This article summarizes the most important components of the SECURE Act 2.0, passed in late 2022, for those either nearing retirement or already retired.
Required Minimum Distribution (RMD) Age Increased:
Prior to SECURE Act 2.0 - Required Minimum Distributions begin at age 72
Starting Jan 1st, 2023 - Required Minimum Distributions begin at age 73
Starting Jan 1st, 2033 - Required Minimum Distributions begin at age 75
Once individuals obtain the ages shown above, they are forced to take annual distributions from pre-tax retirement accounts.
These forced annual distributions are called "Required Minimum Distributions" or "RMDs".
These required distributions generate taxable income, sometimes unnecessarily, and can have adverse consequences on the overall retirement planning situation such as increasing the individual's tax bracket and/or triggering Medicare premium penalties.
This article includes more background info on RMDs, such as a required distribution percentage by age chart and planning techniques to minimize negative impacts: RMD Article
You can still choose to begin distributions sooner than the ages shown above, but you aren't forced to begin distributions until the ages shown above.
The provision of SECURE Act 2.0 that delays the RMD age is beneficial for retirement savers.
It increases flexibility with structuring retirement income distributions.
It also indirectly opens up planning opportunities, such as making Roth conversions easier to perform for longer without increasing the tax bracket or triggering Medicare penalties.
Decreased Penalty for not taking Required Minimum Distributions:
Prior to SECURE Act 2.0 - 50% of the RMD amount
Starting Jan 1st, 2023 - Penalty decreased to 25% of the RMD amount
A well-organized retirement plan works to ensure you take Required Minimum Distributions in the correct amount and on time.
For those with a well-organized retirement plan already in place - there's no reason why you should be paying penalties related to Required Minimum Distributions anyway. For you, this provision of SECURE Act 2.0 is neutral because it doesn't impact your plan at all.
For those who overlook or miscalculate their annual RMDs - this provision of SECURE Act 2.0 is beneficial because it reduces the penalty due. Those in this category should consider creating a well-organized retirement plan so RMD penalties no longer occur in the future. 25% is still a very large penalty to pay for an issue that's easily solvable through well-organized retirement planning.
Catch-up Contribution Roth Mandate for Workplace Retirement Plans (401k, 403b, etc.) Starting Jan 1st, 2024:
If an employee's annual wages are $145k or higher - any "catch-up contributions" made into the workplace retirement plan must be made on a Roth basis.
If an employee's annual wages are below $145k - employees can continue to choose to designate any "catch-up contributions" made into the workplace retirement plan as either pre-tax or Roth.
"Catch-up contributions" are additional contributions that individuals age 50+ are eligible to make into retirement accounts above the normal limits. They're designed to help those nearing retirement boost their retirement savings.
Prior to the passage of SECURE Act 2.0, employees had the ability to designate these "catch-up contributions" as either pre-tax or Roth based on their own preference (assuming their employer offered a Roth option).
Starting Jan 1st, 2024 due to SECURE Act 2.0, those with annual incomes of $145k or higher can no longer make pre-tax catch-up contributions and instead will be forced to make any catch-up contributions on a Roth basis.
With pre-tax contributions, individuals don't pay any taxes now, but they do pay tax later when they take distributions.
With Roth contributions, individuals pay tax now at current rates, but can take tax-free distributions later.
Forced Roth catch-up contributions as a result of SECURE Act 2.0 will increase taxes now for those making $145k per year or more who are age 50+ and who are maxing out 401k contributions on a pre-tax basis.
This isn't ideal and it would certainly be better to have the ability to make the choice yourself based on what's most appropriate for your own unique situation, but being forced into Roth for catch-up contributions may not be the worst thing long-term. It may end up working out better than pre-tax contributions if tax rates increase significantly in the future.
For those with annual income of $145k or higher - this provision is not beneficial because some flexibility is lost (although it could end up being indirectly beneficial long-term for reasons stated above).
For those with annual income under $145k - this provision is neutral because it results in no change. You can still chose to designate catch-up contributions as either pre-tax (no tax now, but pay tax later) or Roth (pay tax now, but tax-free distributions later).
Catch-up Contribution Limits Increased for Workplace Retirement Plans (401k, 403b, etc.) Starting Jan 1st, 2025:
Currently - All employees age 50+ have the same catch-up contribution limits
Starting January 1st, 2025 - Employees age 60 to 63 will be able to make larger catch-up contributions compared to employees age 50-59 and 64+
The catch-up contribution limit for employees age 60 to 63 will be 150% of the catch-up contribution limit for those age 50-59 and 64+
For example, for those age 50+ in 2023, the catch-up contribution limit is $7,500. This applies to all employees age 50+ under current rules.
If this new rule was applicable in 2023, those ages 60 to 63 would be eligible to make a larger catch-up contribution of up to $11,250 ($7,500 x 150%).
Catch-up contributions figures are indexed for inflation and will likely increase in the future.
In summary, this provision of SECURE Act 2.0 allows those ages 60 to 63 to save more money into their workplace plans on a tax-advantaged basis starting in 2025.
For those age 60 to age 63 (and for those currently younger than age 60 to 63 who will likely still be working until at least 60 to 63) - this SECURE Act 2.0 provision is beneficial.
For those not in the category stated above - this provision is neutral because it results in no change.
Roth Option for Employer Match in Workplace Retirement Plans (401k, 403b, etc.) Starting Now:
Before Secure Act 2.0 - Employer matching contributions were not able to be designated as Roth.
Now - Employers can chose to offer employees the ability to designate matching contributions as Roth contributions.
Note that employers are not required to offer this feature. The SECURE Act 2.0 permits Roth employer matches, but it does not mandate that employers offer this option to employees.
Prior to the passage of SECURE Act 2.0, employer matching contributions were automatically designated as pre-tax and could not be designated as Roth.
Due to SECURE Act 2.0, employees now have more flexibility and choice over how employer matching contributions are taxed.
If pre-tax employer matching contributions make more sense for an employee's own unique retirement planning situation, they can continue having employer matching contributions go into their account on a pre-tax basis.
However, if Roth employer matching contributions make more sense for an employee's own unique retirement planning situation, the employee now has the flexibility to designate these contributions as Roth (assuming the employer eventually offers this option).
This provision of SECURE Act 2.0 is beneficial for retirement savers.
Summary:
Overall, SECURE Act 2.0 is positive for retirement savers.
The delay of Required Minimum Distributions to age 73 in 2023 and age 75 starting in 2033 provides additional flexibility and opens up planning opportunities.
Increased catch-up contributions for those age 60 to 63 provides an additional route for tax-advantaged wealth accumulation in the lead up to retirement.
The ability to designate employer matching contributions as Roth provides additional tax planning flexibility and choice.
One of the main downsides of SECURE Act 2.0 is that those with annual income of $145k or greater can no longer make "catch-up contributions" on a pre-tax basis and are forced into Roth, but this downside is likely outweighed by the other positives because:
Catch-up contribution limits are much smaller than normal contribution limits. Normal contributions can still be designated as either pre-tax or Roth.
Forced Roth savings could actually end up benefitting the employee long-term if tax rates increase significantly. With Roth, you're paying tax now instead of later.
SECURE Act 2.0 has many clear advantages for retirement savers, such as delayed RMDs and increased contribution limits from age 60 to 63.
Note that the SECURE Act 2.0 bill includes many other provisions too. This article focuses exclusively on the areas likely to impact those nearing retirement and already retired the most.
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This is article is for informational purposes only and should not be considered as tax or legal advice. Advice is only provided after entering into an Advisory Agreement with the Advisor. See other disclosure here: Disclosures