2 Ways a New Law Could Help Young Workers Save for Retirement

Maximizing early contributions is vital when saving for retirement.

Key points

  • The Saver’s Match will replace the Saver’s Credit in 2027, making some eligible for a federal match into their retirement accounts.
  • New testing requirements may incentivize employers to open their retirement plans to younger or shorter-tenured employees.

With over 90 new provisions, the SECURE Act 2.0, passed in December 2022, has something for nearly everyone. For those just beginning to save, new federal policies may help boost retirement accounts and loosen eligibility requirements for younger workers.

The Saver’s Match

Introduced in 2002, the Saver’s Credit offers a retirement saving incentive that’s hard to pass up. Taxpayers who contribute to a 401(k) or IRA could net up to a $2,000 tax credit. But here’s the catch: joint filers have to earn below $43,500 to get the full credit in 2023. Many workers earn above that amount, and are therefore ineligible for the full credit. However, a young employee at the bottom of the payscale or an employee who only worked part of the year may be primed to take advantage of this program.

The SECURE Act 2.0 made a major change to the program by replacing the tax credit benefit with a matching contribution to your retirement plan from the federal government. This is a key change, as it will allow qualified workers to boost their retirement accounts as a reward for diligent saving, starting in 2027. Properly invested, a $2,000 bonus today could grow to tens of thousands of dollars by retirement.

Top heavy testing

Behind your 401(k) are a lot of rules to protect you, the employee. One rule dictates that certain 401(k) plans cannot disproportionately benefit owners and highly-paid employees. If over 60% of the plan’s assets are owned by these employees, the plan is considered to be top heavy. And having a top heavy plan can be expensive, as your employer may have to make additional contributions to all employee accounts.

The SECURE Act 2.0 changed testing requirements in order to incentivize employers to open their 401(k) plans to otherwise excludable employees, such as those under age 21 or with less than one year of full-time service. The intention of this new law is to encourage plan sponsors to open their plans to younger employees and get employees saving early.

Many of the provisions in the SECURE Act 2.0 targeted those in or near retirement, but there are some points that young savers should pay attention to. First, the Saver’s Match offers free money to qualified workers in the form of an additional retirement account contribution. Second, a change to the rules around 401(k)s may encourage your employer to let you into the plan early. The keys to building wealth are to save early and save often, and this new legislation will help with the former.

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