Secure 2.0 Act: Changes to Retirement
On December 29th, 2022, the Secure 2.0 Act was signed into law. The basis of this new law is to provide changes to the retirement system and hopefully strengthen many Americans’ financial readiness for retirement. Employees will find many opportunities and advantages with this new law in place. Some key takeaways from the Secure 2.0 Act include:
- The age to start taking RMDs (Required Minimum Distribution) increased to age 73 in 2023 and to 75 in 2033.
- Penalties for failing to take your RMD by the end of the year will decrease from 50% to 25%. It will further decrease to 10% if the issue is corrected in a timely manner.
- Starting in 2024, Americans will no longer have to take RMDs from Roth accounts in employer retirement plans.
- Catch-up retirement contributions will increase in 2025 to allow for meeting retirement goals.
RMD Changes (Age Requirements, Penalties, etc.):
A Required Minimum Distribution is an annual amount that you must withdraw from a traditional IRA once you meet a specific age. Before the Secure 2.0 Act passed, the age to take an RMD was 72 years old. With the new law, RMDs will begin at age 73 in 2023 and move up to age 75 in 2033. If you turned 72 in 2022, you will still need to take your yearly RMD. Others who will turn 72 in 2023 now have an extra year before they have to take their RMD.
Previously, the penalty for not taking a Required Minimum Distribution by the end of the year was a 50% excise tax. This penalty has now been lowered to 25%. If an IRA owner withdraws the amount previously not taken and submits a corrected tax return in a timely manner, the penalty drops even further to 10%.
401(K) and Other Retirement Plans:
401K: Currently, individuals over a specific age may make catch-up contributions to allow for an increase in growth in their plan as they near retirement. For people aged 50-61, the catch-up contribution will be $7,500. Secure 2.0 is now allowing those age 62-64 to make catch-up contributions up to $10,000 starting in 2024.
IRA: Additionally, an IRAs catch-up contribution limit will be indexed to inflation starting in 2024. This means that the limit could increase every year based on cost-of-living increases.
Roth IRA: With the Secure 2.0 Act, employees now have the option of receiving vested matching contributions to Roth accounts. This means that employees can contribute to their retirement plan after-tax as opposed to before-tax, which allows for earnings to grow tax-free.
A QCD is a ‘qualified charitable distribution’ that allows for up to $100,000 to be donated each year from a traditional IRA to a charity in place of taking an RMD. A QCD contribution will not be taxable as long as it is taken directly from an IRA and donated to an eligible charity. The limit on QCDs will be indexed to inflation and a charitable gift annuity or charitable remainder trust in the amount of $50,000 or less will be allowed. These gifts must come directly from your IRA by the end of the calendar year to count. As a reminder, a QCD would be in lieu of a charitable deduction on your taxes and cannot be claimed as such.
Mandatory Automatic Enrollment:
Employers are now required to enroll eligible new hires into a contribution plan at a pre-tax rate of 3% of the employee’s pay with an annual bump of 1% up to 10%. Employees may select a different contribution amount if they wish, but law now requires the option of a higher contribution to be available. Small businesses with 10 or fewer employees, employers that have been in business for less than three years, and churches and governments are exempt from mandatory enrollment.
The above information is the most pertinent information to take from the Secure 2.0 Act, but the entire PDF of the Act can be found online should you wish to dive further into the new law.