William Lako:The Secure 2.0 Act: Empowering student loan borrowers and retirement savings

Barring additional suspensions from Congress, student loan payments will resume this fall after a three-year forbearance that began as part of the Coronavirus Aid, Relief, and Economic Security Act. The resumption of payments also includes students who graduated in 2020 and will face their first student loan installments. While the forbearance allowed borrowers to skip payments, it also set the interest rate on federal student loans to 0%, ensuring that interest did not accrue during the pause. Borrowers should find their previous loan balances waiting for them—a collective $1.64 trillion!

Resumed payments will undoubtedly affect many household budgets; however, they may also affect how much borrowers are able to save for retirement. Fidelity Investments studied nearly 60,000 student debt holders and found that roughly one in five borrowers report allocating nothing to their 401(k). Forgoing contributions could result in missing out on employer retirement matching contributions.

In December 2022, Congress passed the SECURE 2.0 Act, which included a provision that allows student loan payments to qualify for employer retirement matching contributions. Starting in 2024, employers will have the option to treat an employee's student loan payments as "elective deferrals," making them eligible for the company match. Employees with student loans could potentially receive employer-matching contributions to their 401(k), 403(b), SIMPLE IRA, or 457(b) plan, even if they don't contribute directly to their employer-sponsored retirement plans. The overall goal is to help young adults start saving for retirement.

While this benefit will require employers to amend their retirement plans, providing this option could significantly affect several generations of companies' workforces and could prove to be a competitive benefit for attracting talent.

The Secure 2.0 Act didn't stop there. It also included a provision beginning in 2024 allowing 529 plan beneficiaries to roll over up to $35,000 to a Roth IRA over their lifetimes. 529 plans are tax-advantaged savings accounts specifically designed for college savings; however, despite the ability to change beneficiaries to nearly any related family member, families can be left with extra funds in an account. This rollover option should allow plan beneficiaries to get a head start on saving for retirement.

The rollover will not be subject to taxes or a penalty that would typically apply to non-educational use of 529 plan funds. The rollover will be limited to the annual contribution limit or earned income. For the rollover to be tax- and penalty-free, the beneficiary of the 529 plan must be the owner of the Roth IRA, and the plan must have been open for at least 15 years. Additionally, contributions and associated earnings made within the last five years are ineligible for a tax-free transfer.

These provisions may go a long way in helping those who are saving or paying for college to plan and save for retirement by minimizing the fear of overfunding a 529 plan and potentially eliminating the need to prioritize loan repayment over retirement savings.