The Secure Act 2.0 has been signed into law and brings with it several provisions aimed at increasing retirement savings and providing more Americans with a secure stream of retirement income.
Of the upcoming changes, which take effect in a staggered way in the years to come, there are a few that will be most impactful for Americans planning for retirement:
2023: Changes to RMDs
The original Secure Act raised the age for required minimum distributions from retirement accounts from 70½ to 72. Secure 2.0 will raise it to age 73 as of 2023, and then adjust again to age 75 starting in 2033.
In addition, the income tax penalty for failure to take an RMD has been reduced from 50% to 25%, and further reduced to 10% if mistakes are rectified in a timely fashion.
2024: Catch-Up Contributions Must Be Roth for Some Earners
In order to make up for the taxes lost due to Secure 2.0 changes, beginning in 2024, anyone making over $145,000 will need to “Rothify” their catch-up contributions. This means that instead of catch-up contributions being before-tax, these contributions will be taxed in the year they are contributed to the account. This will give the government tax revenue up front but will allow retirees to withdraw their catch-up contributions tax-free in the future.
2025: Increased Catch-Up Contribution Limits
Currently, there is a catch-up provision that allows workers aged 50 or older to contribute additional funds to their 401(k), 403(b), or other qualified retirement plan. In 2023, the catch-up increased to an additional $7,500 on top of the $22,500 annual federal limit.
Under Secure 2.0, those aged 60-63 will be allowed to contribute the greater of $10,000 or 50% more than the regular catch-up amount starting in 2025.
Other Notable Provisions:
New rules allow for small business owners to open and contribute to Roth SEP IRAs and Roth SIMPLE IRAs, which creates some parity between large and small employer plan options.
Unused funds in 529 College Savings Plan accounts can now be rolled over into a Roth IRA for the beneficiary, subject to the annual contribution limits and an aggregate lifetime limit of $35,000. If you have funds remaining in these accounts for your children or grandchildren, you’ll be able to utilize this strategy over a 5–6-year period to assist them with their own retirement and income tax planning.
Importantly, no changes have been made to limit or prevent the strategy of “backdoor Roth IRA” planning.
The lesson:
There are many changes to retirement planning on the horizon due to this new law. If you don’t currently have a team of advisors, now is the time to start interviewing potential financial advisors and CPAs and making sure you’re taking full advantage of the ever-changing retirement savings rules.