What do the SECURE 2.0 Act changes to 401(k), Roth, RMD's and other retirement plan rules mean for you?
From student loan repayments to RMD’s, new provisions may reshape saving and investing for nearly everyone.
The SECURE 2.0 Act, passed in December 2022, offers several retirement tax planning opportunities, including changes to funding and tax savings in the accumulation phase of life and the years leading up to retirement. The Act also makes significant changes to the Required Minimum Distribution (RMD) rules to distribute retirement savings later in life.
Key Takeaways of the Act include:
• Revised RMD age: The revised age for RMDs will be age 73, beginning in 2023. Beginning in 2033, the age for RMDs will increase to age 75. Both provisions provide longer windows of opportunity to shift funds to tax-free Roth IRAs or to decrease future RMDs and minimize income taxes and Medicare premiums.
• RMD requirement shifts: The penalty for failing to take an RMD will decrease to 25% of the RMD amount, from 50% currently, and 10% if corrected in a timely manner for IRAs. Also, starting in 2024, RMDs will no longer be required from Roth accounts in employer retirement plans.
• Automatic enrollment and plan portability: Beginning in 2025, employers adopting new 401(k) and 403(b) plans will be required to automatically enroll eligible employees starting at a contribution rate of 3% along with more flexible access to funds. Retirement service providers will also be able to offer automatic portability services to transfer employees low balance retirement accounts to a new plan if they change jobs. This change encourages savers to not cash out their plan but rather continue with another eligible retirement plan.
• Increases to catch-up contributions: Individuals between 60-63 will be able to contribute up to $10,000 effective January 1st, 2025 for workplace plans, which will be indexed for inflation. Catch up contributions must be classified as Roth catch up contributions. The 2023 catch up rate for those age 50 and older is currently $7,500.
• Student Loan Repayments: In 2024, new options will include employer matching on student loan repayments with matching deferrals to Roth IRA accounts for vested employees.
• Emergency savings accounts: Effective January 1st, 2024, the Act offers emergency savings accounts for employees to fund after-tax contributions to Roth IRAs with possible employer matching depending on plan rules. Non-highly compensated participants can make contributions of up to $2,500 annually and the first four withdrawals per year would remain tax and penalty free.
• Withdrawals for disaster relief: More flexibility at the plan level for withdrawals up to $22,000 for disaster relief with no premature 10% distribution penalty; larger plan loans and longer repayment periods for disaster relief.
• Personal or family emergency withdrawals: Personal or family emergency withdrawals of up to $1,000 effective January 1st, 2024 with repayment options.
All these changes create financial and tax planning opportunities to prepare a multi-year strategy through multiple life stages, including accumulation, pre-retirement, and post-retirement. It is also important to take advantage of Roth IRA conversions during the years leading up to the RMDs and to manage income levels for purposes of keeping Medicare premiums at the lowest possible level.
Our goal at Basepoint Wealth is to help you navigate all of the opportunities and pitfalls this legislation offers. We are prepared to address any questions you have and assist directly in your life planning on these issues.
Basepoint Wealth, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
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