Just over three years ago Congress passed the most consequential retirement law in decades. Among other things, the original SECURE Act of 2019:
- Made retirement plans more accessible to more people.
- Increased the potential tax benefits of saving inside a qualified plan by raising the age when required minimum distributions (RMDs) kick in.
- Eased concerns about contributing by accommodating penalty-free withdrawals for certain purposes.
- Broadened the types of financial instruments that can be held inside retirement plans.
Almost exactly three years later, Congress passed, with broad bipartisan support, a package of retirement-related bills referred to as the SECURE Act 2.0. These became law as part of a mammoth federal budgetary bill that President Biden signed in the final days of 2022.
In January 2023, Schwab issued a good overview, which we recommend as a starting place for those who’d like to understand the implication of the new law: “SECURE Act 2.0, the new retirement law of the land.” Here’s a brief excerpt on the topic of RMDs, which we’d classify as one of the key themes in the new law:
“The most notable provision from a financial planning perspective is the increase in the age at which individuals must begin taking required minimum distributions (RMDs) from their retirement account from age 72 to 73. The new RMD age applies to anyone who turns 72 on or after January 1, 2023. In 2033, the RMD age will increase again to 75.”
The original SECURE Act raised the RMD age from 70 ½ to 72. Now, it’s on its way to 75. For those who can draw on income from outside qualified accounts, this change presents a meaningful opportunity to extend tax-advantaged asset growth and to put off taxes due (for non-Roth accounts).
Here’s a brief list of some other important provisions (all subject to various specific points of eligibility):
- Penalties for failing to take an RMD at the proper time are now half what they were—and can be lower still if corrected within two years. This may make it less likely for people to turn away from the plans in fear of doing something wrong.
- Opportunities for catch-up contributions are increased—with an especially attractive accommodation for people age 60-63, which kicks in starting in 2025. For everyone, catch-up contributions will now be indexed to inflation. For higher-income savers, the new law focuses opportunity on Roth (post-tax) retirement accounts.
- Accommodations for tax-free distributions to charities are heightened.
- Unused funds for education in 529 plans can be rolled into a Roth IRA in the beneficiary’s name (with various restrictions).
- More part-time workers will become eligible to participate in company retirement plans.
- A “retirement savings lost and found”—to help savers locate accounts after job changes or corporate consolidations—will be created.
If you have questions about taxes and RMDs, catch-up contribution opportunities or any other aspects of the new law, we warmly invite you to be in touch.
Image (Source: Schwab)