New laws are changing the landscape of retirement – again. SECURE Act 2.0 consists of more than 90 retirement provisions, including changes to RMDs, catch-up contributions, Roth accounts, and college savings plans. Some provisions are immediate, while others go into effect in the coming years.
The first SECURE Act, which went into effect on January 1st, 2020, changed the RMD age from 70 ½ to 72 and eliminated the stretch IRA. I was a vocal critic of the 10-year rule that replaced the stretch IRA. Instead of being able to stretch distributions over a lifetime, those inheriting an IRA from someone other than their spouse now have to take the money out within ten years. When this law passed, we talked to many of you about how this might impact your beneficiaries. Some of you chose to implement an IRA relocation strategy and the ability to see more money go to your loved ones and less to taxes.
Generally, I think the changes in SECURE Act 2.0 are beneficial for pre-retirees and retirees. Here are some of the highlights of SECURE Act 2.0 and how they could impact your retirement.
The RMD (required minimum distribution) age is changing – again. RMDs are distributions you are required to take from retirement accounts you haven’t paid taxes on, like traditional IRAs and employer-sponsored plans like 401(k)s.
SECURE Act 2.0 changed the RMD age to 73, effective January 1st, 2023. The RMD age changes to 75 in 2033. If you turned 72 in 2022, the old rules apply, and you will continue taking RMDs as scheduled. These RMD ages apply to the owner of a retirement account. The rules are different if you inherit an IRA or other retirement account.
Starting this year, the penalty for failing to take an RMD has decreased from 50% of the RMD amount not taken to 25%. The penalty is reduced further to 10% if the account owner withdraws the RMD amount previously not taken and submits a corrected tax return in a timely manner (generally within two years).
SECURE Act 2.0 also revises the statute of limitations for RMD penalties. For people who aren’t required to file an income tax return for the tax year in question, the three-year limitations period starts on the date that an income tax return would have been due (excluding extensions) instead of the date a tax return for the year is actually filed.
Anytime we talk about RMDs, it’s good to be reminded you have until April 1st of the year after you turn RMD age to take your first RMD. For some, delaying their first RMD can be an effective long-term tax planning strategy.
IRAs currently have a $1,000 catch-up contribution limit for those age 50 and older. Starting in 2024, that limit will be indexed to inflation, meaning that it could increase yearly based on the government’s cost-of-living calculations. These increases will happen in $100 increments.
So-called “super” catch-up contributions will apply to those ages 60 to 63 starting January 1st, 2025. That age group can make catch-up contributions of up to $10,000 annually to an employer-sponsored plan. The catch-up contribution limit for those age 50 and over in 2023 is $7,500.
There is a stipulation with the catch-up contribution. If you earned more than $145,000 in the prior calendar year, all catch-up contributions at age 50 or older must be made to a Roth account in after-tax dollars. Individuals earning $145,000 or less (adjusted for inflation annually) will be exempt from the Roth requirement.
Roth and RMDs
Currently, Roth 401(k) accounts are subject to the same RMD rules that apply to traditional IRA accounts. Therefore, the account owner must start taking distributions the year they reach RMD age, currently 73. This was a confusing rule because there are no RMDs on Roth IRA accounts. SECURE Act 2.0 eliminates RMDs on Roth 401(k)s starting in 2024.
The big beef with 529 college savings plans was that if your child didn’t go to college or received a scholarship, there were only a few things you could do with the money without facing a 10% penalty and having to claim distributions as income. SECURE Act 2.0 gives you another option.
Starting in 2024, you can roll up to $35,000 in 529 tuition savings money to a Roth IRA. The $35,000 is a lifetime limit. What you can rollover annually is subject to current Roth IRA limits ($6,500 in 2023, with an extra $1,000 for those age 50 and over). The rollovers can only begin if the money has been in the 529 for at least 15 years. The Roth IRA must be established in the same name as the 529 beneficiary.
Overall, these provisions give you more control when planning for retirement. Pushing back the RMD age means we may have more time to execute long-term planning strategies that can lower or eliminate the tax headache RMDs can cause. The elimination of RMDs on Roth 401(k) accounts is a commonsense change. You’ve already paid taxes on the money, so the government shouldn’t require you to take distributions. It’s also good when catch-up contributions increase, and you can put more money into retirement accounts. I find the ages 60 to 63 timeframe for those “super” contributions somewhat arbitrary, but we’ll take it.
Control of your money is what you are looking for, and it’s why we developed Your Merkle Plan. We also talked about the plan being flexible and subject to the impact of legislative changes. If you have any questions about these new laws, please don’t hesitate to reach out to us.
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