Groundbreaking Benefit for Employees in New SECURE Act 2.0 Law Goes Largely Unnoticed

A new provision stipulated in the SECURE Act 2.0 is perhaps being overlooked as the windfall it is. Per the changes in the law, employers will now be able to provide employees with the option to receive both matching and nonelective contributions to a Roth account for their 401(k)/403(b)/457(b) plans. The new legislation was passed as part of the omnibus spending bill on December 29, 2022, and presents an opportunity for workers to avoid some major taxation in their retirement. Under prior law, all employer contributions had to be deposited to a traditional accounts (pre-tax), not a Roth—(employees could choose a Roth account for their contribution, but the employer could not). For it to be the intended boon, employers need to step up and change their plan’s documentation as this is an optional provision for employers. Employees won’t have this option immediately unless their employer has changed their plan offering. Albeit not required to do this, the pressure on employers to make the accommodation available should be ramped up.

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It is truly for the best interest of America’s workforce that employers amend their plans promptly. This additional feature comes at no cost to the employer if they are already making a contribution match. Considering the growing-pains in developing the workforce post-pandemic and inflationary wage status, it is an asset for creating attractive compensation packages. Every month employers delay, it hurts the long-term picture for their employees and hampers their ability to avoid taxes in retirement. A simple compound interest calculation will show that every $1,000 investment match over an average career span of 30 years can represent more than $50,000 at the end taking into account modest, less than average annual returns.

It is understood that if your employer offers matching contributions for your retirement plan, you should contribute at least the minimum amount necessary to receive the full amount that the employer is willing to match. Both under the old law and under the new law, the employee’s own contributions can be to a Roth or a traditional account. The nuance to employees is that all taxes on Roth match contributions will be a current obligation and the match will be immediately vested. The upside is a larger portion of a retirement plan will accumulate tax-free from now until withdrawal day.

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The rationales are strong for most all younger workers to take advantage of this provision and most mid- and even some late-career employees should also consider it. Making regular contributions to your retirement plan with a Roth rather than a traditional plan is the surest way to accumulate maximum wealth for retirement with no regrets. For people still working, assuming that Roth accumulations make sense, when your employer does offer the Roth option for the employer portion, strongly consider taking advantage of it. If they don’t offer it in the coming weeks, implore them to do so.

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