Read time: 7 minutes
A lot of financial advice is written for investors progressing through life and tackling goals in sequence. But for many young wealth accumulators, that’s not the way life unfolds. Instead, young careerists often choose between competing priorities like paying down student debt, building an emergency cash cushion, and saving for retirement.
A new federal law may help change that. The SECURE Act of 2022 (SECURE 2.0) may make it easier for workers to cast a wider savings net. The following provisions were designed to meet accumulators where they are and to help them take their next best step when reaching for financial goals.
Matching retirement plan contributions based on student loan payments
Starting in 2024: Employers will have the option to make contributions to an employer-sponsored retirement plan—i.e., 401(k), 403(b), SIMPLE IRA, 457(b), and similar plans—that match an employee’s qualified student loan payments, even if the worker doesn’t directly contribute to the retirement plan.
This provision requires an employer to opt in; those who do can help cash-strapped, early careerists straddle that hard-to-navigate line between paying down debt and saving for the future.
Easier access to an emergency cash cushion
Starting in 2024: Employers may choose to add the following new options that grant employees access to emergency cash.
- Up to a $1,000 penalty-free withdrawal from an employer-sponsored retirement plan. The provision is allowable once every three years—or sooner if the withdrawal is paid back to the employee plan.
- A separate emergency savings account as part of an employee’s retirement plan. Under this provision, employees may make voluntary contributions or be autoenrolled at a rate of up to 3% of annual pay (up to $2,500). Contributions are made to a designated Roth account and are subject to the employer match, if there is one.
This provision can help workers get through a near-term emergency while maintaining progress on long-term goals.
Penalty-free withdrawals during times of need
The new legislation has expanded the availability of penalty-free withdrawals for those under age 59½, including during a wide range of hardship situations, when cash is often needed most. The following scenarios may allow for penalty-free (but not income-tax-free) retirement plan withdrawals:
- A terminal illness that is expected to result in end of life within seven years (effective immediately).
- Within one year of suffering domestic abuse (effective 2024).
- During the first 180 days after a natural disaster strikes an area where the worker’s primary residence exists (effective immediately).
Distributions are subject to ordinary income tax. All or part of these distributions may be repaid during the three-year period that starts the day after the distribution is received, so long as certain employer plan conditions apply.
More Roth contribution options
Effective immediately: 401(k), 403(b), and 457(b) plans may offer a Roth option for an employer match or nonelective contribution, so long as those contributions are fully vested.
For participants, this adds another financial planning consideration when deciding which tax treatment is most appropriate for a long-term financial plan.
Automatically move retirement plan assets when switching jobs
Mandatory automatic enrollment for new defined contribution plans
Small steps can add up to substantial results
For young wealth accumulators, the provisions available in SECURE 2.0 offer additional opportunities to balance competing financial goals, get through unexpected life events, and save additional retirement assets over the span of a career.
“There are a lot of minor provisions within the legislative package that, when aggregated, will create significant change to the retirement landscape,” said Dickson. “In addition, many of the additions demonstrate recognition that sometimes life happens—and that access to assets can help smooth troubled periods—at least from a financial standpoint.”
- All investing is subject to risk, including the possible loss of the money you invest.
- We recommend that you consult a tax or financial advisor about your individual situation.