You may have heard about the bill that was passed just before the end of 2022 that has been named the SECURE act 2.0. The original SECURE act passed in December of 2019 and made changes to retirement accounts, including an increased RMD age, and revised rules for inherited IRAs. Unlike most movie sequels though, this 2.0 is just as good if not better when it comes to retirement changes.
Instead of having to read the 400+ pages of the bill, we want to give you a quick and condensed version of the major provisions that may affect your retirement.
Increased RMD Age
Traditional IRAs are tax-deferred, which means the income wasn’t taxed when it was put in, and none of the growth of that account had been taxed since. Eventually though, the IRS wants their money, and they require that the account owner start taking withdrawals called required minimum distributions (RMDs) at a certain age. In 2019 SECURE 1.0 changed the starting age from 70 ½ to 72. The SECURE act 2.0 increases the age even further for those that haven’t yet started their RMDs.
Below are the new RMD starting ages according to birth year.
- Born 1950 or earlier, Age 72
- Born 1951-1959, Age 73
- Born 1960 or later, Age 75
For most people, later RMDs are a welcome sign because it means they can hold onto their savings for longer. However, for those with large enough IRA balances, later RMDs mean larger RMDs, and higher tax liability. Since IRA withdrawals are 100% taxable, another one to three years of growth can make that RMD significantly bigger and possibly push your income into the next tax bracket, or even possibly cause an increase in your Medicare premiums.
Smaller Late RMD Penalty
In addition to the change in RMD age, the penalty for not taking an RMD by the deadline has been reduced from a 50% penalty, to just 25%. Previously, if the account owner then took the distribution in what the IRS deemed a “timely manner,” the penalty was reduced to 25%, but now with a “timely manner” distribution, the penalty will be only 10%.
Roth Contributions to SIMPLE and SEP IRAs
Some smaller employers offer a SIMPLE or SEP IRA plan instead of a 401k plan to help their employees prepare for retirement. Previously, these contributions had to be pre-tax, but now there is the option to make contributions on a Roth basis for both accounts as well. This allows for tax free growth going forward and better tax diversification in retirement.
Changes to Catch-up contributions
Catch-up contributions allow those over fifty to contribute an additional amount to retirement plans such as 401ks. Starting in 2024 all catch-up contributions for those with wages over $145,000 will have to be on a Roth basis. This income limit will also be adjusted for inflation going forward.
The bill also adds a special catch-up contribution for those aged 60-63 starting in 2025. Those eligible are allowed the greater of $10,000 or 150% of the “standard” catch-up contribution amount for 2024. Then, starting in 2026 this special catch-up amount will be adjusted for inflation going forward.
529 plans to Roth IRAS
529 plans have been a great vehicle for tax advantaged college savings for family members for a long time. What tends to happen often times with these plans is that the beneficiary of the money doesn’t end up needing all of it to pay for their college. Instead of having to take that remaining money and transfer it to an eligible family member, you will now be able to do a tax-free rollover of those 529 funds to a Roth IRA owned by the beneficiary starting in 2024.
The amount that can be transferred is subject to the Roth IRA contribution limit for every year, and the individual doing the rollover must have earned income. Each individual wanting to take advantage of this has a $35,000 lifetime cap on these types of transfers, and the 529 plan must have been opened for a least 15 years before the transfer can be done.
Unclaimed Assets Database
Most people will work at multiple jobs throughout their career and have multiple retirement accounts with those employers, or other financial institutions. Keeping track of those various accounts can be difficult, and many people forget about them entirely. In fact, it’s estimated that 1 in 7 people have unclaimed assets being held by the government with the total estimate reaching 70 billion dollars.
To address this, the SECURE act 2.0 instructs the Labor Department to create a “Lost and Found Database” that allows you to search and find out if you have any unclaimed property that you would be able to reclaim.
QCDs indexed for Inflation
Qualified Charitable Distributions (QCDs) allow an IRA owner to distribute money directly from their IRA to a charitable organization and have that distribution completed excluded from their taxable income. It’s a great strategy for those that are already doing charitable giving to reduce their taxable burden.
The amount allowed to every IRA owner per year was $100,000, but along with many other provisions of this bill, this limit will now be adjusted from inflation going forward.
We know that’s a lot to digest all at once, and you may be wondering how you can take advantage of these changes for yourself. That’s where we come in. Our knowledge and experience can help guide you to make the best, most informed decisions regarding these provisions or anything else you need guidance on. Contact our office by phone or email today and we will be happy to help.
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