How New Legislation Affects Your Retirement

The US government recent passed new legislation, Secure 2.0, that will affect your retirement.

While there were many changes that will affect many people, below are some of the main ones.

RMDs Moved to Age 73

Required Minimum Distributions (RMDs) are a predetermined amount of money individuals have to take out of their retirement accounts each year.

Secure 2.0 extended the age of these distributions from age 72 to age 73.

RMDs are determined on a percentage basis. This means that regardless of whether you have $10k or $1M in retirement assets you have to take out the same percentage of your portfolio.

The first year RMD typically hovered around 3-4% of the portfolio. If you failed to take your RMD you paid a penalty of 50% of the amount you needed to take. That penalty has since been reduced to 25% with the new bill.

This is a win for retired investors. Delaying RMDs allows your money to grow before you are forced to take it. You can still access the accounts penalty free at 59.5.

This is really important given where the market is. Having to pull money out in a down year compounds sequence of returns risk and depletes retirement savings more quickly.

By delaying RMDs another year that risk lessens and can help investors withdraw later at a more favorable time.

Catch Up Contributions

Catch up contributions allow investors 50 and over to make extra payments to their retirement accounts.

Investors ages 60-63 can put in even more. On top of the $6500 investors over 50 can put in, those between 60-63 can put in up to an additional $10k.

While this does not seem like a lot if that money stays invested until RMDs at age 73 that 30k could be worth another $75k or more.

Student Loan Match

It is no secret that millennials and those generations coming after have been disproportionately affected by student loan debt.

In fact, student loan debt is one of the main reasons these individuals do not save for retirement. It also is making them push back purchasing a home and having children.

Secure 2.0 says that as long as an employee is contributing to a retirement plan, they can redirect employer contributions to their student loans.

This does two things.

• Incentivizes retirement savings
• Relieves some student loan payment burden

In my opinion this is the best part of this bill. Incentivizing young people to save for retirement is huge because they have so much time on their side.

Secondly, taking some of the burden off of them for what is likely their biggest expense also helps them now make ends meet.

This is a huge win for young investors and will help many retire more comfortably.

Roth Matching

The final change we will talk about is employer Roth Matching.

Previously if you had a Roth retirement account at work, your employers matching contributions were still traditional contributions.

Now employers can make Roth contributions which allow for even more tax-free income in retirement.

This also helps sidestep the RMD rule at age 73 because Roths do not have that requirement.

This also will help with rollovers in the future as employers won’t cut a single check with both pre and post-tax amounts that advisors have to split when depositing.

This will result in less deposit errors and fewer surprise tax bills down the line.

Wrapping It Up

The Secure 2.0 act was a big win for investors. It addressed many shortcomings in current retirement plans faced by investors.

As the rules evolve what I would like to see in future iterations is employer provided financial planning and better rules on inherited Roth RMDs.

These rules will likely change again in the next few years, but this was a great start.

What do you want to see changed in the next retirement plan bill?