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In December 2022, Congress passed an end-of-year spending bill that included the SECURE Act 2.0 to help to strengthen retirement readiness and help more people financially prepare for the future. Along with provisions that are meant to help people in or nearing retirement, SECURE 2.0 also might make it easier for younger people to pay off student debt and build their savings, helps simplify the process of moving retirement savings plans between employers, and enables people to build an emergency fund within retirement accounts. Here are some highlights to be aware of and how new regulations could affect your retirement plan.
“The law includes provisions designed to boost savings for low- and middle-income Americans, increase participation in employer-sponsored retirement plans, provide more flexibility to savers, and reduce regulatory barriers for annuities in retirement plans,” shares Tyler Brown, Director of Government Affairs at Sammons Financial Group.
Building upon these updates, the most recent SECURE Act 2.0 looks to help reshape the retirement landscape by addressing additional issues regarding retirement and empowering more Americans to build their savings for the future. There are numerous provisions in the bill, here are a few notable components you may want to be aware of.
The age for retirees to make RMDs, or minimum withdrawals from their retirement accounts, has increased from 72 to 73 starting in 2023, and it will increase again to 75 in 2033. Retirees who are currently subject to RMDs under the previous 70 ½ or 72 RMD age rules will not be impacted by these changes. For example, if you turned 72 in 2022 or earlier, you will need to continue taking RMDs as scheduled. If you will be turning 72 this year, you have the option to wait until 2023 to start taking RMDs. Year of Birth RMDs begin at age… 1950 or earlier 72 1951 to 1959 73 1960 or later 75 Another important update is the penalty for failing to take an RMD will decrease from 50% to 25% starting in 2023. The penalty is further reduced to 10% if the RMD that should have been received is taken during the defined “correction window.”
|Year of birth||RMDs begin at age...|
|1950 or earlier||72|
|1951 to 1959||73|
|1960 or later||75|
Beginning in 2024, SECURE 2.0 will provide additional options for a surviving spouse beneficiary who inherits a retirement account, including the ability to calculate RMDs using the Uniform Lifetime Table rather than the Single Lifetime Table.
Under SECURE 2.0, some new circumstances would allow penalty-free early withdrawals. For example, if you are diagnosed with a terminal illness or condition by your physician that can be expected to result in death within 84 months of diagnosis, you can withdraw money without penalty. Additionally, victims of domestic abuse can withdraw certain amounts penalty-free from their retirement plan account.
While it is not effective until 2024, this new provision allows individuals to roll over funds from 529 education savings account plans to Roth IRAs. “For families who have created 529 plans in the past, but their child received a scholarship or decided not to go to college, those leftover funds will now be able to roll in to a Roth IRA for the beneficiary,” adds Brown. Rollovers from a 529 to a Roth IRA are subject to the annual Roth IRA contribution limit ($6,500 for 2023), and the total lifetime rollover amount cannot exceed $35,000. In addition, the 529 plan must have been in place for 15 years, and contributions to the 529 plan over the past five years are not eligible to be rolled over. .
SECURE 2.0 makes several changes to increase participation and help boost savings for employer-sponsored retirement plans. This includes enhancing the tax credit for small business retirement plan startup costs, allowing employers to provide matching contributions to retirement plans for employee student loan payments, raising catch-up limits for plan participants between ages 60 and 63, and allowing matching and non-elective contributions to be Roth, among many other changes. A full section-by-section summary of SECURE 2.0 can be found here.
“The SECURE 2.0 Act will likely impact retirement savers in different ways depending on the retirement plans in which they may participate, as well as their age and financial situation,” adds Brown. “It is important to talk to a financial professional, tax advisor, or other retirement or estate planning professional to determine the impact the SECURE Act may have.”