We Now Have the Secure Act 2.0 in Effect

by Peter Rizzo

Life Settlements in a Retirement Account? Think Again.

Below is a breakdown of some of the changes that could affect your planning for contributions and also your future RMDs.

Key takeaways:

  • The age to start taking RMDs increases to age 73 in 2023 and to 75 in 2033.
  • The penalty for failing to take an RMD will decrease to 25% of the RMD amount, from 50% currently, and 10% if corrected in a timely manner for IRAs.
  • Starting in 2024, RMDs will no longer be required from Roth accounts in employer retirement plans.
  • Catch-up contributions will increase in 2025 for 401(k), 403(b), governmental plans, and IRA account holders.
  • Defined contribution retirement plans will be able to add an emergency savings account associated with a Roth account.
  • Prior to the SECURE Act, you could not contribute to a Traditional IRA once you reached the age of 70½. The SECURE Act eliminated the age restriction on Traditional IRA contributions. Beginning with tax year 2020, people with earned income can now contribute to a Traditional IRA regardless of their age.
  • The annual contribution limit for an IRA for 2023 is $6,500, or $7,500 if you are age 50 or older.
  • The 401(k)-contribution limit for 2023 is $22,500 for employee contributions and $66,000 for combined employee and employer contributions. If you’re age 50 or older, you’re eligible for an additional $7,500 in catch-up contributions, raising your employee contribution limit to $30,000. And the employer contribution can be ROTH contributions.

The SECURE 2.0 Act is now law. The legislation provides a slate of changes that could help strengthen the retirement system—and Americans’ financial readiness for retirement.

The law builds on earlier legislation that increased the age at which retirees must take required minimum distributions (RMDs) and allowed workplace saving plans to offer annuities, capping years of discussions aimed at bolstering retirement savings through employer plans and IRAs.

While SECURE 2.0 contains dozens of provisions, the highlights include increasing the age at which retirees must begin taking RMDs from IRA and 401(k) accounts, and changes to the size of catch-up contributions for older workers with workplace plans. Additional changes are meant to help younger people continue saving while paying off student debt, making it easier to move accounts from employer to employer, and allowing people to save for emergencies within retirement accounts.

For people in or near retirement

Big changes to RMDs.

  • The age at which owners of retirement accounts must start taking RMDs will increase to 73, starting January 1, 2023. The current age to begin taking RMDs is 72, so individuals will have an additional year to delay taking a mandatory withdrawal of deferred savings from their retirement accounts. Two important things to think about: If you turned 72 in 2022 or earlier, you will need to continue taking RMDs as scheduled. If you’re turning 72 in 2023 and have already scheduled your withdrawal, you may want to consider updating your withdrawal plan. Good to know: SECURE 2.0 also pushes the age at which RMDs must start to 75 starting in 2033.
  • Starting in 2023, the steep penalty for failing to take an RMD will decrease to 25% of the RMD amount not taken, from 50% currently. The penalty will be reduced to 10% for IRA owners if the account owner withdraws the RMD amount previously not taken and submits a corrected tax return in a timely manner.
  • Additionally, Roth accounts in employer retirement plans will be exempt from the RMD requirements starting in 2024.
  • And beginning immediately, for in-plan annuity payments that exceed the participant’s RMD amount, the excess annuity payment can be applied to the following year’s RMD.

 

Turning 72 in 2023?

Consider when to take your first RMD: Either by December 31, 2024, or delay until no later than April 1, 2025. Remember, if you delay your first RMD to April 1, 2025, you’ll need to take 2 RMDs in 1 tax year: Your first by April 1, 2025, which satisfies your required withdrawal for 2024, and your second by December 31, 2025, which satisfies your required withdrawal for 2025.

Higher catch-up contributions.

Starting January 1, 2025, individuals ages 60 through 63 years old will be able to make catch-up contributions up to $10,000 annually to a workplace plan, and that amount will be indexed to inflation. (The catch-up amount for people age 50 and older in 2023 is currently $7,500.)

One caveat: If you earn more than $145,000 in the prior calendar year, all catch-up contributions at age 50 or older will need to be made to a Roth account in after-tax dollars. Individuals earning $145,000 or less, adjusted for inflation going forward, will be exempt from the Roth requirement.

IRAs currently have a $1,000 catch-up contribution limit for people age 50 and over. Starting in 2024, that limit will be indexed to inflation, meaning it could increase every year, based on federally determined cost-of-living increases.

Matching for Roth accounts.

Employers will be able to provide employees the option of receiving vested matching contributions to Roth accounts (although it may take time for plan providers to offer this and for payroll systems to be updated). Previously, matching in employer-sponsored plans were made on a pre-tax basis. Contributions to a Roth retirement plan are made after-tax, after which earnings can grow tax-free.

Important to know: Unlike Roth IRAs, RMDs from an employer-sponsored plan are required for Roth accounts until tax year 2024.  This means you can make your full Solo 401k a ROTH contribution.

To find out how this can be applied personally set a time to discuss here or call 1-800-482-2760

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