Many people in this country are not prepared for retirement, causing large concern. People are living longer into retirement, yet savings are not keeping up, not to mention concerns about Social Security and what it will look like in the future. Gone are the days of large Pensions and living off your fixed income for most Americans. More than ever it’s up to each individual to make sure they have enough saved for retirement.
The SECURE Act of 2019 and the SECURE 2.0 Act of 2022 are two laws that aim to improve retirement savings options and rules for investors and help alleviate those concerns. They contain many provisions that impact individual savers, employers, and plan administrators. The purpose of these new rules to help solve the problem is welcome but as you’ll see in some instances there may be some negative side effects, such as higher taxes and estate planning issues they create. Here are five things you should know about these laws and how they may impact your retirement planning.
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You must withdraw Inherited IRAs within 10 years
The SECURE Act of 2019 changed the rules for inherited IRAs, also known as stretch IRAs. Previously, beneficiaries of inherited IRAs could stretch out the distributions over their lifetimes, potentially deferring taxes and extending the growth of the account. The SECURE Act of 2019 eliminated this option for most non-spouse beneficiaries, requiring them to withdraw the entire balance of the inherited IRA within 10 years of the original owner’s death. This may result in higher taxes and less compounding for the beneficiaries.
There are some exceptions to this rule, such as for minor children, disabled or chronically ill individuals, and beneficiaries who are not more than 10 years younger than the original owner. These beneficiaries can still take distributions over their lifetimes, but they must follow certain rules and limitations.
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RMD age changes
The SECURE Act of 2019 also increased the age at which owners of retirement accounts must start taking required minimum distributions (RMDs) from 70½ to 72. This gives retirees more time to defer taxes and grow their savings. The SECURE 2.0 Act of 2022 further increased the RMD age to 73 starting in 2023 and 75 starting in 2033. Additionally, it also reduced the penalty for failing to take an RMD from 50% to 25% of the amount not withdrawn in any given year and if corrected in a timely manner the penalty drops to 10%.
Another change starting in 2024 is that Roth accounts in employer retirement plans will no longer be subject to RMDs. That means that Roth account owners can leave their money untouched and tax-free for as long as they want or pass it on to their heirs without RMDs. This has always been the case for Individual Roth accounts and so this will make the rules for each more cohesive. RMDs never made sense for a Roth account of any kind because the distributions are tax-free.
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529 conversion to Roth for beneficiary
The Secure Act of 2019 expanded the uses of 529 college savings plans, allowing withdrawals of up to $10,000 per year per beneficiary for qualified student loan repayments. The SECURE Act 2.0 added another option for the 529 plan owner: they can convert their 529 plan balance to a Roth IRA for the benefit of the beneficiary, subject to certain rules and limitations.
One of the common reasons for not wanting to contribute to a 529 plan for a child or grandchild is the unknown of whether they will actually need the funds for their education. Some might get scholarships or decide to take some other alternative route. This takes away a bit of that concern for beneficiaries who do not need or want to use their 529 plan funds for education expenses, or who prefer to save for future retirement instead. However, there are some drawbacks to consider, such as potential taxes, penalties, contribution limits, and eligibility requirements for Roth IRAs.
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Higher IRA and 401k catch-up contributions
The SECURE Act of 2019 increased the contribution limit for IRAs from $6,000 to $7,000 for individuals who are age 50 or older. The SECURE 2.0 Act of 2022 further increased the catch-up contribution limit for IRAs and employer-sponsored plans such as 401ks and 403bs.
Starting in 2025, individuals who are age 62, 63, or 64 can make an additional catch-up contribution of $10,000 per year to their employer-sponsored plans, and an additional catch-up contribution of $5,000 per year to their IRAs. This means these individuals potentially can save up to $39,500 per year in their employer-sponsored plans ($29,500 regular limit plus $10,000 catch-up limit) and up to $12,000 per year in their IRAs ($7,000 regular limit plus $5,000 catch-up limit).
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High-income earners will be required to make Roth catch-up contributions
The SECURE Act of 2019 did not change the rules for choosing between traditional and Roth contributions for retirement accounts. However, the SECURE 2.0 Act of 2022 introduced a new rule that affects high-income earners who make catch-up contributions.
Starting in 2026, if you are at least 50 and earned $145,000 or more in the previous year, you can still make catch-up contributions to your employer-sponsored plan, but it’s required to be made as an after-tax Roth contribution. This means that these individuals will have to pay taxes on their catch-up contributions upfront, rather than defer them until retirement.
The new rules on catch-up contributions do not apply to taxpayers who have earned income of less than $145,000. They still will have the option of making either Roth or traditional contributions.
This rule also does not apply to catch-up contributions to IRAs, which can still be made as traditional or Roth contributions, depending on the individual’s preference and eligibility.
Conclusion
The SECURE Act of 2019 and the SECURE 2.0 Act of 2022 are significant pieces of legislation that aim to enhance the retirement security of Americans. They offer many benefits and opportunities for savers, employers, and plan administrators, but they also come with some challenges and trade-offs. It is important to understand how these laws affect your retirement planning and to consult with a qualified financial professional if you have any questions or concerns.
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