Key takeaways:
- Starting in 2024, RMDs will no longer be required from Roth accounts in employer retirement plans.
- The age to start taking RMDs increases to age 73 in 2023 and to 75 in 2033.
- 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.
- Catch-up contributions will increase in 2025 for 401(k), 403(b), governmental plans, and IRA account holders.
- Defined contribution retirement plans will be able to add an emergency savings account associated with a Roth account.
On December 23, 2022 the Federal government passed the SECURE 2.0 Act, new legislation aimed at strengthening the retirement system and helping bolster Americans’ financial readiness for retirement. Some key features of the SECURE 2.0 Act include increasing the age at which retirees must begin taking required minimum distributions (RMDs) from IRA and 401(k) accounts, and changes to the size of catch-up contributions for older workers with workplace plans. Additional changes allow people to save for emergencies within retirement accounts, enable easier retirement account movement from employer to employer, and help younger people to save while paying off student debt. If this all seems overwhelming, not to worry. We’ve broken it down based on your retirement age and readiness below.
Notable RMD Changes for Those Close To or In Retirement:
- The age at which retirement account owners must begin taking RMDs has increased from 72 to 73, effective in 2023. Investors who turned 72 in 2022 or earlier will need to continue to take RMDs as scheduled. For example- if you turned 72 in 2022 and delayed your RMD until 2023, you are still required to take it by April 1, 2023, plus take your 2023 distribution in 2023.
- Starting in 2023, RMD penalties for those who fail to take their distribution will decrease from 50% to 25% of the RMD amount not taken. The penalty is reduced to 10% for IRA owners if corrective action is taken in a timely manner.
- Starting in 2024, Roth accounts held in employer retirement plans will be exempt from RMD requirements.
- The SECURE 2.0 Act will eventually increase RMD age to 75 in 2033.
Notable Changes for Those Further From Retirement:
- Traditional IRA and Roth Contribution limits have increased from $6,000 to $6,500. Those who are 50 and over still have a $1,000 contribution catch-up limit.
- The basic salary deferral amount for 401(k) and similar workplace plans is $22,500, with a $7,500 catch-up amount for those 50 or older.
- Contributions an employer can make to an employee's SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $66,000 for 2023, an increase from $61,000 in 2022.
- The amount individuals can contribute to their SIMPLE retirement accounts is increased to $15,500. For employees age 50 or over, a $3,500 catch-up contribution is also allowed.
- The contribution limit for employees who participate in 401(k), 403(b), most 457 plans and the federal government's Thrift Savings Plan will increase to $22,500. It will increase to $30,000 in 2023 for those age 50 or older.
Key Changes and How to Best Use Them to Your Advantage:
- The legislation requires businesses adopting new 401(k) and 403(b) plans to automatically enroll eligible employees, starting at a contribution rate of at least 3%, starting in 2025. It also permits retirement plan service providers to offer plan sponsors automatic portability services, transferring an employee's low balance retirement accounts to a new plan when they change jobs. The change could be especially useful for lower-balance savers who typically cash out their retirement plans when they leave jobs, rather than continue saving in another eligible retirement plan.
- Defined contribution retirement plans would be able to add an emergency savings account that is a designated Roth account eligible to accept participant contributions for non-highly compensated employees starting in 2024. Contributions would be limited to $2,500 annually (or lower, as set by the employer) and the first 4 withdrawals in a year would be tax- and penalty-free. Depending on plan rules, contributions may be eligible for an employer match. In addition to giving participants penalty-free access to funds, an emergency savings fund could encourage plan participants to save for short-term and unexpected expenses.
- Starting in 2024, employers will be able to "match" employee student loan payments with matching payments to a retirement account, giving workers an extra incentive to save while paying off educational loans.
- After 15 years, 529 plan assets can be rolled over to a Roth IRA for the beneficiary, subject to annual Roth contribution limits and an aggregate lifetime limit of $35,000. Rollovers cannot exceed the aggregate before the 5-year period ending on the date of the distribution. The rollover is treated as a contribution towards the annual Roth IRA contribution limit.
- Additional information on 2023 changes for retirement plan contributions can be found on theIRS website.
Designated Beneficiaries of Inherited IRAs
- Beneficiaries who are not considered eligible designated beneficiaries (EDBs) and subject to the 10-year rule will now be required to take distributions in years 1 through 9 and then deplete the account by December 31 of the 10th year of death. PerIRS Notice 2022-53 (which has not been published but indicates the intent to issue final regulations), beneficiaries who failed to take distributions in 2021 and 2022 will NOT be subject to a 50% penalty. The IRS has not yet issued any guidance or instruction indicating that those who did not take distributions in 2021 and 2022 are required to make up those distributions.
While the SECURE 2.0 Act and 2023 contribution limit increases provide additional opportunities to save for retirement, every investor’s financial situation is different. As always, please consult a tax professional to understand how these changes apply to you. We stand ready to help you navigate these new rules and make sure you are aware of how they apply to you. Please don’t hesitate to reach out to us with any questions or concerns.