Are you comfortable with your retirement planning?
While many Americans are hoping to retire with peace of mind, many do not have the proper nest eggs to allow them to do so. To better help Americans prepare for retirement, Congress decided to modify the rules to help Americans reach some retirement savings milestones.
On December 29, 2022, the SECURE Act 2.0 was signed into law. This bill was created to expand and encourage saving for retirement through qualified plans and Individual Retirement Accounts (IRAs). These changes made to the retirement system impact retirees and those currently saving for retirement.
Some of these changes have gone into effect in 2023, and some of them are still coming at a later time. It’s important to familiarize yourself with these new rules now and understand how they may impact you and your retirement plan as time goes on.
Age Increase for Required Minimum Distributions
If you’ve been contributing to a retirement account, it’s likely you haven’t paid any taxes on the earnings inside that account. Tax-deferred retirement accounts are allowed to grow tax-free and are generally subject to income taxes once distributed.
The government wants to ensure that these accounts are used for retirement and are not to be passed on to future generations. That’s why the Internal Revenue Service (IRS) mandates that required minimum distributions (RMDs) be taken annually from certain tax-deferred retirement accounts, such as a traditional IRA or 401(k).
Prior to 2023, those who attained age 72 were generally subject to these RMD rules. With Americans working and living longer than ever before, Congress agreed to raise the age at which RMDs must begin.
Effective January 1, 2023, individuals who were born in 1951 through 1959, will now be subject to these required minimum distribution rules in the year they reach age 73. The RMD age is further increased to age 75 for those born in 1960 or later. This age increase gives individuals more planning flexibility and allows those retirement funds to continue to grow tax-deferred for an additional few years. However, delaying RMDs too far into the future may result in larger taxable withdrawals over a shorter period of time.
What’s your RMD age?
| Born in 1950 or earlier | Age 72 |
| Born in 1951-1959 | Age 73 |
| Born in 1960 or later | Age 75 |
Technically, the first RMD can be delayed until April 1 of the year following the year you attain your RMD age. However, delaying this initial distribution still requires that a second RMD be taken no later than December 31st of that same tax year, likely increasing your taxable income even more.
If you own a Roth IRA, you don’t need to worry about RMDs. Roth IRA owners are not required to take annual withdrawals from the account during their lifetime. These accounts only become subject to the RMD rules after the death of the account owner.
Catch-Up Contribution Changes (for those age 50 or older)
If you’re age 50 or older, catch-up contributions allow you to add even more to your retirement savings.
Older individuals tend to reach their peak earnings in their 50s and are more likely to have additional savings to set aside for retirement. This catch-up provision allows individuals to ‘catch-up’ their retirement savings to a level that they can be more comfortable with heading into the golden years.
The SECURE Act 2.0 makes significant changes to how catch-up contributions will work in the future.
- Starting in 2024:
- All catch-up contributions for employees with wages higher than $145,000 during the previous year (indexed for inflation), will be required to be made as after-tax catch-up contributions. Under current law, catch-up contributions can be made on a pre-tax basis regardless of income, reducing your taxable wages. The current catch-up contribution limit for employees is $7,500 for the 2023 tax year.
- The catch-up contribution for an IRA is limited to $1,000 and despite years of inflation, it has not increased since 2006. Beginning in 2024, this $1,000 amount will finally be indexed for inflation on an annual basis. However, this increase will only occur in $100 increments, so it is likely to be a few years until we see any benefit from this provision.
- Starting in 2025:
- Individuals aged 60, 61, 62, and 63 are allowed to make additional catch-up contributions. This allowance limits the catch-up contributions to 150% of the regular catch-up contribution amount for that tax particular year.
- For example, if the 2025 regular catch-up contribution is limited to $8,000, the additional catch-up contribution will be limited to $12,000 ($8,000 x 150%).
- Individuals aged 60, 61, 62, and 63 are allowed to make additional catch-up contributions. This allowance limits the catch-up contributions to 150% of the regular catch-up contribution amount for that tax particular year.
Convert Excess 529 Plan Funds to a Roth IRA
College tuition is expensive and isn’t getting cheaper anytime soon.
Investing in your child’s education at an early age can help set your mind at ease when it comes time to pay those tuition bills. 529 plans are a great tax-advantaged investment account designed to help save for future educational expenses.
Contributions to a 529 plan grow free of federal and state income taxes while invested in the account. Payments made from a 529 plan for qualified educational purposes allow any earnings on the contributions to avoid income tax as well.
The SECURE Act 2.0 makes 529 plans even more attractive.
Under current law, there is no ability to roll over unused 529 funds once an individual graduates from college. These funds would either need to be distributed for non-educational purposes and be subject to a penalty or transferred to another relative to be used for qualified educational purposes.
Starting in 2024, if a child graduates from college and has unused funds in their 529 plan, the child may be able to roll over some of those remaining funds to his or her Roth IRA.
A Roth IRA is an individual retirement account that is funded with after-tax dollars. These accounts grow tax-free and can be withdrawn in retirement without incurring any income taxes on the distributions (similar to how a 529 plan works when used for qualified educational purposes).
However, there are some stipulations around this:
- The 529 account must have been in existence for at least 15 years,
- 529 contributions made within the last 5 years don’t qualify for rollover,
- The annual rollover is limited to that tax year’s Roth IRA contribution limit,
- The total lifetime rollovers per individual cannot exceed $35,000.
Student Loan Payments Qualify for 401(k) Employer Matching Contributions
Many student loan borrowers struggle to save for retirement as they are prioritizing paying off their loans. As a result, these individuals can lose out on years of potential growth in their retirement accounts. The SECURE Act 2.0 includes a provision to help student loan borrowers.
Effective January 1, 2024, if an employee is paying off a qualified student loan, those payments are allowed to count toward their 401(k) plan. The benefit of this provision would enable employees to receive matching 401(k) contributions from their employer, even if the employee is not directly funding their own retirement account.
However, it is up to each employer whether they want to offer this feature. As this provision is not mandatory, it’s best to check with your employer first to see if this may apply for you starting in 2024.
Missed RMD Penalties Are Reduced
If you failed to take your required minimum distribution for the year, the IRS will slap you with a 50% penalty on the amount that should have been distributed. This substantial penalty is aimed to encourage individuals to withdraw their RMDs timely and while this penalty may seem excessive, the IRS has a good history of waiving it when due to reasonable cause.
Effective January 1, 2023, the SECURE Act 2.0 reduces this excise tax penalty from 50% to 25%. This penalty is further reduced to 10% if the missed RMD is corrected in a timely manner, which generally means within two years.
One concern amongst financial experts is that the reduction in the excise tax may encourage the IRS to be more stringent when enforcing this penalty. However, that is purely speculation as this provision is brand new.
Roth 401(k)s Are No Longer Subject to RMDs
Under current law, Roth IRA accounts are not subject to lifetime RMDs. However, there is a unique rule in the tax code where designated Roth accounts held in qualified employer plans, such as a 401(k), are subject to the required minimum distribution rules…until now.
The SECURE Act 2.0 conforms the RMD rules for Roth IRAs and designated Roth accounts.
Beginning January 1, 2024, RMDs will no longer be required for designated Roth accounts held in qualified employer plans. This means that all non-inherited Roth accounts are no longer subject to RMDs during the account owners’ life.
Penalty-Free Emergency Withdrawals from Employer Plans
According to a report by the Federal Reserve, almost half of Americans would struggle to cover an unexpected $400 expense. With so many Americans living paycheck to paycheck, Congress wanted to expand the resources available to taxpayers in the case of an emergency.
Effective for tax years beginning January 1, 2024, any individual with a tax-deferred retirement plan is allowed to take a distribution of up to $1,000, without incurring any penalties. However, this distribution may still be subject to federal and state income taxes.
As retirement accounts are not intended to be used prior to retirement, Congress limited the ability to withdraw funds for emergencies. These emergency withdrawals are limited to one distribution every three years unless a prior distribution is recontributed to the account before then.
Planning Ahead from Secure Act 2.0
The SECURE Act 2.0 includes more than 90 changes aimed to help retirees and those saving for retirement. These provisions may change the way that you personally save for retirement, so be sure to reach out to your financial Advisor to help you understand what the SECURE Act 2.0 means for you. Your advisor can also assist in identifying specific opportunities to help you achieve your retirement goals.
If you’re not sure your advisor has the resources in retirement planning you might need or you’d like a second opinion on next steps for you financially, our advisors at Domani Wealth are always available to start a conversation! You can get in touch with one of our team members directly, use our book a consult form, call us at 855-855-5455 or email us at [email protected].
