A major piece of legislation, referred to as SECURE Act 2.0, is set to become law in 2023. This lengthy piece of legislation (over 4,000 pages) includes a number of retirement provisions that improve upon current law and are worth noting.
Below are the most important items and changes to be aware of for retirees and those approaching retirement:
Required Minimum Distributions (RMDs):
RMDs refer to the age at which the IRS requires people to distribute a portion of their pre-tax retirement accounts each year.
In 2023, the starting age increases from 72 to 73. So if you are turning 72 in 2023, you will have another year (till 2024) to start RMDs. Then, in 2033, the starting age is set to increase again to 75.
For people that are already taking RMDs, they will continue distributions on their normal schedule without any changes.
Excise Tax on RMDs:
This is one of the heftiest taxes the IRS imposes. If someone does not take the full amount of their RMD in a given year, the IRS can impose a 50% excise tax on the shortfall.
This penalty amount is set to be reduced to 25% and could be as low as 10% depending on how quickly the shortfall is distributed.
529 Accounts and Roth IRAs:
This is a popular way for parents and grandparents to save and invest funds for college.
One of the reasons some people hesitate to use a 529 plan is the fear that any funds that are not used for higher education could be assessed a penalty in order to withdraw them for other purposes. The new law adds additional flexibility as well as an interesting planning option by allowing a 529 beneficiary to rollover up to $35,000 into a Roth IRA. As always, there are some details that need to be adhered to – namely the 529 account must have been opened for at least 15 years, and the rollover amount in any year can not exceed the annual IRA contribution limit. However, this could be a great opportunity for a young adult to get money into a Roth IRA that could compound over the ensuing decades. And for a parent or grandparent, it should provide additional comfort that there is a good option for funds that might not get used for higher education.
Retirement Catch-Up Contributions:
For those age 50 or older you are allowed to contribute extra funds into retirement plans.
401(k) and 403(b) plans: In 2023, the catch-up contribution is $7,500 that you can sock away in your plan on top of the normal contribution limit. Starting in 2025, for people between the age of 60-63, the catch-up contribution will increase to $10,000 (indexed for inflation).
IRA accounts: The current catch-up contribution is $1,000. The new law will automatically increase this amount each year by the inflation rate.
Catch-Up Contributions in Roth Accounts:
Changes coming to which account you can contribute to with the catch-up contributions.
Starting in 2024, for workers with wages over $145,000 in the previous year, the catch-up contributions will be required to be deposited into the Roth portion of your 401(k) or 403(b). This will limit the current year tax deduction to the normal retirement account contribution limits, and these additional contributions would not receive an immediate tax benefit. However, the catch-up contributions would be eligible for tax-free withdrawals later in retirement.
Employer Contributions Eligible for Roth Accounts:
Currently, all employer matching contributions go into the pre-tax portion of retirement accounts.
Effective in 2023, employees will be allowed to elect that employer matching contributions and other nonelective employer deferrals go into the designated Roth accounts. Previously, these contributions have been restricted to the pre-tax portion of retirement accounts.
Mandatory Automatic Enrollment:
While this part of the legislation will likely have little impact for those nearing retirement, we think it could end up being one of the most significant changes for the general public and younger people in the workforce.
Starting in 2025, new 401(k) and 403(b) plans must auto-enroll all eligible employees into the plan at a minimum contribution level of 3% or as high as 10%. Additionally, there needs to be an automatic increase to this savings rate of 1% per year until a 10% employee deferral rate is reached. Employees still have the option to opt-out of contributing to the plan, but research shows that automatic enrollment can significantly increase participation and employee retirement plan balances.
