Changes in the Secure 2.0 Act are a Mixed Bag for Consumers
A few weeks ago a major piece of legislation was signed into law and in our qualified opinion, seniors win. Young people however, who are being told they win as well, may actually lose, due to basic human nature.
For our seniors, the rules around Required Minimum Distributions from IRAs, also known as “RMDs” were changed, moving the age at which they must begin from 72.5 to 73 years old. Tax rules that run on age changes and dates are just easier to follow for most. As people are living longer and many are working past age 65, it was time to adjust those rules, which just a few years ago had required distributions triggering at age 70.5. It is scheduled to increase again in the future, so good rule changes for seniors and two thumps up from us!
For businesses there were also some great changes to align Roth 401(k) rules with traditional 401(k) rules. Also, tax credits were increased, allowing small businesses to recoup more of the costs of starting a 401(k) plan. That allows small businesses to help their employees and themselves in the process. There is actually a great deal more in this area that is beyond the scope of this article, but again, two thumps up!
The problem we see involves the rule changes for working people who are in a crisis and need to access those 401(k) funds, which have been expanded to allow withdrawals in more situations without the penalties that normally apply. On the surface, this seems like a good idea. But when you consider the power of the long term value of money, maybe not so much. People of all ages can encounter a financial crisis that causes them to need access to emergency funds. But the long term cost to a 30 year old taking an emergency withdrawal of say $1,000 from their 401(k) to cover an urgent (and now exempt from penalty) expense, versus using a credit card, borrowing from a family member, friend or co-worker, or almost any other source, will be much higher than the same withdrawal would be for a 55 year old. The lost earning power of that $1,000 over that 25 year span will cause a significant reduction in the overall value of that account at retirement.
Between mortgages, credit cards, student loans and a variety of other topics, there has been a lot of legislation produced aimed at consumer protection and education, forcing companies to explicitly explain the true cost of borrowing money over time. Hopefully, at some point, that same approach will find its way into the rules and recommendations around these new options. But at first glance, there are none, and that’s unfortunate. A young person in crisis thinks, “All these scary notices I get from my credit card company have taught me that if I borrow the $1,000 I need on my credit card, it’ll cost me thousands if I don’t get it paid back soon, so I’ll just take it from my retirement fund.” The fund isn’t required to explain to them how much it will cost them in the long run to remove that money from the retirement account at age 30.
As a country, we lost our financial discipline a long time ago, and it’s gotten worse since the pandemic. More stimulus, more public welfare, and a national debt now over 31 trillion dollars. Giving young people easier access to their 401(k) balances doesn’t seem like a step in the right direction, when the message should be “That’s the last place on earth you would want to take money from.”