Last week, we recapped the first SECURE Act and looked at the highlights from SECURE 2.0. As I said, both pieces of legislation increase opportunities to strengthen the retirement system—and Americans' financial readiness for retirement, as well as their ability to save money in general. This week, we will start our in-depth exploration of SECURE Act 2.0 with a look at how it affects retirement plan participants. So, let’s get started.
New RMD Start Date
SECURE 2.0 pushes back the beginning date for required minimum distributions from qualified plans. Individuals turning age 72 during 2023 or later will now start their RMDs at age 73. For those reaching age 74 after December 31, 2032, their start date is age 75. For those able to defer their RMD to these later birthdays, retirement savings may continue to compound earnings tax-deferred or tax-exempt in the case of inherited Roth IRAs. That’s pretty good news.
Under current law, employees aged fifty or older can make extra “catch-up” contributions of up to $7,500 per year to their 401(k) or 403(b). Beginning in 2025, individuals aged 60 through 63 will
be able to contribute up to $10,000 annually. Furthermore, that amount will be indexed to inflation, meaning it will go up as inflation does. For people who are 50 or older – but not between the ages of 60-63 – the catch-up limit will remain at $7,500 per year.
People aged 50 and older who own IRAs can also make catch-up contributions, albeit at a smaller amount. Currently, the catch-up contribution limit for IRAs is $1,000 per year. In 2024, that number
will be indexed to inflation, too. Again, that means the limit could increase each year as cost-of-living expenses rise.
Annuity Investment Option
While SECURE Act 1.0 allowed for the use of annuities in retirement plans, Act 2,0 makes them more readily available within employer plans. The new law directs the IRS to modify its regulations within 18 months to allow for more relaxed rules around the payment of premiums for an annuity and how the annuity’s annual payment is considered in the determination of the participant’s RMD. This is good news because annuities can be a bit complicated, but they are good options as part of a retirement income in many cases because they can provide lifetime income. Of course, each person’s retirement scenario is different and must be considered before you decide to use an annuity.
Limiting IRA Penalties
Let’s move on to another interesting provision. As a financial advisor, I’ve long recommended that all investors have a Rainy-Day Fund. But sometimes, even this isn’t enough to handle unexpected expenses, like a health crisis or loss of income. Under SECURE Act 2.0, it’s now easier to use your retirement savings in an emergency. Previously, there was a 10% penalty for withdrawing money from a retirement account prior to reaching age 59½. (This was to prevent people from using their retirement savings for something other than retirement.) However, there are some exceptions, such as when you need the money to pay for certain medical expenses. The new law has expanded the list of exceptions. Here are some examples where the 10% penalty no longer applies:
- Recovering from a natural disaster, like an earthquake or hurricane
- Dealing with a terminal illness
- Being the victim of domestic abuse
The law also allows for emergency withdrawals for any taxpayer who needs to meet “unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses.”2 Now, what the law does not do is specify what situations qualify as an emergency. Instead, the law states that “the administrator of an…eligible retirement plan may rely on an employee’s written certification that the employee satisfies the conditions of the preceding sentence in determining whether any distribution is an emergency personal expense distribution.”1
I know, I know – that sentence is Washington legalese at its finest. Basically, this means people need to be reasonable in determining for themselves what qualifies as an emergency. For example, if a loved one has been injured in an accident? That’s an emergency. Desperately want to buy the newest PlayStation before it goes out of stock? Not an emergency.
Hopefully, you will never have to make use of this provision. But it’s nice to know that it’s there in case you ever do!
RMD Penalty Relief
Another noteworthy change is the penalty applied to those who fail to take their RMD or don’t withdraw enough. Previously, the penalty was 50% of what the retiree should have withdrawn. Beginning this year, that penalty has now been reduced to 25%. And if the mistake is corrected within the proper “Correction Window,” it will be reduced further to a mere 10%.
The Correction Window is usually defined as beginning January 1st of the year following the year of the missed RMD and ending when a Notice of Deficiency is mailed to the taxpayer or penalty is assessed by the IRS.
Finally, the law eliminates the need to take RMDs for Roth IRAs that are inside qualified employer plans. What does that mean in English? It means that if a retiree owns a Roth IRA through their old employer, they need never make mandatory withdrawals during their lifetime. This change begins in 2024.
(Note, of course, that regular Roth IRAs not part of an employer plan were never subject to RMDs, to begin with, so this change does not apply.)
That’s enough “government-speak” for one week! Tune in next week when we will discuss changes that affect employers.
Until next time…
One last thought, I believe an educated investor is an empowered investor. If you like what you’ve read and think your friends and family can benefit as well, please share.
“Here’s what’s in the $1.7 trillion spending law,” CNN, December 29, 2022.
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