On December 23, 2022, the US House of Representatives passed the Consolidated Appropriations Act of 2023, a spending bill authorizing roughly $1.7 trillion in new Federal spending. Included in the 4,000+ page document was the retirement bill known as SECURE Act 2.0.
Although the legislation includes many provisions, we discuss the top areas that have the most significant impact for those who are nearing or just entered retirement.
• RMD age pushed later
Secure Act 2.0 includes provisions to push the age one has to begin taking Required Minimum Distributions (RMD's) from their qualified pre-tax retirement accounts from the current age of 72 to 73 or 75, depending on one's date of birth.
The new rules state that individuals born between 1951-1959 would have to start their RMD's at age 73, and individuals born 1960 or later would not have to take RMD's until they reach age 75.
These changes provide a couple of financial planning items to consider. The delayed RMD timing allows individuals to grow their pre-tax accounts for a longer period of time before taxable withdrawals are required.
This could have the effect of creating a larger first RMD when it is finally required and creating a larger tax bill later in life. It could also result in a larger portion of pre-tax accounts passing to heirs - assuming one used less of their qualified account during their lifetime - which could potentially result in a higher tax liability to their heirs.
The additional couple of years before RMD's are required also allows individuals more time to consider tax optimization strategies - such as Roth conversions - in years where income may be lower than it will be once RMD's begin.
• High wage earners required to use Roth option for catch-up contributions beginning in 2024
The Secure Act 2.0 legislation that states, beginning in 2024, any individual whose wages exceed $145,000 in the prior year, and who makes catch-up contributions in an employer-sponsored retirement savings plan, must make the catch-up contribution to the Roth portion of their retirement plan.
This begs the questions " What if my employer does not offer a Roth option in our 401k plan?"
In these cases, if a Roth option is not offered and there are any individuals that earn more than $145,000 in that plan, then no one in the plan would be allowed to make any catch-up contributions.
A couple of additional points of clarification:
- The new Roth requirement only applies to catch-up contributions in employer sponsored retirement plans, but not to IRA accounts.
- Self-employed individuals seem to be exempt from these provisions as they don't receive "wages" from the employer sponsoring the plan.
- The language of the legislation also offers some ambiguity related to workers who change employers during the year. Since the language of the act states that the $145,000 in wages are earned from the employer sponsoring the plan, there may be an opportunity for a worker over age 50 to still make pre-tax catch-up contributions if they did not earn more than $145,000 from the new employer.
If you are age 50 or over, it can be important to review your planning for catch-up contributions in 2023 and 2024. If you expect to earn more than $145,000 in wages, 2023 may be the last year you can make pre-tax catch-up contributions to your employer retirement savings plan.
Be aware also - if you are eligible to make catch-up contributions in 2024 on a Roth basis, the amount of the catch-up contribution would not be tax-deductible to you. This could impact how much you pay in taxes for 2024 and beyond.
• Increased Plan Catch-up Contributions for workers in their early 60's
Beginning in 2025 and beyond, the amounts allowed for employer plan catch-up contributions will increase, but only for workers who are age 60, 51, 62 or 63. The catch-up contribution limits will be the greater of $10,000 or 150% of the prior year's limit (indexed for inflation). If you expect to still be working in 2025 or beyond, and fall into those age ranges, it can be helpful to understand how the increased catch-up limits can help with your retirement savings.
IRA Catch-up Contribution Limits to be indexed for inflation
Starting in 2024, the IRA catch-up contribution limits (which have remained at a static amount of $1,000 since 2006) will be indexed for inflation. This will most likely mean that individuals aged 50 or over can contribute a larger amount to Traditional and Roth IRA accounts in 2024 and beyond. Review your savings and financial plans to see if you are eligible to take advantage of the increased limits next year.
If you need help understanding how these new rules could impact your ability to retire, Schedule a Call or send us a question so we can help you.
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