By: Mike McGowen, Lead Advisor, TriBridge Partners Financial
Saving for Retirement and paying off Student Loans is no longer an “either-or” proposition, thanks in part to the latest version of the Secure Act (Setting Every Community Up for Retirement Enhancement).
In the recent 2.0 legislation, Congress recognized that the ballooning and candidly, concerning levels of college debt were dragging down the retirement savings rates of millions of Americans, notably millennials.
In past generations, college debt was much lower, and retirement was often 100% employer funded via a “Pension Plan.” Fast forward to current day, college debt is much higher, and retirement is now largely funded by the employee (with a little help from the employer in the form of a match), via a “401k.”
Although these variables help contribute to the Retirement Savings Crisis that we find ourselves in, there are tools being deployed to try and narrow the savings gap in the form of legislation.
Student Loan Repayment Summary:
The provision permits an employer to make a matching contribution into your retirement account based on your student loan payment, even if you are not actively contributing to your plan (or not contributing enough to receive the full employer match). Let’s look at a quick and simple example. . .
The Case of Jane
Let’s say Jane earns $50,000 per year and her employer matches 100% on 401(k) contributions up to 3% of salary. This means Jane could receive a match of up to $1,500 ($50,000 x 3%) annually. However, Jane is focusing on paying off her student loans and not contributing to the plan (forgoing the $1,500 match). Jane currently pays $125 per month towards her student loans, which equates to $1,500 per year.
Under the Secure Act 2.0, Jane’s employer can now treat her student loan payments as if she were contributing to her 401(k) plan and match the $1,500 per year that she was previously forgoing by not participating.
Now $1,500 per year may not seem like a lot of money, but if that compounds at let’s say, 7% annually over Jane’s working career, she will likely have hundreds of thousands of dollars in retirement. This demonstrates the true power of investing and compounding interest. I like to use the analogy of a snowball rolling down a hill. It starts off small at the top (beginning career) and grows bigger over time until it reaches the bottom (retirement) and is the size of a boulder!
Become an Advocate
Most top 401k providers (think of the company logo you see when you login to your account) like Principal Financial, now have solutions in place to support Student Loan Repayments, however, it is an optional provision. This means that you will likely need to start the dialogue with your HR team. It can be as simple as “I’ve been reading up on the Secure Act 2.0 and it permits student loan payments to qualify for our 401(k) match. I think this could be great for the organization. What is the evaluation process?”
Talk to colleagues and likeminded individuals who may also benefit from this provision. Life is busy and chances are, few colleagues may even be aware of the option or it’s tremendous financial impact.
529 Provision Summary
The Secure Act 2.0 also increased flexibility for those who did not utilize college loans but rather 529 savings plans for college. A 529 plan looks and feels like a workplace 401k plan (you make periodic contributions, the money is invested in mutual funds and grows tax deferred over time), however, it is on behalf of a child and must be used towards college expenses.
Since this is an investment account, it can be challenging to know what the balance will be once a child enters college down the road, so planning is a little more of a moving target. If funds are leftover after college expenses are covered, an additional option to roll the funds into a Roth IRA on behalf of the child is now permitted via the Secure Act 2.0
This is a huge potential benefit for a child, due to the long-time horizon that the account would have time to grow and compound (think 40+ years!). Additional considerations include the account being in place for at least 15 years, rollover amounts being from contributions that are at least 5 years old, not exceeding the annual IRA limits and a $35,000 lifetime limit (as of right now). Please note that it is always best to consult with a tax advisor on these types of strategies.
Closing Thoughts:
Paying off debt and saving for retirement is always a delicate balancing act with often times, no clear path forward. The Secure Act 2.0 is a pragmatic piece of legislation that acknowledges the need to help today’s younger workforce who face a different set of financial challenges than previous generations.
As our financial system evolves, so must the tools and resources we use to combat the growing level of debt and shrinking amount of retirement savings that many Americans have. There is certainly a lot of work ahead, but the Secure Act is certainly a good avenue.
To learn more about how our team can help you navigate planning and student loan repayment, please call our office at 240-422-8799 or email Jessica Storck at Jessica.storck@tribridgepartners.com.
