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SECURE Act 2.0: What Does It Mean for You?

In the final days of 2022, President Joe Biden signed into law the SECURE Act 2.0 — a piece of legislation with the aim of strengthening the U.S. retirement system and helping Americans to be more financially prepared for retirement (SECURE stands for “Setting Up Every Community for Retirement Enhancement”). The new law features many new provisions to address issues not covered by the original SECURE Act of 2019, and it has implications for retirement-age individuals and those still years away from retiring.  The following are a few highlights from the Act.


Required Minimum Distribution (RMD) Age Changes

  • The RMD age increases to 73 in 2023
  • In 2033, the RMD age is set to increase to 75

Required Minimum Distributions — or RMDs — are the minimum amounts a retirement account owner must withdraw every year starting at a certain age. The original SECURE Act of 2019 increased the age for RMDs from 70 ½ to 72. The SECURE Act 2.0 increases the RMD age again — this time to 73 starting in 2023.

That means, if a retirement account owner turned 72 in 2022, they must continue to take RMDs as scheduled. However, those turning 72 in 2023 will have an extra year before they're required to begin taking RMDs.

Additionally, the RMD age will increase to age 75 starting in 2033.

RMD Penalty Changes

  • The penalty for failing to take an RMD falls from 50% to 25% of the RMD amount
  • The penalty is reduced to 10% of the RMD amount if the error is self-reported and corrected in a timely manner

The IRS imposes strict penalties on retirement account owners who fail to take an RMD (or fail to take the full required amount). And while the SECURE Act 2.0 does not do away with this penalty, it reduces it from 50% of the RMD amount to 25%. Additionally, the penalty falls to 10% if the account owner corrects the mistake and submits a corrected tax return during a two-year “correction window.”


Changes to catch-up contributions

  • Starting in 2024, annual retirement catch-up contributions (which are limited to $1,000) will be tied to inflation

In 2022, owners of traditional IRAs or Roth IRAs were allowed to contribute up to $6,000 to a traditional IRA or Roth IRA (or a total of $6,000 to multiple IRAs). This contribution limit changes from time to time due to inflation. For example, in 2023, the limit increased to $6,500.

Additionally, those aged 50 and older can contribute an extra $1,000 to their IRA on top of the base amount (for example, in 2022 individuals 50 and older could contribute the $6,000 base limit plus $1,000, for a total of $7,000 to their IRA). This is called a catch-up contribution, and it's meant to help people put away additional savings as they get closer to retirement. However, unlike the base amount which periodically changes with inflation — the catch-up contribution amount was stuck at $1,000.

The SECURE Act 2.0 changes that. Starting in 2024, the catch-up contribution may change with inflation. That means it could go up annually based on federally determined cost-of-living increases.


Increase to Qualified Charitable Distribution (QCD) Limit

  • Starting in 2024, the annual QCD limit will be tied to inflation

Qualified Charitable Distributions (QCDs) allow those aged 70 ½ to make tax-free donations to certain charities directly from their IRA. QCDs may be beneficial to retirees and those with inherited IRAs because they can help to satisfy RMDs through charitable giving to qualifying organizations.

Currently, the maximum annual amount for a QCD is $100,000. But starting in 2024, that limit will be indexed to inflation.


A 529 Plan Can Be Rolled Over into a Roth 401k

  • Starting in 2024, a 529 plan that has been open for at least 15 years can be rolled into a Roth IRA

A 529 plan is a type of tax-advantaged savings plan to help save money for future educational costs. Starting in 2024, the SECURE Act 2.0 will allow unused assets in a 529 plan to be rolled over into a Roth IRA. The 529 plan must have existed for at least 15 years, and it must be rolled into a Roth IRA account in the name of the 529 plan beneficiary. The rollover is subject to the annual IRA contribution limits and there is a lifetime limit of $35,000 per beneficiary. Also, account holders and beneficiaries cannot roll over any contributions or earnings on contributions that were made in the last five years.


How Can Individuals Benefit from the SECURE Act 2.0?

The SECURE Act 2.0 is designed to give people more tools and opportunities to prepare financially for retirement. It has many different provisions and has different implications depending on a person's age, finances, and other factors. And like all tax-related legislation, it is complex. Therefore, it is always wise for people to consult a tax professional to understand how the changes in the SECURE Act 2.0 may affect their personal situation.


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