The New Year always seems to bring a change of some sort, from beginning a new health regimen to becoming more intentional with your finances by developing a spending plan. This year, retirement savers have gotten an added wrinkle to help them prepare for their retirement years through new legislation known of as the SECURE Act 2.0. President Biden signed into law the SECURE Act 2.0 on December 29th, 2022. The new act builds on the SECURE Act of 2019 or as I like to refer to it, “Original Recipe”. While there are close to 100 provisions to be rolled out over the coming years, we will only focus on those with the most immediate impact on individuals and some anticipated changes that were not included.
More Opportunities to increase your Roth Dollars in Retirement
The availability of after-tax Roth accounts within Employer Sponsored plans like 401(k)s and 403(b)s has been increasing in recent years. Previously, all employer matching and non-elective contributions were only eligible to be added pre-tax. One change in the new law that is effective immediately, would allow participants to designate employer contributions (does not include profit sharing) for placement into these Roth accounts. While the IRS is allowing this to take effect immediately, employers or the financial institution that administers your 401(k) may not be as quick to respond to such changes.
One of the tradeoffs for participants is that any employer contributions earmarked to Roth accounts will be treated as income to the participant. We recommend you review the potential tax impact with your tax or financial professional prior to making any such changes. Additionally, Roth contributions are subject to the 5 year rule, which may impact your ability to access these funds so plan accordingly.
Kicking the Can on Required Minimum Distributions (RMDs)
This may prove to be one of the most popular provisions for those families we serve by allowing folks to further delay or reduce a taxable distribution from their retirement account. Effective for 2023, the “magic age” to begin taking Required Minimum Distributions or RMDs from IRAs, 401(k)s, and most other qualified plans is now age 73 instead of 72. The age to start mandatory distributions will be pushed back again in 2033 to age 75. On your initial beginning date, the IRS does allow some leeway by allowing you to withdraw the funds no later than April 1st of the year after you reach your “magic age”, so to speak.
Year of Birth
Change to RMD Age (beginning date)
Pushed back to 73
1960 and later
Pushed back to 75
This can provide additional years of growth for these assets while also increasing the window to do proactive tax planning. Beware of the looming “Tax Crunch” that could result from potentially larger distributions over a shorter number of years, says Jeffrey Levine the Lead Financial Planning Nerd at Kitces.com. This could come in the form of increased taxation of Social Security benefits and Income Related Monthly Adjustment Amounts (IRMAA) to Medicare Part B and D premiums by hitting higher income thresholds.
Exploring Roth conversions during the extended period can make sense if it aligns with your tax, retirement, and estate wishes. Below is an example of a pre-retirement couple that has incorporated partial Roth conversions of their IRAs and 401(k)s and the potential lifetime tax savings however, mileage will vary based upon your circumstances.
Reduced Penalty for missed RMDs
We don’t like penalties and do everything in our control to help folks avoid making a mistake when it comes to their retirement planning. For those that forget to take an RMD from their retirement account, the IRS assesses a penalty of the amount that should have been distributed. Beginning this year, the penalty is being reduced from 50% to 25%. For those that rectify this situation in a timely manner, they can receive a further reduction to only 10% of the required amount.
The penalty is in addition to any income taxes owed and any RMDs for the current tax year that must still be distributed. It goes without saying that it is still best to take your RMD when the IRS tells you too.
What’s not changing? (at least not yet)
- Eliminating the Backdoor or Two-Step Roth IRA that has been a popular strategy for higher earners was not addressed.You can learn more from our previous blog on Roth IRAs.
- The age when one can take a tax-free Qualified Charitable Distributions or QCDs from their IRA paid directly to a church or charity stays at 70.5.
What to do now?
While the number of changes from the SECURE Act 2.0 and the impact on your finances may seem overwhelming, you can be better equipped by educating yourself and/or consulting with your financial advisor. Start the year off on the right foot by reviewing your current plan or getting a financial plan in place. We have financial advisors that are passionate about the planning and would love to hear from you!
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