New law makes saving for retirement easier
Cash Flow and Retirement
Legislation enacted at the end of 2022 included the long-awaited SECURE 2.0 Act of 2022 (SECURE 2.0), which expands on the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. Many of the changes made by SECURE 2.0 make it easier to save for retirement in a tax-advantaged manner. Here are some of the highlights.
The first SECURE act raised the age at which individuals must begin taking required minimum distributions (RMDs) from IRAs and employer-sponsored retirement plans — from 70½ years to 72 years for those who turn 70½ in 2020 or later). SECURE 2.0 increases the starting age further, to 73 beginning in 2023 and to 75 beginning in 2033. Keep in mind that if you turned 72 in 2022 or earlier, you must continue taking RMDs as scheduled. Similarly, if you turn 73 before 2033, you need to continue taking RMDs as scheduled, even after the starting age increases to 75.
Note: An apparent drafting error creates some ambiguity over whether RMDs start at age 73 or 75 for people born in 1959. Congress will likely make a technical correction to the act to clarify that the RMDs start at age 75 for people born in 1960 or later.)
If you don’t need the funds for living expenses, delaying RMDs can boost your retirement savings by allowing additional years of tax-deferred growth. Delaying RMDs may also reduce income tax on distributions if you’ll be in a lower tax bracket when they’re made. If you turn 72 in 2023, and you’ve already scheduled your first RMDs, consider delaying them by a year.
The penalty for failing to take an RMD on a timely basis is also changing. In the past, it could result in a tax penalty equal to 50% of the amount that was required to be withdrawn. SECURE 2.0 reduces the penalty to 25% (starting in 2023). The law also provides for further reduction, to 10%, for those who correct the missed RMD in a timely fashion.
Starting in 2024, Roth accounts in employer-sponsored plans will no longer be required to make RMDs. This is the same treatment currently available to Roth IRA owners.
Catch-Up and Matching Contributions
Currently, individuals age 50 and older may make annual catch-up contributions of an additional $7,500 to 401(k) plans and similar employer-sponsored plans and an additional $1,000 to traditional or Roth IRAs. Starting in 2024, the catch-up amount for IRAs will be adjusted for inflation. And, beginning in 2025, employer plan participants ages 60 through 63 will be able to make catch-up contributions equal to the greater of $10,000
(adjusted for inflation) or 150% of the regular catch-up amount.
Starting in 2024, employer plan participants who earned more than $145,000 (adjusted for inflation) from their employer in the previous year must make any catch-up contributions to a Roth account. In other words, these highly compensated employees will no longer be able to make catch-up contributions on a pre-tax basis.
SECURE 2.0 also boosts employer-matching contributions. Beginning in 2023, employees may elect to receive matching funds as after-tax Roth contributions — provided their plan offers this option. (Employer-matching Roth contributions will be taxable to the employee when they’re made.) The act also enables employer plans to treat certain student loan payments as plan contributions for matching purposes.
Section 529 Issues
Section 529 plans are a great way to fund qualified educational expenses, but distributions used for other purposes are subject to tax and penalties. SECURE 2.0 provides relief for overfunded 529 plans. Starting in 2024, the law permits up to a lifetime limit of $35,000 to be rolled over into a Roth IRA (for the same beneficiary), free of tax and penalties.
To qualify for a rollover, the 529 plan must be at least 15 years old and the rolled over funds can’t include any contributions (plus earnings on those contributions) made to the plan within the preceding five-year period. Rollovers in a given year are also subject to otherwise applicable limits on Roth IRA contributions.
Revisit Your Plan
These are just some of the many changes contained in SECURE 2.0’s 300-plus pages. Significant new tax laws such as this often requires individuals to revise their plans. Contact your Lenox Advisor to discuss how SECURE 2.0 affects yours.