Are you worried about having enough to retire, let alone have the lifestyle you want? You are not alone! According to U.S. Census Bureau data, 50% of women and 47% of men between the ages of 55 and 66 have no retirement savings. Women over age 65 are more likely to be poor than men, regardless of race, education, or marital status. One of the main reasons many Americans reach retirement age with little, or no savings is that too few workers are offered an opportunity to save for retirement through their employers. However, even for those employees who are offered a retirement plan at work, many do not participate.
Would you like the option to contribute to an employer sponsored retirement saving plan, or contribute more to your retirement savings on your own through an IRA? On the other hand, have you had a family emergency that presents a hardship and found it difficult to come up with money to pay for it? Perhaps you considered taking the money from your IRA, but the tax and penalty made that option prohibitive. The good news is that the changes made with the SECURE 2.0 Act of 2022 gives you new options.
The SECURE 2.0 Act of 2022 signed into law by President Biden on December 29, 2022, part of a much bigger Consolidated Appropriations Act, made almost 100 changes to retirement plans and the rules that apply to them. Some encourage employees to save for their retirement and others help employers cover plan costs and pave the way to offer retirement plans where none currently exist. Still others relieve some of the restrictions and penalties associated with IRA withdrawals before age 59 ½, and others are intended to encourage retirement saving in general.
This is a three-part series on the Secure 2.0 Act of 2022 which will highlight select provisions. Changes for business owners are covered in a separate blog. Tax credits offered to small businesses to help defray some of the costs associated with offering retirement plans are covered in a second blog. Changes to personal saving rules through Traditional and Roth IRAs are covered in this blog.
Some rule changes are effective immediately while others will become effective in the future. The effective dates are noted.
Delayed Required Minimum Distributions—2023
A required minimum distribution (RMD) is the amount of money that must be withdrawn from an employer-sponsored retirement plan, traditional IRA, SEP, or SIMPLE IRA by owners and qualified retirement plan participants of retirement age. You may recall that investments in these retirement plans are not subject to income or capital gains taxes from year to year. It’s only when funds are removed from the account or plan, that taxes are assessed. A required minimum distribution acts as a safeguard against people using a retirement account to avoid paying taxes indefinitely.
The SECURE Act of 2019 increased the required minimum distribution age to 72. SECURE 2.0 Act of 2022 further increases the required minimum distribution age to 73 starting on January 1, 2023, and increases the age further to 75 starting on January 1, 2033. This means that a person turning 72 in 2023 is not required to take a distribution until 2024, when they turn 73. Those who previously started RMDs continue as before.
There is a formula for the amount that is required to be withdrawn and there are penalties if you do not comply, although SECURE 2.0 reduced the penalty from 50% to 25% and even 10% if corrected in a “timely manner”. (Roth IRAs do not require a minimum distribution until the death of the owner when the account becomes an Inherited Roth IRA. Roth designated accounts that are part of employer retirement plans are subject to RMD only through December 31, 2023.)
It should be noted that while you must withdraw the RMD amount at your required age, you can also withdraw above that amount. If you want to withdraw 100% of your account that’s perfectly legal, but the tax bill could be a bit of a shock. Please also note that there are different rules for Inherited IRAs.
Linked Catch-Up IRA Contributions and Qualified Charitable Distributions to Inflation—2024
Individuals aged 50 and older can make an additional $1,000 contribution to their Traditional or Roth IRA. As a person approaches retirement, this provision can help to increase retirement savings. The catch-up amounts for IRAs have not increased since initially set, but will now be linked to inflation and increase in $100 increments.
Qualified charitable distributions (QCDs) are tax-free donations to specified charities that count toward a retiree’s annual required minimum distribution. Individuals who are 70½ years of age or older can make tax-free QCDs of up to $100,000 per year from their individual retirement accounts (IRAs). Because of the tax-advantaged status of the distribution, a QCD donation does not qualify as a charitable tax deduction. You may make a QCD if you take the standard deduction or if you itemize.
Since QCDs were first introduced more than 15 years ago, the maximum amount was limited to $100,000 per person. However, thanks to the SECURE 2.0 Act of 2022, beginning in 2024 the maximum annual qualified charitable distributions from an IRA will be linked to inflation.
Another ACT provision expands the IRA charitable distribution provision to allow for an additional one-time, $50,000 distribution to charities through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts.
Expanded 529 College Saving Withdrawals—2024
The SECURE 2.0 Act of 2022 added another option for transfers from an existing 529 account, provided it has been open for over 15 years. Starting in 2024, under certain conditions, a 529 account owner may make a tax and penalty free rollover from a 529 account to a Roth IRA for the beneficiary.. The rollover can only be made to the beneficiary’s Roth IRA and not that of the account owner. In other words, a 529 owned by a parent with the child as beneficiary must be rolled into the child’s IRA and not a parent’s IRA.
Allowed rollovers are limited to a lifetime maximum of $35,000 per beneficiary. The rollovers are also subject to Roth IRA annual contribution limits ($6,500 in 2023). The effect is that a full $35,000 529-to-Roth IRA rollover would need to be done over several years. Contributions made to and earnings from the 529 account investments in the previous five years may not be rolled over. The beneficiary must also have earned income equal to or greater than the amount of the Roth rollover for that year. (The earned income requirement is a qualification for any contribution to an IRA—Roth or Traditional.)
My oldest granddaughter will turn 16 this year and her 529 account was opened shortly after her birth. Several years ago, she won an essay contest and received a scholarship to any state university in her state. She may not use the funds in her 529 account for her college education. As the account owner, I could transfer the funds to her siblings or, with this new option, I could gradually rollover the funds to her Roth IRA provided she has earned income to support IRA contribution requirements.
Increased Retirement Plan Catch-Up Limit for Those Age 61-63—2025
Under current law, employees who have reached age 50 are permitted to make catch-up contributions to their company retirement plan which exceed the otherwise applicable limits. This Act provision increases the catch-up limit to the greater of $10,000 or 150 percent of the regular catch-up amount for 401(k), 403(b), 457, and Thrift Savings plans. The increase is $5,000 or 150% of the regular catch-up for SIMPLE and SEP IRAs. These additional contributions may be made starting in 2025 for individuals who have attained ages 60, 61, 62 and 63. The increased amounts are indexed for inflation after 2025.
Expanded Reasons for Penalty-Free IRA and 401(k) Withdrawals—various years
Withdrawing retirement savings from a 401(k) or IRA before age 59 ½ will usually trigger an early withdrawal penalty of 10%. This penalty is in addition to paying income taxes on the withdrawn funds, if applicable. A penalty-free withdrawal occurs when an account holder pulls money from a retirement account without incurring punitive fees.
The allowable reasons for penalty free withdrawals vary between IRAs and 401(k)s. IRAs allow more circumstances than 401(k)s but some 401(k)s allow loans and IRAs do not. The SECURE 2.0 Act of 2022 add several reasons for penalty-free withdrawals:
- Hardship is one of the existing penalty-free circumstances. However, now an employer may rely on their employee’s self-certification that hardship distribution requirements are met. This became effective January 1, 2023.
- Starting in 2024, penalty-free withdrawals from retirement plans the lesser of $10,000, indexed for inflation, or 50 percent of the participant’s account are allowed for a self-certified case of domestic abuse. A participant can repay the withdrawn money from the retirement plan over three years and will be refunded income taxes on money that is repaid.
- Also, effective the beginning of 2024, penalty-free distributions from retirement accounts may be made when the funds are used for emergency expenses which are unforeseeable, or immediate financial needs relating to personal or family emergency expenses. Only one distribution is permissible per year of up to $1,000, and there is the option to repay the distribution within three years. No further emergency distributions are permissible during the three-year repayment period unless full repayment occurs.
- A retirement plan is allowed to distribute up to $2,500 per year (increased for inflation) for the payment of premiums for certain long-term care insurance contracts. The contract can cover you or your spouse and the distribution can be no more than the contract premium. This penalty-free option becomes effective January 1, 2026.
Replaces the Savers Tax Credit with a Savers Match—2027
Current law provides for a federal tax credit for certain low- and moderate-income individuals who make contributions to individual retirement accounts, employer retirement plans (such as 401(k) plans), and ABLE accounts (for eligible people with disabilities). This Act provision repeals and replaces the credit with respect to IRA and retirement plan contributions, changing it from a credit paid in cash as part of a tax refund into a federal matching contribution that must be deposited into a taxpayer’s IRA or retirement plan. The match is 50 percent of the individual’s IRA or retirement plan contributions up to $2,000 per individual. The ability to receive the match phases out as income increases so it will be important to check those parameters as 2027 approaches.
No matter your personal situation, there is a provision in the SECURE 2.0 Act of 2022 that may be important to you or a family member either now or in the future. The rules may seem complicated so if you want help to identify the changes that will affect you, a discussion with a CERTIFIED FINANCIAL PLANNER™ may be helpful. Find a CFP® in your area at https://www.letsmakeaplan.org/.
Beverly Bowers’ diverse financial career included stints as a portfolio manager, stock and bond trader, mutual fund and ETF sales manager, and personal advisor and financial planner. She is a CERTIFIED FINANCIAL PLANNER ™ professional and served on the Board of Directors of Financial Planning Association of Greater Phoenix in various capacities including President and Chairman of the Board. Beverly is a member of the Arizona Hall of Fame of Financial Women International. During the isolation of COVID in 2020 and 2021 Beverly wrote and self-published How to Dress a Naked Portfolio: A Tailored Introduction to Investing for Women.
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