[2023 Update] The SECURE 2.0 Act is a new law that aims to strengthen the nation’s retirement system. Some of the key changes brought about by the Act include increasing the age at which required minimum distributions (RMDs) must be taken from retirement accounts to 73 starting in 2023 and to 75 starting in 2033.
The Act also reduces the penalty for failing to take an RMD to 25% of the required amount and allows for catch-up contributions to 401(k), 403(b), governmental plans, and IRAs to increase in 2025.
In addition, the Act allows defined contribution retirement plans to offer emergency savings accounts associated with Roth accounts and exempts Roth accounts in employer retirement plans from RMD requirements starting in 2024.
The Act also includes provisions to help younger people save while paying off student debt, make it easier to move accounts between employers, and allow people to save for emergencies within retirement accounts.
Secure Act 2.0 impact if in or near retirement
The age at which retirement account owners must begin taking required minimum distributions (RMDs) will increase to 73 starting in 2023. This means that individuals will have an additional year to delay taking mandatory withdrawals from their retirement accounts.
If you are turning 72 in 2023 and have already scheduled your withdrawal, you may want to consider updating your plan. However, if you turned 72 in 2022 or earlier, you will still need to take RMDs as scheduled.
It is also important to note that the age for taking RMDs will increase to 75 starting in 2033. Though the penalty for failing to take an RMD will decrease to 25% of the required amount starting in 2023 (it is currently 50%).
If you are an IRA owner and do not take your RMD but later withdraw the required amount and submit a corrected tax return in a timely manner, the penalty will be reduced to 10%.
Roth accounts in employer retirement plans will also be exempt from RMD requirements starting in 2024. If you receive in-plan annuity payments that exceed your RMD amount, the excess payment can be applied to the following year’s RMD.
Higher Catch-up Contributions
Starting in 2025, individuals aged 60 to 63 will be able to make catch-up contributions of up to $10,000 annually to a workplace plan, according to the SECURE 2.0 Act. This amount will be adjusted for inflation.
Currently, individuals aged 50 and over can make catch-up contributions of $7,500. However, if you earn more than $145,000 in the previous calendar year, catch-up contributions made at age 50 or older must be made to a Roth account in after-tax dollars.
Those earning $145,000 or less, adjusted for inflation, are exempt from this requirement. In addition, IRAs currently have a catch-up contribution limit of $1,000 for those aged 50 and over.
This limit will be adjusted for inflation starting in 2024, which means it could increase every year based on cost-of-living increases determined by the government.
Per the SECURE 2.0 Act, employers will be able to offer employees the option of receiving vested matching contributions to Roth accounts.
Prior to the Act, matching contributions in employer-sponsored plans were made on a pre-tax basis. Contributions to a Roth retirement plan can now be made after taxes, and earnings can grow tax-free.
However, it may take some time for plan providers to offer this option and for payroll systems to be updated. .
It’s important to note that, unlike Roth IRAs, RMDs are required for Roth accounts in employer-sponsored plans until the tax year 2024.
[2022 update] With RMD’s now required to be taken after a pandemic pause, the IRS is reminding IRA owners age 70 ½ or over that they can transfer up to $100,000 annually to charity tax-free each year. This will count towards their RMD.
These qualified charitable distributions (QCDs) provide an altruistic way for older Americans (over 72) to meet their RMD for a given year. They can be paid directly to the qualified charity organization(s) the donor chooses and the distributions are tax free, unlike other regular IRA or 401K distributions.
QDC also provide an effective tax management tool by potentially allowing donors to stay in a lower tax bracket and prevent phaseouts of other valuable tax deductions or lower eligibility for certain government programs (including Social security taxes).
[2020 Update] Under the recently passed $2 trillion CARES stimulus bill, workers will see a temporary loosening of the hardship distribution rules from retirement accounts. Eligible people affected by COVID-19 related fallout will have access to up to $100,000 (or 100% of their account balance if lower) of their retirement savings without the 10% penalty that is currently in place.
The law also doubled the amount participants can take in loans from a 401k or IRA account for the next six months to the lower of $100,000 or 100% of the account balance. Note – IRAs don’t permit loans.
For retirees, the law suspends 2020 Required minimum distributions (RMDs) from tax-deferred 401(k)s and individual retirement accounts starting at either age 70½ or age 72. This is good news for those that have seen sharp falls in their portfolio values.