Money Management

The legislation, passed in December, will roll out over the next decade. 

Following in the footsteps of its 2019 predecessor, the SECURE Act 2.0 is making big changes to the way Americans are saving for retirement. Following the passage of the law in December 2022, millions of Americans are subject to new opportunities and restrictions within their 401(k) accounts. Here are the three sections of the law that are most likely to affect your retirement.

Higher catch-up limits

As Americans near retirement, they should have the ability to direct more of their assets to their retirement accounts. At least, that’s the idea behind the catch-up contribution limits that are currently available to Americans aged 50 and older.

While the average saver is limited to deferring a maximum of $22,500 (2023) into their 401(k) account, those aged 50-plus can contribute up to $30,000 (2023). That $7,500 difference is called the catch-up contribution limit, and can make a big difference when funding a retirement account. And catch-up contributions aren’t limited to employer sponsored retirement plans — they exist, at a significantly lower annual amount, for individual retirement accounts, too.

The SECURE Act 2.0 sought to expand catch-up contribution provisions by enacting a second tier of the retirement-saver’s perk. Those who have reached age 60, 61, 62, and 63 will have the ability to contribute even more to their retirement accounts than the original catch-up limit. How much more? Either 50% more than the regular catch-up contribution or $10,000, whichever is greater.

‘Rothification’ of catch-up contributions

Staying on the topic of catch-up contributions, let’s discuss how they are treated from a tax standpoint. Prior to the SECURE Act 2.0, catch-up contributions could be made on a pre-tax or a Roth basis, if the plan allowed. However, the new law will restrict that option for certain taxpayers.

Starting in 2024, savers earning over $145,000, indexed for inflation, will be required to make catch-up contributions on a Roth basis. Although those workers will receive tax-free income in retirement, their catch-up contributions will not be tax deductible. This may be a raw deal for workers who lock in their current tax rate, which will likely be higher than their post-retirement tax rate.

Employer Roth contributions

Many employers offer matching or non-elective contributions in their 401(k) plans. However, those contributions were restricted to being made on a pre-tax basis only, even if the savings they matched were made on a Roth basis. Following the passage of the SECURE Act 2.0, however, employers may now offer workers the option to receive these contributions on a Roth basis. Note that employers may choose to offer Roth contributions, but are not required to.

Over the next few years, those nearing retirement will need to consider the implications of the SECURE Act 2.0. Higher catch-up limits for those in their early 60s, as well as employer contributions made on a Roth basis, will present new opportunities for savers. However, the “rothification” of catch-up contributions may lock some into a tight tax spot.

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Don’t buy a money pit. 

Anyone who tells you that buying and owning a home is less costly than renting one is not seeing the whole picture. Even if a mortgage payment on a property comparable to the home you rent is less expensive per month than your rent payment, you’re not seeing all the costs of homeownership. These include ongoing maintenance and repairs. And if you own the house, it’ll be on you to pay for and arrange the work (or perform it yourself, if you are qualified to do so).

This is why it’s a good idea to approach the buying process with eyes wide open and not to waive your inspection contingency. The inspection contingency in your purchase offer states that you are allowed to have the house inspected, and should that inspection turn up some less than optimal news about the home’s structure and features, you can renegotiate the price or ask the seller to pay for repairs. Here are five bad signs to watch out for — getting a mortgage on a home with these issues can end up costing you a lot.

1. Roof issues

The roof is an extremely important part of a home, as it’s literally your shelter from the weather. And it’s also expensive to replace a roof. Realtor.com notes that a standard home inspector may not dig too deep when it comes to checking out the roof of a home. But if they (or you) notice visible clues, like curling or missing shingles, it might be worth it to call in a specialist (i.e., a roof inspector).

2. Window problems

If a home inspector spots problems with a home’s windows, it could be an indication of larger issues with the house. Possible window red flags include feeling a draft, seeing condensation on the glass, and difficulty opening and closing. If it’s an older home with wood-framed windows, the frames could even be rotting. Window replacement is not cheap (Bob Vila notes an average cost of $564 per window), and having bad windows can result in higher energy bills (as my dad used to tell me, you don’t want to be paying to cool or heat the outdoors).

3. Older home systems

Ideally, your home inspector will take special care to check out the home’s vital systems, including heating and cooling, plumbing, and electrical. The technology, safety standards, and materials used for all these parts of a house have evolved and changed over time, so if you’re buying an older home, it’s vital to ensure these are in good condition and have been cared for or recently replaced.

4. Water damage

Water damage in a home can be easy for an unscrupulous home seller to mask. Beware of hastily painted over water stains on ceilings, odd smells, or warped walls and floors. And remember that water leaks can also lead to mold growth — which is both gross and not good for your health.

5. Foundation damage

A home’s foundation is like its skeleton, so you want to make sure you’re not buying a house with foundation problems. Ideally, a home inspector (and you) should look for danger signs like uneven floors, cracks in walls and ceilings, and moisture in the crawl space (depending on what type of foundation the house has).

What happens now?

If your home inspection turns up these or other potentially costly issues, you have a few options. You can see if the seller will either renegotiate the price, or pay to have the problems fixed. Or you can walk away from the deal (it bears repeating, don’t waive the inspection contingency when you make an offer). You’re likely buying a home to live in for at least a few years, so do yourself a favor and avoid buying a money pit that will drain your bank account.

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Here is how you can save faster for a down payment. 

According to the U.S. Census Bureau (as reported by the Federal Reserve Bank of St. Louis), the average cost of a U.S. home in Q4 2022 was $535,800. This hefty price tag can be daunting when you’re saving up for a down payment to buy a home. How long is it going to take you to save the necessary amount? Here is what you need to know and how long the process might take.

Saving for a down payment in 2023

Ideally, you should aim to save around 20% of the total purchase price of the home. For a home that costs $535,800, this means you will need $107,160 saved up as a down payment. It may seem impossible to save up such a large sum of money from scratch, but with careful planning and dedication, it is achievable.

If you’re an active duty or retired service member and qualify for a VA loan, your required down payment may be as little as 0%. The minimum down payment for an FHA loan can be either 3.5% or 10%, depending on your credit score. However, your monthly mortgage payment will be higher with a smaller down payment, so you will need to take that into account.

How much can you save?

Once your budget is sorted out and you have identified how much money you can realistically put aside every month toward your down payment, you can figure out how many years it would take you to reach your goal. For example, if you are able to save $500 a month, and assuming that you can get 3% APY in a high-yield savings account, it would take more than 14 years to save $107,160.

How to save faster

The first step is to make sure your finances are in order. You need to have a budget that accounts for all your expenses and leaves enough money left over to save each month toward your home down payment. If your current salary isn’t enough to cover this savings goal, it might be time to look into other income streams or ways of increasing your earnings (such as working overtime or starting a side hustle).

In addition to finding additional income, you can open a brokerage account to invest part of the down payment in a more aggressive fund to get a higher return. If you are able to save $1,000 per month and decide to invest the funds and earn 8% per year, then it would take about 7 years to save. Note, however, that if the home appreciates 5% per year, then it would take about 15 years. There are some downsides to this approach, as you may lose some of your principal if an investment goes down. So the closer you get to purchasing your home, look into reallocating your funds into more conservative investments to protect your money.

Depending on how much money you are able to put away each month and any additional income streams that come into play, it could take years to save up. So it is important to be patient and disciplined when saving. However, with careful planning and budgeting, it is possible to save up enough money for a down payment on an average U.S. house at today’s prices, it just depends on how much money you can realistically put aside each month and any additional income streams available. With the right approach and perseverance, this goal is within reach.

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It’s like PayPal and UPS had a baby. 

There are few things Amazon truly excels at more than taking your money. It has streamlined the checkout process in remarkable ways. You can go from browsing an item to “Thanks for your purchase!” in seconds. Set up your favorite credit card ahead of time and it’s even a one-button process.

And Amazon has extended that seamless experience to many small businesses through Amazon Pay. You can have the convenience of an Amazon checkout while actually supporting your favorite small business! Win-win.

Now, Amazon’s taken it a step further. May I introduce: Buy with Prime.

Amazon Pay + Prime shipping = Buy with Prime

A new service that was tested last year, Buy with Prime is set to launch more broadly by the end of January. Its goal? To make every purchase an Amazon purchase — even when you’re not actually making an Amazon purchase. (Cue Twilight Zone music.)

For shoppers, Buy with Prime is basically an upgrade to the Amazon Pay program (provided you have a Prime membership). And it really does make it seem like you’re making an Amazon Prime purchase, no matter whose website you’re really on.

Using Buy with Prime is a bit different than regular Amazon Pay, however. For one thing, you won’t be filling up your shopping cart.

Instead, you’ll find bright blue Buy with Prime buttons on individual product pages. Once you hit the button, you’ll be prompted to log into your Amazon account. From here, your payment and shipping information will automatically populate and you can complete your purchase.

Eligible Buy with Prime items are then shipped using Amazon’s network to your door.

The Amazon behind the curtain

For merchants, Buy with Prime is a more cosmopolitan version of the Fulfillment by Amazon program. It’s what you get when small businesses want to use Amazon’s huge fulfillment network — but they don’t want to actually sell stuff on Amazon.com.

It’s like a retail mullet: small business in the front, giant corporation in the back.

Given the issues facing Amazon’s marketplace lately — including a systemic issue with fake reviews and a growing counterfeit problem — this is an ideal compromise for many small businesses.

Whatever issues customers have with the sellers on Amazon.com, Amazon’s fulfillment platform remains very popular. It’s not uncommon to see reviews bemoaning the poor quality of an item — while lauding Amazon’s shipping and returns process.

And it seems to be working so far. Numbers from Amazon claim that Buy with Prime increases conversion by an average of 25%. (This means 25% more people completed a purchase when Buy with Prime was an option than when it wasn’t.)

Should you use Buy with Prime?

It sometimes feels like every time I check out with a small retailer, there are more payment options than there were the last time. Not that long ago, you simply entered your credit card information. Then, it was credit card or PayPal. Now, there’s half a dozen digital wallets, some pay-over-time programs, and now this.

But with so many options, which should you actually use? Should you stop using your credit card for online shopping in favor of Buy with Prime?

In the end, I think it all really depends on what kind of service you usually get from the company. Do they typically have some sort of free shipping option and good customer service for returns or exchanges? Then Buy with Prime isn’t necessarily going to be any better.

Even if you want the convenience of paying with your Amazon account, using Amazon Pay at checkout after filling your cart is still a viable option. One that could be easier if you’re buying multiple items and don’t want to Buy-with-Prime them individually.

However, if you want the benefits of Prime shipping and the convenience of Amazon Pay and you want it all in the click of a button — well, then you just may love the new Buy with Prime.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Brittney Myers has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon.com and PayPal. The Motley Fool recommends the following options: short April 2023 $70 puts on PayPal. The Motley Fool has a disclosure policy.

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Staying on top of your credit card debt could minimize the financial pain involved. 

America is a nation that’s fairly comfortable with debt. We routinely borrow money to finance home purchases and cars, and those types of debt are very common.

Credit card debt is also pretty common, despite the fact that it can be costly and financially harmful. And unfortunately, it only seems to be on the rise.

As of the fourth quarter of 2022, U.S. credit card balances amounted to $930 billion, according to a recent report by TransUnion. When we compare that to Americans’ collective $785 billion in credit card debt one year prior, it’s clear that we’re looking at a notable uptick. And that’s really not a good thing at all.

Why the increase in credit card debt?

Americans owed a lot more money on their credit cards at the end of 2022 than they did at the end of 2021. And inflation most likely played a big role in that.

Inflation was rampant from the start of 2022 all the way through the end of it. Meanwhile, many consumers depleted their savings accounts during the initial phases of the pandemic to cope with things like income loss and added expenses. So by the time inflation started surging, their safety nets were already gone. That no doubt forced a lot of people to fall back on credit cards when their paychecks could no longer do the job of covering their essential bills.

Getting a handle on your credit card debt

If you owe money on credit cards, your goal should be to eliminate that debt as quickly as you can. First of all, the sooner you do so, the less money you stand to lose to interest.

Also, too high a credit card balance relative to your total spending limit could cause damage to your credit score. So if you’re able to shed some or all of your credit card debt, your credit score might improve nicely.

So how do you go about managing and paying your credit cards? First, take inventory of your debts. Make a list of how much money you owe on each card with a balance, and figure out what interest rate each card is charging you.

From there, you have options. You could attempt to consolidate your debt via a balance transfer and then make a single credit card payment every month. Or, you could tackle your existing balances separately in order of highest interest rate to lowest.

The upside of doing a balance transfer is that many of these cards will give you a 0% introductory APR for a period of time. But you might also pay hefty fees to move your balances over to a new card, so you’ll need to weigh your potential savings against that expense.

Of course, it will take money to pay off that debt, no matter which strategy you use, so to that end, you may need to look at getting a second job or making some serious lifestyle changes. But it pays to do what you can to get out of credit card debt as quickly as possible — even if you have to make some near-term sacrifices to achieve that goal.

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It depends on what type of plan you have. 

If you’ve saved up for retirement in an IRA or 401(k) plan, give yourself a pat on the back. Building a retirement nest egg is no easy feat, especially when other expenses, like your mortgage payments, grocery costs, and utility bills no doubt got in the way all those years.

But if you’re getting ready to start tapping your retirement savings after years of building up cash reserves, you may be wondering if that money is going to be yours to keep in full, or if the IRS will be able to get a piece of it. The answer? It depends on the type of retirement plan you have.

Know the rules of your plan

The average senior on Social Security today collects $1,827 a month. If your monthly benefit is comparable, then it’s probably not a lot to live on. That’s where your personal savings come in.

But even if you have a nice nest egg to tap in retirement, money might still be pretty tight at that point in life. And so it’s important to know what to expect tax-wise.

Whether you’ll need to pay taxes on your retirement plan withdrawals or not will depend on the type of account you have. If you saved for retirement in a traditional IRA, your distributions from that plan will indeed be taxable. But if you have your savings in a Roth IRA, taxes on withdrawals won’t apply. (These rules are the same for 401(k) plans, where traditional 401(k) withdrawals are taxable and Roth 401(k) withdrawals aren’t.)

So how much tax will you have to pay if you’re looking at removing funds from a traditional IRA? Well, that will depend on your tax bracket. And the tax bracket you fall into will hinge on your total income.

Now, you might think your total income is limited to retirement plan withdrawals and Social Security benefits. But remember, if you have money in a savings account that’s earning interest, that interest counts as income. So do investment gains in a regular brokerage account. Your best bet is really to sit down with an accountant before you start withdrawing from your retirement savings so you can figure out what your tax liability looks like. That should help you budget more accurately and avoid financial stress.

Be mindful of taxes later in life

Taxes can be a burden at any stage of life. But in retirement, you’ll be limited to a fixed income. That income might consist of different sources, but if you don’t intend to work as a senior, you’ll need to be very careful about managing your money (and even if you do hold down a job as a retiree, accurate money management is still key). That’s why it’s so important to know what taxes to expect.

Not only are traditional IRA withdrawals taxable, but a portion of your Social Security benefits may be taxable, too, depending on your total income. Sitting down with an accountant could help you get a better handle on your retirement taxes so they don’t become a problem for you.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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