New Retirement Rules have goodies for everyone!

The Secure Act 2.0 passed the Senate at the very end of 2022, and there is something for everyone in there. Many of the new regulations go into effect over the next few years but a few are immediate.

First, the new requirement minimum distribution (RMD) age is 73. This is up from 72 last year, allowing your retirement funds to grow another year tax-deferred, which can be a great boon to many retirees. The RMD age will edge up to age 75 in 2033. With people living longer, this may help ensure that you won’t outlive your money. In addition, the penalty for failing to take out your RMD has dropped from 50% to 25%.

A later RMD age allows many to do some tax planning as they may be in a lower tax bracket after retirement but before they must take money out of their IRAs. Because social security is taxed differently than regular income, many find themselves in low tax brackets for several years. It is a great time to take advantage of these tax advantages with careful planning.

Another helpful strategy may be a ROTH IRA conversion. It can be done during low tax years, sheltering income from future taxation as Roth IRAs are not subject to RMDs. If you do decide to try a ROTH IRA conversion, you should make sure you are working with your financial advisor and accountant to ensure you are following all the rules.

Another interesting tidbit in the Secure Act 2.0 is in regard to College Savings Accounts called 529 plans. After 2024, if you have money left in a 529 plan that you will not be used for educational purposes, you can roll it into a ROTH IRA for the beneficiary. There are limitations to how much your can rollover, how long the accounts need to be in existence, and how much you can convert each year. However, this can be a wonderful way to set up a child for a secure retirement. Imagine if your parents set up a tax-free fund when you were 22! A $6,000 investment growing at 6% over 40 years would grow to over $60,000. In the past, any money withdrawn from a 529 plan not used for higher education purposes was taxed as ordinary income and penalized 10%. Depending on which 529 plan you utilize; you could get a state income tax deduction as welll. A win win!

Another goody in the Secure Act 2.0 are increases in the catch-up provisions which allow people 50 years and older to set aside additional dollars beyond the standard maximum contributions to workplace retirement plans (such as 401(k)s) and IRAs. Several important changes were included in the SECURE 2.0 Act in regards to catch-up provisions. The first bumps the maximum additional amount that can be contributed to a workplace plan if you’re age 50 and older from $6,500 per year to $7,500 per year, effective in 2023. In addition, if you’re ages 60 to 63, you’ll be able to add $10,000 more per year above the standard limit beginning in 2025. However, if you earn more than $145,000 your catch-up provision will have to be on an after- tax basis. Beginning in 2024, catch-up contributions to IRAs, currently limited to $1,000 per year, will be adjusted for inflation in increments of $100.

There are a lot of other goodies in the Secure Act 2.0 for workplace retirement plans, incentives for both employers and employees, as well as incentives for people paying off student loans. This year may be a good time to do a deep dive tax review.