0 allows sponsors to give a match to employees paying off student loans (44.7 million Americans) just as if they were saving in a 401(k). So, instead of going directly into a retirement account, similar to an employer match does today, the match would go toward paying down the debt.

Plan sponsors will be given grace period to correct “reasonable” errors made with automatic enrollment and escalation in multiple employer plans. Any errors must be corrected within 9.5 months of the year in which they are made.

And finally, people would be required to get annual paper statements showing the status of their retirement benefits. This suits AARP just fine. They have supported this idea for a while now. The benefit allows people to more easily understand and manage their different plan options and track the amount of their benefits.

If you have questions or concerns about the SECURE Act 2.0, or anything else, we would be glad to help. Contact us today at Hefren-Tillotson for more information. 

DISCLAIMER: Past performance does not predict future results. This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.

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