Tricia Bailey is back this week to talk about the changes in the SECURE 2.0 Act passed by Congress, and how they will affect you, including incentivizing retirement savings.
Business owners can get tax credits for instituting retirement plans for their employees. Not only will this allow them to save money, but they can offer a benefit to be more attractive to potential employees.
Also, when it comes to enrolling in a retirement plan, employees will have to opt out of the plan instead of opting in. This can reduce the overwhelm when HR drops a giant benefits package on your desk. Studies show that 88% of employees auto-enrolled stay enrolled!
Too many Americans are living paycheck to paycheck and aren't able to save for retirement. SECURE 2.0 will allow for penalty-free withdrawals from retirement accounts in an emergency, and it will also incentivize employees to have an emergency savings fund, with retirement plan benefits. Tricia explains.
There will soon be a student loan 401k match, allowing employers to match student loan payments in retirement accounts for employees, according to their existing plan rules.
Part-time workers will be able to contribute to a retirement plan, and if you employ a domestic employee, such as a nanny, or home health care aide, you can create a SEP for them.
One of Paula's favorite aspects of SECURE 2.0 is the ability to convert unused money from a 529 education savings plan to a Roth IRA. Not everyone uses that money for college or a trade school - this will allow them to convert that money into a post-tax retirement plan.
If you have additional questions, you can reach Tricia Bailey at 248-520-6372 or tricia.bailey@futureplan.com
Email Paula Christine at Paula@PaulaChristine.com. You can also learn more online at www.PaulaChristine.com.
Paula: Hi, and welcome to Beyond the Paycheck. I'm Paula Christine. So last week we talked with Tricia Bailey on some of the, what did we talk about? We, oh my God. Oh my God. It's Friday. Okay last week we talked about retirement savings plans for self-employed people. So today we're gonna talk about, there's been a lot of changes that have been happening in the 401k arena and the retirement savings when it comes to the SECURE 2.0 Act, which is potentially gonna reshape tax incentives for people for years to come. So we're gonna talk about the highlights. We're not gonna get deep into the details, so welcome back Tricia Bailey from Future Plan. How are you Tricia?
Tricia: I'm good. Thank you for having me back. I appreciate you both.
Paula: No, we appreciate you. You have all the knowledge. What's the biggest change that you see that's gonna be advantageous for the employee as well as the employer?
Tricia: Oh boy. There are 92 provisions, so I am glad that we're not talking about each and every one cuz there are so many.
Paula: Me too.
Tricia: But I think the additional credits that business owners can get for instituting a plan. So if they've never had a plan before, or if they're in a current MET product, say with one of those group products, right? Multiple employers being in the same plan. These additional credits, they used to be only about 50%, up to $5,000.
Now, if you have 20 employees, you can get up to 100% of up to $5,000 for the first three years of starting a plan. That's a huge one, right? It's taking some of the barriers out of the way for small businesses to add a retirement plan, and historically speaking for retirement plans to work, you really need to incentivize the workers with some type of a match or some type of employer contribution.
So there's also, and this is new with SECURE 2.0, employers could, get this, a thousand dollars credit and they're giving it to their employees in the form of a match or in form of a nonelective contribution. It is only for those that make less than a hundred thousand dollars and you can only get up to a thousand dollars credit.
But that's a significant savings for the business owner and helpful and incentivizes the employees to save.
Paula: And just on a caveat here, If you're not saving in your 401K and your employer does offer a match, you're basically giving up free money. So you wanna make sure you get enrolled right away and at least do up to the employer's match.
Tricia: I couldn't agree with you more. Nobody would leave a $20 bill on the sidewalk. I say that so often, but people leave $20 bills on the sidewalk all the time if they're not saving up to their employer match.
Paula: It's crazy. Yes. Okay. So I know that there was automatic enrollment, but I know that there's some changes that are happening to that also.
Tricia: Yeah, so with automatic enrollment, so if you decide, okay, now is the year that I start a retirement plan for my employees and I have at least 10 employees in my plan, I'm gonna have to provide automatic enrollment by the year 2025. So I might as well, if I'm starting the plan now, I might as well just set it up the right way so it's not confusing in two years.
But automatic enrollment doesn't mean everybody has to get into the plan. It just makes it easier for employees to actually get enrolled, get set up, and start saving money out of their check. They do have to save at least 3%, unless of course the participant opts out. If they say, I don't wanna save, or I don't wanna do this right now, but the plan design has to show that you're saving at least 3% of your pay.
And you're increasing at 1% a year. That will help build retirement savings for those folks that don't necessarily get involved or were confused about the process. Because it used to be these record keepers, they're great, but they would send out these enrollment kits, these enrollment packages that are like, 200 pages and nobody reads all that information, nobody even understands that information.
So now they're saying, okay, let's automatically put you into the plan at 3% of your pay, and we're gonna put you in a target date fund unless you tell us not to. But every plan that's new with 10 or more employees has to do that by at least the year 2025, that started their plan in 2023.
Paula: That's great. I think a lot of people get stuck. When they do get that 200 page document that's killing a bunch of trees. But anyway, thought stuff cuz our industry is so much into printing everything, but I just got on my soapbox.
Tricia: It's true though,
Jon: Trisha. I think the key takeaway here is that employees have to opt out now as opposed to opting in. Do I have that right?
Tricia: Exactly. So that kinetic energy. Like path of least resistance is to actually get enrolled in the plan as opposed to trying to figure out how much I should save and which investments I should go into. And if I don't understand this stuff, what am I doing? Throwing darts at a dart board, right?
Or if I'm not talking to a financial advisor. So this is gonna help most folks at least get started and get enrolled. The stick rate for auto enroll in the past has been about 88%. So people really like it. They just didn't know they needed it. So the government's like, all right, let's just make this happen going forward.
Paula: Realistically, you're not gonna miss 3% of your paycheck, right?
Tricia: And it's pre-tax dollars. You might just see a small difference in your take home. Very small difference in your take home.
Paula: So I know that most people don't contribute to their 401K because they're living paycheck to paycheck. They don't even have an emergency account, but I do understand that the rules are changing on emergency expense distributions.
Tricia: Yeah. There's actually two provisions in the SECURE 2.0 that allows greater access, right? Unfortunately, most people don't even have $400 saved to be able to, tap in for an emergency fund and that sort of thing. So a lot of times you'll see loans taken in a 401k and if they don't pay it back, there's penalties involved.
There's all these things, right? So everyone understands how Americans save or don't save, right? How we struggle with it. So there's two provisions. Both are starting in 2024, right? Because the SECURE act does range over certain years, but one is an emergency withdrawal. So I, if I am in a hard spot, I can take up to a thousand dollars out of my retirement account, without that additional 10% penalty on it. I'm still gonna have to pay my taxes, but I don't. I have that penalty on that money,.
Paula: Do you have to pay it back?
Tricia: If you don't pay it back, you can't take another one you'll have three years to pay it back. It is going to require some hard work with record keepers and TPAs to handle the tracking of it.
I know they are shooting for 2024 to allow for this and I really hope most employers adopt it. It would make a difference for a lot of Americans. The other provision is in emergency savings. So the emergency savings allows for the plan to be designed in such a way that the employees, when they're automatically enrolled into the plan at 3%, the first $2,500 of it goes into an emergency savings account.
It would be treated like after tax dollars. And then any kind of employer match, that money would go into the 401k, so they're getting money into the 401k through the employer match. But now I, as an employee, I'm less stressed out about money because I've got $2,500 in reserve. If I need to tap into it, it's tax free, right?
Not tax free, but I've already paid my taxes into it because it's pretty like Roth money, and then I don't have the additional 10% penalties on it as well. And I'm getting my match on that money. So it helps grow my retirement account while I'm saving for my emergency account.
Paula: But I'm also thinking , I get it, but ideally you wanna be able to do a combination of both of those. Thinking about having to get the money out, it's not gonna be easy as if you had an emergency account at your bank.
Tricia: No, I agree with that. There is a firm out there that I don't wanna give too much away, but our firm is working with to design it like it's more like an HSA, right? So you have your HSA card, and if an emergency arises or you need to pay for some doctor bills or prescriptions, things like that, you can use your card and it's attached to it. And so we are in talks to design something. So that if I have that $2,500 in this account, I have access to it through a card.
Paula: Yeah, that's great.
Tricia: Yeah. If I've got a blown tire on the side of the road, like I can't wait 10 days to get those dollars. Like I had to pay the tow truck, so it is a group that is getting grant money from the United Way because so many Americans are impacted. By, the paycheck to paycheck cycle that a lot of people are living in.
Paula: Yeah, now that makes more sense to me cuz I was just thinking if I need it, how long do I have to wait to get it? If you have a card, that makes perfect sense. So I understand for people like myself now, I'm not quite 60, but I'm getting closer to that number, that there's some catch up contributions. It's gonna be increased?
Tricia: So the catch up contributions are gonna be increased. So between 60 and 63, it's gonna be bumped up to $10,000. So that's gonna help the people that, we finally got to retirement age and maybe we couldn't save as much. Getting there, right between kids education and all the other things that we paid for, or we just started late in our retirement, that's gonna allow you to throw an additional amount.
But starting after 2023, catchup contributions all have to be classified as Roth money. So it's not gonna be a pre-tax contribution of $10,000. It's gonna be an after tax or a Roth contribution of $10,000. So it's not an additional tax savings for older folks. And let me caveat that. It's for Roth only.
If you make over $145,000 a year, if you're a little bit higher income earner, they're gonna make you put it in a Roth and not get an additional tax break.
Paula: But that's okay cuz you get the tax break on the end when you withdraw it when it's withdrawn tax free. So it's a win-win situation.
Tricia: Yep.
Paula: I think this is interesting too, the student loan 401K match. What is that?
Tricia: So student loan matching, it allows for, say I had a student loan out there, I and I have to make a decision whether I pay my $250 student loan bill or I save $250 for myself and my retirement account, what am I gonna do? I'm gonna pay my student loan because that's what I need to do and I'm gonna pause my retirement savings until I can afford to do. This is a win for both sides. So from an employer standpoint, they can entice more people to come in for work for them because they're saying, hey, we're gonna match your student loan payments. It's self certification, meaning the employee says, this is what I put in over the course of the year, so please fund my match based on that.
But it allows for a student or an employee to pay their student loans, and then employer match would still happen and that employer money would go into the 401K for them, and this will allow them to cut down their debt and save for retirement. This is definitely gonna put some of our younger folks in a better situation.
Paula: So I have to pay a student loan of $250 a month, so I make that payment. At the end of the year, I tell my employer if I made $3,000 in student loan payments, He or she would then deposit $3,000 into a 401K for me. Is that how I'm understanding this?
Tricia: So it might not be exactly dollars per dollar match. It would be whatever the match program is designed within the 401k plan.
So they would deposit a match based on whatever the plan design is. If you had just contributed that $3000 into the 401k. But it is supposed to be self-certification. So we'll see if the government comes in, clears that up for us a little bit, right? Gives us more guidance on it, but as long as they're making qualified student loan payment, they can get that match on the retirement plan.
The other thing it does for a business owner, now those people are getting some money into the retirement account, but they're shown as zeros on the non-discrimination test. So this won't impact the non-discrimination test in a negative way for those employers because they're providing them something. Again, waiting for more clarity from the government on that.
Jon: Worth mentioning, we're recording this on June 9th. Everything you're hearing is accurate as of June 9th, 2023.
Paula: Thank you. Mr. Compliance. Thank you.
Jon: One of my many roles as producer.
Paula: And also we should state that your employer has to adopt all of these provisions. It's just not gonna happen automatically.
Tricia: Correct? Yeah. There are some that are mandatory. But there are a lot that are an opt-in or a employer choice, right? So a mandatory one would be the automatic enrollment. The emergency savings would be an opt-in or a choice. The student loan match is an opt-in or a choice, but making your plan more beneficial. It's just gonna help you find the best, find and retain the best employees.
Paula: So one other thing I seen was there's something about part-time workers and 401ks.
Tricia: It's one of my favorite provisions. Paula, I love this one because we're actually taking into consideration the forgotten American. One of the members of Congress, his mom worked for Kmart part-time, her whole life. And working for Kmart part-time her whole life, she never had an opportunity to save into a retirement plan. So now it's going to open up for anybody that has worked part-time for any companies for at least two years, 500 hours, they can now contribute to the retirement plan. It's not gonna impact the discrimination testing. They don't have to provide a match, but it gives those individuals an opportunity to actually save something for themselves and put them in a better position at retirement. And that is a mandatory one. That is one they cannot get out of. So they have to do that one.
Paula: Because it is so much easier to save for retirement when it's coming directly out of your paycheck than it is to then say, okay, at the end of the month, I need to make a deposit into my traditional, my Roth IRA. It is a ton easier just to do it right from your paycheck. That way you don't even miss it.
Tricia: Yep. You don't see it. So you don't spend it. You end up saving it and you're like, oh, how did this grow so fast? Yes. RMDs have also changed. So RMDs are a required minimum distributions. It used to be, at 70 1/2 you start had to start taking some of your money out of your account.
The IRS wants to collect their taxes for the year. In 2023, it's bumped up to age 73, and then by the year 2033, it's gonna get up to age 75 because they know a lot of people are not necessarily needing access to those dollars just yet, and people are living longer.
Paula: Yeah. No, that's a really cool benefit for a retiree. Anything else that you think is important? And then I wanna talk the last thing, about the 529.
Tricia: The biggest things, like I said, are the credits, right? Because if it goes up to 50 people, Say I have 50 people and I'm giving a match up to a thousand dollars to people, or I'm giving a match up to $1,200 for people in their account, that would be a $60,000 match that I would have to provide.
But if I get a credit of a thousand dollars for each one, I'm really only on the hook for $10,000 out of pocket, and I get a tax break for that. So I think a lot of people just don't even realize how much that impacts. It's a hundred percent for the first two years, 75% the third year, 50% the fourth year in 25% the fifth year. That's how long the credits last for them.
Paula: It's a great opportunity too, for employers to start offering retirement plans.
Tricia: Yes, and I do see retirement plan at that for sure.
Paula: Okay. This is one of my favorites. Tell me the 529 plan change that you can roll over leftover 529 money into a Roth, IRA.
I think that is so huge because you think about, I save monthly into my grandchildren's 529 plans, but they like, range from one to eight years old. I have no idea if they're gonna go to college or trade school or whatever, but if they decide not to, or they don't use all the money that I've saved for them, they can roll it into a Roth IRA.
And I've been having that conversation a ton with people. That have old 529 plans, and don't know what to do with them.
Tricia: That money's just sitting around and if they take it right now, I've got this taxable event, oh, and penalties and I am with you on this one. It is exciting because it does allow for that rollover of $35,000 into a Roth. And like you said, you just don't know if your grandkids are gonna use all those dollars or that sort of thing. So definitely a positive.
Paula: We won't go over all the rules on there, but there are some rules. If you're considering that, it's only a certain amount each year with the contribution limit, and then plus you have to have the 529 for at least 15 years.
So there are some rules to look into, but I think it's huge. Huge opportunity to get kids saving into a Roth IRA. It's, I just love this thing.
Tricia: I am a big fan of Roth Money, Roth IRAs, especially for young folks. We just don't know what tax rates are gonna be like at retirement.
Paula: Hey it goes for old folks too.
Tricia: It goes for old folks too. Yeah. I apologize. I take it back. Do not mean to be ageist. What other fun things can I tell you in the SECURE Act? If you have a domestic employee, say a nanny or something like that, or a caregiver for a parent, and you are the employer of this domestic employee, you can actually provide benefits for them under a SEP too.
So that actually begins this year. Caregivers, that is a industry where people are coming and going all the time. And if you find one you really like, this might be the way to keep 'em.
Paula: That's interesting. Hey, do you know much, I know a little bit about the savers credit. But it's now going to become the savers match? Do you know a lot about that?
Tricia: Got a little blurb on that. So the savers match, it's a non-refundable credit for contributions to IRAs and retirement plans. So it, he helps on both sides, but it's up to $2,000. I know there is a phase out at different income thresholds.
Paula: So just to highlight what the saver's credit is today is, yes, you're right, there is an income limit, but it encourages lower income people to save within a IRA, and you get up to $2,000 credit on your. Income taxes. So what a credit is a dollar for dollar reduction in your tax liability. So it can be huge. I always talk to my older clients to encourage them to have their younger grandchildren who are working maybe part-time or something and not earning a lot, but to get them to start saving or making that contribution for them, and then they can take that tax credit.
Tricia: That is good. Yeah. And it's gonna be changed to a federal match though, so that $2,000 will no longer come back as a credit and it'll be put in as in a match. But again, not until after 12/31/26. So yes, in 2027, that's when it turns into a match.
Paula: But still, that's 2027. Today, take advantage of the savers credit.
Tricia: Agreed. Yes.
Paula: Okay, so hopefully we haven't overwhelmed everybody. And if you want some more information, you can reach out to Tricia. How can they get ahold of you?
Tricia: Reach out to me at Tricia.Bailey@futureplan.com.
Paula: Or you can reach out to me at paula@paulachristine.com, or you can check out my website at paulachristine.com. Great information. I know I've always learned something from you.
Tricia: I've always learned something from you too. So we thank you, Paula, for having me.