This would eliminate the need for younger Americans to choose between saving for retirement and paying off student loans, allowing them to start building for their future in multiple ways.
Catch-Up Contributions
Getting close to retirement can be nerve-wracking if people feel they have not saved enough or haven’t developed a plan for determining where retirement income will come from. SECURE Act 2.0 could help those who may have under-saved by increasing 401(k) catch-up contributions to $10,000 for those aged 62-64. Right now, it maxes out at $6,500 for those who are 50 or older.
This is the last chance to save money while in the workforce. Catch-up contributions are designed specifically for people who are closer to retirement so they can put away more money at a time when they may have the means to do so. If a client makes these catch-up contributions into a Roth arrangement, it builds up the potential for even more tax-free income later. The current version of the bill includes a provision that would require all catch up contributions be made to Roth arrangements. There would be no tax deduction for Roth contributions, but these savings eventually lead to potentially higher tax-free withdrawals and increased net income during retirement.
It’s also important to note that Roth IRA conversions may be something for people already in retirement to consider as it helps them diversify the types of tax arrangements held and avoid being too heavily invested in pre-tax qualified arrangements that will be taxable when distributions are taken.
This news is significant for people who may have retired earlier than expected. According to the 2022 Retirement Risk Readiness Study, more than four in 10 (42%) of respondents said they retired early. Although this is down from the 68% who noted early retirement in 2021, its clear that over the last two years of managing through the pandemic, many people have had to leave the workforce before they were ready. The new rules around catch-up contributions could be a substantial help.
Conversation Starter
Last but not least, simply having new proposed legislation around retirement saving could spur more interest in financial planning for all Americans.
Conversation around the proposed Secure Act 2.0 could prompt more clients to want to discuss saving and spending habits, and how they can add more protection to their portfolio, including risk mitigation strategies that offer protection but still allow room for growth. This is a great opportunity for financial professionals to highlight buffered strategies within ETFs, fixed index annuities (FIA)s and registered index-linked annuities (also known as Index Variable Annuities) that can help clients feel more prepared for the next big event
As the rules change, financial professionals should check in with their clients about how new legislation can affect which retirement saving strategies to consider.
*Allianz Life conducted an online survey, the 2022 Retirement Risk Readiness Study, in February 2022 with a nationally representative sample of 1,000 individuals age 25+ in the contiguous U.S. with an annual household income of $50k+ (single) / $75k+ (married/partnered) OR investable assets of $150k.
Kelly LaVigne is vice president of consumer insights for Allianz Life Insurance Company of North America (Allianz Life). LaVigne oversees the advanced markets team and is responsible for its strategic direction.