By Jonathan Bird, CFP®
The SECURE 2.0 Act is here to make a difference in the US retirement system, bringing forth a range of modifications to strengthen the retirement system and enhance financial preparedness for all Americans.
SECURE 2.0 became law on December 29, 2022. The main objective is to encourage people to save more, provide additional benefits for businesses, and increase flexibility for individuals saving for retirement. Some provisions are already in effect and others will be rolled out in 2024, 2025, and future years.
Key Changes if You are Retired or Close to Retirement, and the Benefits to You
1. Changes to the Required Minimum Distributions (RMDs)
One of the key changes in SECURE 2.0 is the increase in the age at which retirees must start taking Required Minimum Distributions (RMDs) from their IRA and 401(k) accounts. The age has been raised to 73 starting January 1, 2023, and will continue to rise to 75 in 2033. However, if you turned 72 in 2022 or earlier, the previous RMD schedule still applies.
The penalties for not taking an RMD, the excise tax, have also been reduced. Now, the penalty is 25% of the RMD amount (instead of the previous 50%) and even lower to 10% if you correct it promptly for IRAs. This reduction is applicable for taxable years after December 31, 2022.
Starting in 2024, RMDs will no longer be required from Roth accounts in employer retirement plans, which is a major change and gives you more control over your retirement savings.
Another major change is that in-plan annuity payments that exceed the participant’s RMD can now be applied towards the RMD for the year, which makes managing your retirement funds much easier.
For those aged 70 ½ and older, SECURE 2.0 has an added bonus – a one-time gift is allowed of up to $50,000 (adjusted for inflation) to a charitable organization of your choice, which can be counted towards the annual RMD if applicable. This is a great opportunity to give back to a cause that you support. It’s important to note that these gifts must be made directly from your IRA by the end of the calendar year to qualify. Do also check that the charity you choose is eligible for these gifts, so you can make the most of this opportunity.
2. Bigger Catch-Up Contributions
Firstly, what is a catch-up contribution? If you’re 50 years or older and looking to boost your retirement savings, a catch-up contribution might be just what you need! It’s an extra contribution you can make to your 401(k) or individual retirement account (IRA) above and beyond the usual limits. By making a catch-up contribution, you can increase your total contribution and give your retirement savings a helpful boost.
Catch-up contributions for older workers with workplace retirement plans have been modified under the new SECURE 2.0. Starting January 1, 2025, catch-up contributions will be increased for 401(k), 403(b), and 457 plans. If you will be between 60 and 63 years old when this comes into effect, you will be able to make annual contributions of up to $10,000, indexed to inflation. This applies to those earning $145,000 or less. Catch-up contributions for those earning over $145,000 must be made in after-tax dollars to a Roth account (this is effective after December 31, 2023).
Another exciting change is the introduction of Roth accounts for employer-sponsored plans. Employers now have the option to offer employees the option of receiving matching contributions in their Roth accounts, which are made on an after-tax basis and allow for tax-free earnings growth. It’s important to note that, unlike Roth IRAs, employer-sponsored Roth accounts still require Required Minimum Distributions until the tax year 2024.
3. More Access to Retirement Savings
From January 2, 2024, defined contribution retirement plans will be able to offer an emergency savings account associated with a Roth account. This lets employees withdraw up to $1,000 for personal or family emergency expenses, once a year, without incurring the typical 10% tax penalty for early withdrawal if they are under the age of 59½. Companies can choose to set up an emergency savings account for their employees through automatic payroll deductions, with a cap of $2,500.
If you’re a victim of a natural disaster that has been declared a federal disaster, you may be able to withdraw up to $22,000 from your retirement account without penalty. This provision was put in place with the passing of the new Act. The withdrawal is treated as income and spread out over three years, but you won’t have to worry about any penalties. This can be a helpful way to access some extra funds during a difficult time.
The Bottom Line
There are a host of changes for everyone, and we have only picked out a few for retirees. Some of the new provisions are already in effect and others will be rolled out in due course. The SECURE 2.0 Act is making great strides in enhancing the US retirement system and helping all Americans prepare for their retirement years. To make sure you’re taking full advantage of your retirement plans, it’s a good idea to speak with a fee-only fiduciary advisor. They can help guide you through the changes relevant to you and make sure you’re on track to meet your retirement goals.
Have questions about retirement planning? Contact our Free Financial Helpline today and get connected with a financial advisor for 1:1 pro bono mentoring.
Jonathan Bird, CFP®
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