Socking away money for retirement is a stumbling block for many workers.
“Very few Americans are adequately prepared for retirement,” Bogart Wealth CEO and President James E. Bogart recently told Yahoo Finance Live (video above).
More than one-third of Americans say they’ve never had a retirement account, such as a 401(k) or an Individual Retirement Account (IRA), according to a Bankrate.com survey. A Harris Poll released in December reported that over a fifth of the more than 2,000 adults canvassed are saving nothing each year for retirement.
Last month, the House of Representatives voted overwhelmingly (414-5) in favor of the Securing a Strong Retirement Act of 2022, known as the SECURE Act 2.0. If it becomes law, it’s a considerable boost for savers and retirees. Next stop, the Senate, which is creating its own model of the bill.
The provisions and adjustments in the act “can dramatically encourage enhancements to retirement savings,” Bogart said. “SECURE Act 2.0 has been something that's been discussed for almost two years. I am glad to see that it's finally getting some momentum.”
Saving for retirement automatically through the workplace
The SECURE Act 2.0 requires 401(k) and 403(b) plans to automatically enroll participants when they become eligible. Employees, however, may opt out of this coverage. A few states — Oregon, California, and Illinois — now offer auto-IRA state-sponsored retirement savings plans to workers without employer-sponsored plans, and others are considering similar options.
The automatic enrollment amount starts at 3% of salary — and increases 1% each year until it reaches 10%. Small businesses with 10 or less employees, businesses under three years old, church plans and governmental plans, are exempted.
Meantime, the Act reduces the time until long-term, part-time workers are eligible to start to contribute to their employers’ 401(k) plan from three years to two years.
The provisions are bright lights of the potential new law. They are “increasing savings percentages as much as you possibly can, which is increasingly challenging in this environment with inflationary pressures right now,” Bogart said.
Ramping up allowable contributions
Under the act, the current $1,000 catch-up IRA contribution allowed for people aged 50 and over would be indexed for inflation. And the act juices up the catch-up contribution limits to $10,000 for employer-sponsored retirement plans for those aged 62-64, up from the current $6,500.
Importantly, those catch-up contributions to employer-provided plans would be contributions to Roth accounts. That means savers would pay taxes now, but would withdraw the funds without paying capital gains later. Both provisions would apply to tax years beginning after December 31, 2023.
Moreover, the pending legislation ratchets up Required Minimum Distributions (RMDs) —the amount of money that must be withdrawn from tax-deferred retirement plans and taxed–to age 73 in 2022, to 74 in 2029, and to 75 in 2032.
“For more affluent households, obviously, delaying RMDs allows tax deferred growth for longer, which will benefit them, at least from a tax management perspective,” Bogart said.
Finding unclaimed retirement accounts
Other game-changing provisions include a national online, lost-and-found database for Americans’ retirement plans, and permitting employers to match student loan payments, up to a certain percentage of an employee’s salary, and deposit their matching contribution in the employee’s retirement account.
“In terms of accumulation of wealth, we know the time value of money, saving early on, or at least starting to save early on, has the most impact,” Bogart said. “So I love the student loan match provisions.”
What’s not included in the act that could significantly alter the retirement savings crisis in this country: “Financial education is paramount here,” he said. “I think there needs to be some level of mandating at the corporate level for employee education on the need for savings. We haven't seen it in the colleges, or even in high schools, where people are required to pass some level of financial literacy program. And so an uneducated consumer, no matter what we're discussing, really can make erratic or bad decisions.”
Kerry is a Senior Columnist and Senior Reporter at Yahoo Money. Follow her on Twitter @kerryhannon