Episode Transcript
Brenton: [00:00:00] At the end of 2022 Congress passed legislation that will make it easier for you as a consumer to do things like establishing an emergency fund, tackling student loan debt, while saving for retirement and even contributing to your children's retirement. And in this episode, we'll tell you all the details you need to know.
Let's get started.
Analogue 1 + 2 (4- Focusrite USB Audio) & EOS Webcam Utility: At the end of 2022, you might've seen some headlines that were giving you a brief introduction into some legitimately major updates that were recently passed in a legislation called secure 2.0.
So today we're going to cover the things that I think are most important from this legislation, as it pertains to a young professional with high income and possibly high debts, when you can expect these things to go into effect and the potential impact it could or could not have on your finances.
Let's start with the auto-enrollment of 401k's provision.
If you have access to and participate in a company retirement plan, like a 401k, you might assume that all of your coworkers are participating in that [00:01:00] plan, as well .
But one thing that we know to be true after years and years of research is that when you have a company retirement plan, you are going to get the most signups if you use what's called auto enrollment, which essentially means that an employee has to formally opt out of the 401k, because if they do not, they will be automatically enrolled once they become eligible.
Some stats show that over 90% of employees participate in 401ks if their company automatically enrolls them.
And there's all types of human behavior that has to play in this scenario. There's a book called Predictably Irrational that I really love that talks about this phenomenon, where in European countries they have a much higher rate of organ donors. And a big reason why is because when you are in many of these countries, you have to formally opt out of donating your organs upon your death, as opposed to opting in. Now there are two elements of auto-enrollment as it pertains to secure [00:02:00] 2.0 and 401ks or company retirement plans.
The first is that if a company offers a 401k or company retirement plan, they will be required to automatically enroll participants at a contribution rate of at least 3% of their pay, but no more than 10% of their pay. So the employer can decide we're going to automatically enroll employees at 3%, 4%, 5%, 6%. They just can't exceed 10%.
Now on its face, this is a really helpful feature. But the other thing that statistics show about these plans is that auto enrollment alone is not enough to get employees where they need to be.
If you look at the typical 401k plan that offers auto-enrollment today, the employee is going to often be automatically enrolled to contribute that 3% of their pay and their employer is not going to increase that contribution over time.
In later episodes we might talk about whether you have to save 10, 15, 20% of your pay towards retirement, like you've seen[00:03:00] from bloggers or financial influencers. But the one thing that we do know is for the average person saving 3% of your pay isn't enough, it needs to be a higher number.
So when you stop at 3% pay for auto-enrollment 401k plans, you essentially have people who, again, are not going to get off of the couch and change that contribution. And they could do it for 30, 40 years just to find out they are woefully under-prepared.
The good news is that secure 2.0, recognizes this. And in addition to the auto-enrollment feature, it also requires that employers include an auto escalation feature.
This feature says that the auto enrolled employee will see their contributions increased by 1% a year up to a minimum of 10% and a maximum of 15%.
Now again, if you don't want to participate, you have to formally unenroll yourself, which most people won't do, but you will know that if you're in these plans, you're automatically signed up. You're [00:04:00] automatically contributing and that contribution will increase by at least 1% per year, until you are saving at least 10% of your pay on an annual basis.
So this is something that will be available, but it will not be available until after December 30th, 2024. So this is an example of something that's a really cool feature, but it's something that you really won't see coming to play until two years from now.
Next, we have employer contributions based on student loan payments.
Prior to the passage of this legislation, there was already a groundswell of companies, employees, who were saying that they have a larger group of younger employees who are burdened by student loan debt and are really faced with a decision of whether they're going to put money towards that debt or save for their retirement because they didn't feel they could do both. So even before 2.0, the IRS had allowed some employees to do what's called a retirement match based on student loan [00:05:00] contributions.
In essence, what would happen would be that an employer would work with an employee and figure out how much that employee had paid towards their student loans in the prior year. And based on those student loan contributions, the employer would treat them as if they had put that money towards their 401k and they would match those dollars.
And even though not a dollar of that money went into the 401k, the employer acts as if it does, and they match it into that account.
Now let's talk about the actual functionality of this. How useful will it be? A lot of it depends on how much you owe in student loans. We have another podcast that we operate called Escape Student Loan Debt. For compliance reasons, I have to let you know that's considered an outside business activity. It is not connected to my work as a financial advisor.
But on that podcast, we talk in detail about student loan strategy. And we also talk in detail about plans called income driven repayment plans. These are plans where [00:06:00] instead of you paying an amount actually needed to pay off your student loan balance in a particular period of time, you instead pay a percentage of your income towards that debt for 20 or 25 years. And if after 20 or 25 years, there's still balances remaining on those loans. They're forgiven. It's a way to minimize the damage on your budget that you have when you have an extremely large amount of student loan debt.
It might be better for you to pursue forgiveness under these IDR plans than it would for you to actually try to attack them and pay them off in full using another strategy. So when you look at the ability to put money towards the student loan debt and have it counted as a retirement contribution, it's helpful for everybody.
But what I wouldn't want you to think is because that's a feature you can now attack this student loan debt and try to pay it off faster, no matter what. There are some people out there who may owe less, as it relates to their income. Maybe they have a balance that's 50% of their income, 20% [00:07:00] of their income, 75% of their income.
This could be a feature where the benefit of attacking the debt while also having retirement contributions could make it worthwhile to get that debt out of the way faster. But if you owe 150 200, 300% of your income in student loans, it's highly likely that whatever bump you get, a couple hundred dollars here there each year in retirement matches, by you putting money towards that income driven repayment plan, that's likely all you need to do. I would not be encouraging you to pay more than you're required to under the student loan balance and pat yourself on the back saying it's okay, my company is putting that money in my retirement account. It's likely it would still benefit you to make that minimum payment towards the student loans, aim for forgiveness. And focus your other financial efforts towards goals like paying down different debts, saving for your retirement, establishing an emergency fund, or even using that money to increase the amount of income you earn through [00:08:00] special training and things of that nature.
But regardless, no matter the level that it benefits you or not, it will benefit you in some way. And this is a really cool feature that will come into effect a little sooner. You will see this come into effect starting in January of 2024.
Welcome back before the break. We told you the first two of some of the changes toward your retirement planning that you'll see as a result of the passage of secure 2.0. And up next, we have penalty free thousand dollars withdrawals from your retirement account.
We have talked to this point about qualified retirement plans and some of the limitations, one of those limitations being that, in most cases, you cannot access funds in these plans until you are at least 59 and a half.
If you're a person who has a fully stocked emergency fund and would have no need to access these retirement savings, then good for you. But again, statistics have shown that for the average American an emergency of even $400 would cause them to [00:09:00] borrow money or go into debt to cover that expense.
As a result of the passage of this legislation, however, they will now be able to access one time per year, a penalty free withdrawal from a company retirement plan of up to a thousand dollars. What this means is typically if you access money from these retirement plans early, you would pay income taxes on the money that you withdrew, if it was a pre-tax plan, and then you would also pay a 10% penalty for accessing it before age 59 and a half. In this scenario that 10% goes away. They will still pay income taxes on the funds, if you pay it back within three years, then you pay it back to your plan and you get a refund of whatever taxes resulted from that withdrawal. If you choose not to pay it back, however, you don't have to, but you will then have to wait another three years until that period ended before you could access another thousand dollar emergency withdrawal.
This feature ties into the next benefit as it [00:10:00] relates to savings and secure 2.0, and that is the ability for employers to assist their employees in setting up an emergency fund.
This is not available to those who don't have retirement plans that they offer to their employees.
But if you have a plan, this legislation allows these employers to essentially set up a secondary retirement account with money that is called post tax dollars. Basically this is money that is more similar to your savings account than it is to your 401k.
And once that second account is set up, what it allows employers to do is automatically enroll their employees to contribute money to that savings account until $2,400 has been set aside.
Money will go towards your 401k and money will also automatically be contributed to that secondary account until it reaches a balance of $2,400. That money can be accessed by the employee if they so choose, but in doing so, they have [00:11:00] partnered with their employer to make sure that in case of an emergency, they have funds set aside.
Now, this is huge because again, we've talked ad nauseum about the fact that for many people, one of the things that keeps them back from putting money in savings is trying to establish the discipline to do it themselves. Whereas it becomes much easier to have that discipline when you don't have to have that discipline and it's automatically taken from one account and put into another, you have to take advantage of automation, wherever possible.
And by allowing these employers to automatically enroll their employees in these plans, I guarantee you, more people than not will forget that this money is being set aside as well. But if they need it, there will be $2,400 there for them in the event of an emergency. This is a huge, feature. That should radically improve the savings habits and the savings balances of people who have a retirement plan available to them, to their employer.
That's it! [00:12:00] Details on benefits and features of secure 2.0, as it relates to people who have new money and new problems. I hope this was something that benefited you. There are a number of things that are going on that are giving you an idea that Congress and society is starting to realize that it is infinitely harder to save for retirement now than it has ever been in years past.
And hopefully we see more types of legislation like this that you can use to benefit your journey to wealth. My name is Brenton Harrison of new money, new problems. I hope you join us on the next episode. If you haven't already joined our email list at newmoneynewproblems.com/podcast.
And I'll be back in your ear with new information that will help you as we grow our wealth together. Have a good one.
