Secure 2.0: Can you save for retirement while paying off your debt?

I used to believe you couldn’t pay off debt and save for retirement, but new legislation through the Secure 2.0 Act is making me reconsider.

Years ago, I wrote a post titled If you feel like you have too much debt to ever save for retirement. This was based on a conversation I had at a meetup group I used to run, where the participants lamented that they were never going to be able to start saving for retirement because they had too much debt.

I explained that, technically—or rather, mathematically—they are both versions of the same thing. Paying off debt is reducing a balance with a negative interest rate, while saving for retirement is increasing a balance with a positive interest rate. They are, in effect equivalent, so doing one is exactly like doing the other.

But the whole reason why we were talking about this was because I don’t generally believe that you can actively pay off debt and actively save for retirement at the same time. Unless you’re getting a match at work, you would be better served just to focus on paying off your debt as quickly as possible, and then funnel all that money into savings later. Otherwise, you’re working at cross-purposes, with your debt cancelling out your savings.

But new legislation has changed some this argument slightly, which might give certain employees the ability to do pay off debt and save for retirement at the same time.

Secure 2.0

The Secure 2.0 Act, passed in 2022, is U.S. legislation whose primary aim is to increase people’s retirement savings. (The 2.0 part refers to it being a kind of sequel to the original Secure Act passed in 2019.)

According to Investopedia, the three aims of this bipartisan law are to:

  • Get people to save more for retirement
  • Improve retirement rules
  • Lower the employer cost of setting up a retirement plan.

Sounds pretty good to me, right?

Section 110

One aspect of this legislation that totally passed me by until I read about it in an article for the New York Times is an interesting provision in there among the 92-odd other provisions, titled: “Section 110: Treatment of student loan payments as elective deferrals for purposes of matching contributions”. Here’s the important text:

Section 110 is intended to assist employees who may not be able to save for retirement because they are overwhelmed with student debt, and thus are missing out on available matching contributions for retirement plans. Section 110 allows such employees to receive those matching contributions by reason of repaying their student loans.

Let’s go into what this means.

Employer matching

Some employers offer a “match” on their workplace retirement plans, such as a 401(k) or 403(b).

What this means is that if you contribute a certain amount (usually a percentage) to your workplace retirement plan, you will get some kind of matching contribution (also usually a percentage) in kind.

So for example, some company might offer a 3% match, which means that if you contribute 3% of your paycheck to the retirement plan, they will put an equal 3% of their own money in your account.

This is free money, one of my favorite kinds.

The obvious point here though is that you have to contribute to the plan to get the match. Even with a 3% match, if you only put 1% in, you only get a 1% match. (If you put more than 3% in, you still only get the 3% match though.)

What about student loan debt?

It is the stated aim of Secure 2.0 to “Get people to save more for retirement”, since if you don’t save enough for retirement, your life in your golden years will be significantly more difficult. It’s in society’s best interest for you to save more.

(Actually, it’s in society’s best interest to provide a universal basic income and pension system, as this would spread costs around, eliminate unnecessary stress, and ultimately save lives. But I digress.)

But looking to the world around us, many people are saddled with a lot of student loan debt. And those monthly payments may inhibit your ability to fund a retirement account.

There hasn’t been a good solution to this. The Biden Administration has tried hard to cancel a lot of people’s student loan debt, though the Supreme Court and recalcitrant Republicans have tried hard to put a stop to that.

But with the Secure 2.0 Act, Congress has come up with a novel solution for those who have lots of student loan debt and want to save more for retirement.

Debt payments as contributions

The Secure 2.0 Act states that employers can choose to accept proof of student loan payments as equivalent to employee retirement plan contributions as far as eligibility for the match.

In short, you can pay off your debt and still get the match.

Here’s an example of how this works. Zane earns $60,000 a year and gets paid monthly. Each paycheck is therefore $5,000. Zane works at a place with the 3% match I talked about above, so in order to get the full 3% match, Zane would need to defer $150 to the retirement plan, in order to get $150 in free (match) money.

But under this new provision, Zane could pay $150 towards a student loan debt, and still be eligible to receive the $150 in matching contribution to the retirement plan. So Zane pays down the student loan, and gets $150 in retirement contributions for the trouble.

That’s pretty cool if you ask me.

Now, there are caveats. You need to be working at a job that offers a match. Companies need to opt in to this scheme. And if you’re on one of those payment plans where you don’t have to pay anything toward your loans, you won’t get any matching benefit.

But I feel like these are minor quibbles to a decent idea. It’s valid to want people to contribute more to their retirement, given that we have very little safety net and a system that punishes people for being poor. At the same time, we have engineered a system when many people have student loans that are equal to more than their salary for an entire year. A clever solution is to use payments on one to benefit the other.

So, on balance, maybe you really can pay off your debt and save for retirement at the same time. Just not in the way that most people think of it.

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