New Year, New Revisions
Happy New Year to all our readers and clients! Ahh the one time of year in every 12 month rotation in which almost every human resolves to do something different / better for the sake of a fresh start in a the new year ….“New Year, New Me!”. Despite the best of intentions, we all know that many New Years resolutions tend not to stick or don’t come to fruition as intensely as we had planned.
Luckily, for retirement savers Congress got an early start to one of their resolutions and passed the SECURE 2.0 Act. The Setting Every Community Up for Retirement Enhancement (SECURE) Act was initially passed in 2019 with the purpose of revamping rules around retirement savings – most notably raising the age of Required Minimum Distributions (RMDs). The 2.0 version brings further revisions which are important to know.
**Full disclosure , if you’d like to save yourself the time on reading this, check out Nathan’s summary in last week’s Meridian Market Minute on Facebook.
There is a multitude of additions and changes in the new act, but here are the major highlights:
RMD Age Extended
Required Minimum Distribution ages related to IRAs and employer sponsored plans such as 401ks have once again been extended for those individuals who turn 72 in 2023 or later. (So sorry for those who were born on December 31, 1950!!) If you were born in the years 1951-1959, you are now required to start distributions at age 73 as opposed to age 72. Individuals born in 1960 or later are now required to start distributions at age 75.
This extension in RMD age provides some tax planning opportunity for individuals that fall into the above brackets who are not currently needing to supplement income with distributions. Pushing retirement income for a few more years can help to stave off higher Medicare premiums and also increase the amount of years available for possible Roth conversions.
And while delaying the RMD age has it’s clear perks, delaying RMDs could (and hopefully will!) result in a larger portfolio due the combination of portfolio growth plus the absence of money leaving the account, therefore resulting in a larger RMD / tax bill down the line. However, every situation is different though and we recommend planning with your advisor on how to incorporate these changes with your plan.
Penalties for Failure to Take an RMD
Failure to take an RMD will decrease from the current penalty of 50% of the RMD amount not taken down to 25%. This is further reduced to 10% if the individual takes the missed distribution in a “timely manner” and submits a corrected tax return.
Hopefully this is never an issue for any of our clients! 😊
Roth Employer Plan Changes
Previously the rules stated that while Roth IRAs are exempt from RMDs, Roth accounts in employer plans such as 401ks/ 457s/ 403bs were not. Starting in 2024, all Roth retirement accounts are exempt from the RMD requirements.
Employers will also be able to provide employees the option of receiving vested matching contributions to their Roth accounts. Previously matching employer contributions were made on a pre-tax basis.
Also starting this year, employers can create Roth accounts for SIMPLE and SEP plans. Previously these plans only allowed pre-tax contributions.
Just another reason to like Roths!
Catch Up Contribution Increase
Individuals 50 and older are now able to bump up their contribution to employer sponsored plans by $7,500 per year (a $1,000 increase from last year). Additionally, beginning in 2025 this catch-up contribution for individuals ages 60,61,62,63 will bump up to $10,000.
For IRAs the current 50 and older catch-up contribution is an $1,000 on top of the annual maximum contribution. Starting in 2024 that will be adjusted for inflation in increments of $100.
Auto Enrollment in 401k plans
Previously, employers of a certain size had the option, not the requirement to automatically enroll employees in a workplace plan. With Secure 2.0 Act, effective in 2025, employers of a certain size will be required to automatically enroll full-time employees at a contribution rate of at least 3%. This is a huge step to encouraging workers to save more as too few people currently make contributions to qualified workplace retirement plans.
Creation of Linked Emergency Savings Accounts
Hearing the words “emergency savings” and “retirement plan contributions” together makes any financial planner’s heart soar. This new type of “Emergency Savings Account” would allow defined contribution plans such as 401ks starting in 2024 to add a designated Roth account for non highly compensated employees to contribute towards. Depending on the plan rules, contributions may be eligible for an employer match. Contributions are limited to $2500 annually and the first 4 withdrawals in a year would be tax and penalty free. The creation of the Emergency Savings Accounts could create saving and contributing to retirement much easier for many workers.
529 Plan Rollover to Roth IRA
The tax benefits of contributing to a 529 are many; however, I hear the question from many clients “what if my child doesn’t use their funds in the 529?” This new law helps provide an additional resolution to that conundrum. After 15 years of the 529 plan account being opened, plan assets can be rolled over to a Roth IRA for the same beneficiary. The amount that can be rolled over into the Roth must not exceed the annual IRA contribution limits with a lifetime maximum rollover amount of $35,000. Any 529 contribution within the previous 5 years prior to Roth rollover and the earnings associated with those contributions are not eligible.
Updates to Early Penalty Free Withdrawals
Currently a 10% early withdrawal penalty is imposed on distributions from retirement accounts prior to reaching age 59 ½. The new code includes these exceptions:
• Effective immediately, the penalty for early withdrawals is waived for those certified by a physician as having a terminal illness or condition that can reasonably result in death in 84 months or less. To avoid a penalty, distributions must be repaid within three years.
• Effective Jan. 1, 2024, “hardship” withdrawals are available for individuals who have been subject to domestic abuse equal to the lesser of $10,000 or 50% of the vested balance of the retirement account. The withdrawal must occur within one year after the individual became a victim of abuse. And all or a portion must be repaid within three years.
• Effective in 2026, withdrawals of up to $2,500 per year can be made to pay premiums on certain types of long-term care contracts.
Student Loan Debt
Beginning in 2024, employers will be able to “match” employee’s student loan payments with matching payments to a retirement account. This could potentially incentivize workers to save while also paying off their loans.
So while your resolutions to exercise more, eat more green vegetables, and learn a new language may not all actualize this year, the revisions in the SECURE 2.0 Act could present opportunities in retirement saving.
May we all resolve to be as patient as our dog, Dude, and as confident in our hair style as my son Chae.
Cheers to a successful 2023 to all!