Secure 2.0, which is sister legislation to The Secure Act of 2019, was signed into law on December 29, 2022. Some provisions took effect January 1, 2023, others won’t until 2024 or 2025, and one not until 2033. There are 92 provisions in all that benefit both employees and retirees.
What’s Your New RMD Age?
Your RMD age is now higher than it used to be, which is good news. RMDs, which stand for required minimum distributions, are all about Uncle Sam wanting his tax money. He’s been waiting a long time for it. Once you reach your RMD age, you’re forced to take out a portion of your pre-tax savings every year going forward, whether you want to or not, until it’s all gone and taxed.
If you’re turning age 72 between now and the end of 2032, your new RMD age is 73. For everyone else, it’s age 75. That’s up from age 72, which was 2022’s RMD age.
In the past, if you didn’t take your RMDs when you were supposed to, the penalty was 50% of the amount you were supposed to take out. I’ve always thought that was ridiculously high. Starting this year, it’s been reduced to a more reasonable 25%.
Higher Catch-Up Limits
Unfortunately, if your employer doesn’t offer a retirement plan, you’re stuck with IRAs as your main savings tool, and those yearly contribution maximums are much lower than employer plans ($7,000 vs $23,000 in 2024). Secure 2.0 threw IRA savers a bone, albeit a very small one: The $1,000 catch-up amount, available for savers age 50 and older, will now be indexed for inflation starting in 2024. (The $7,000 regular contribution has always been indexed.)
Employees with a 401(k)-type plan at work will have to wait until 2025 to take advantage of higher catch-up limits. Starting then, the catch-up contribution for savers ages 60-63 will be increased to $10,000 (currently $7,500 in 2023). Note that higher wage earners making over $145,000 are restricted to making Roth catch-up contributions only, not traditional or pre-tax.
Other Changes for 401(k)-Type Plans
Another thing that always bugged me was how the IRS forced employees to include Roth contributions and associated earnings in their 401(k)-type plans in their required minimum distribution calculations. It was silly to make them distribute Roth money because there’s no tax owed on it.
Secure 2.0 fixed that. Roth money is no longer included in your RMD calculations, but not until 2025. For those of you taking RMDs from 401(k)-type plans this year and next, roll your Roth money from your 401(k)-type plan tax and penalty-free into a Roth IRA now. That accomplishes the same thing. Roth IRA money has never been included in RMD calculations.
Student Loan Help
Thanks to Secure 2.0, employers can now offer their employees a great new benefit: The ability to pay off student loans and save for retirement at the same time. Employees who are making qualified federal loan payments and are offered this benefit can sign up. Their employer will match that loan payment amount with a deposit into the employee’s 401(k)-type account.
Keep in mind it is not mandatory for employers to offer this benefit and it doesn’t take effect until at least 2024.
[Best Money Newsletter originally published 2023 0307 on the Worm Moon.]