Financial Guidance
SECURE 2.0 Could Change the Way You Save for Retirement
We combed through 19 pages and 11,000 words of tax prose, so you don’t have to.
Back in 2019, the IRS made a troubling discovery: Americans weren’t saving for retirement like they used to.
There are a number of potential factors behind this trend, from inflation and the rising cost of living to economic instability. Whatever the causes, the consequences of a widespread failure to prepare for retirement are clear: Individuals are less secure, the country’s social safety net is strained, and the economy suffers.
One solution? Make saving for retirement easier and more rewarding—and make long-term financial planning cool again.
What is SECURE 2.0?
The federal government recently developed a law designed to do just that. Passed in 2019, the SECURE Act brought changes to the tax code designed to allow taxpayers to put more money away for retirement and incentivize them to do so.
Then, in 2022, the government introduced the SECURE 2.0 Act, an update that makes further changes to the tax code in pursuit of the original bill’s mission: to encourage workers to save more for retirement and foster economic independence.
SECURE 2.0 may seem like old news, but many of its provisions only begin to apply in 2023. As we approach tax season, now’s a great time to catch up on the new rules and adjust your retirement savings strategy.
Here’s what you need to know:
The Required Minimum Distribution (RMD) age is going up.
The government wants individuals to save for retirement. At the same time, it wants retirees to spend their money, rather than holding onto it and transferring it to beneficiaries.
Under previous law, individuals were required to begin taking distributions from their retirement plans at age 72. Secure Act 2.0 increased the RMD age to 73 as of January 1st, 2023. Under the new law, this age will increase to 75 beginning on January 1st, 2033.
Like many of the provisions listed below, this one is designed to make saving for retirement more attractive. A later RMD means that you can hold your tax-deferred savings for a longer time and potentially grow your wealth.
Your 401(k) is no longer subject to RMD rules.
Under previous law, owners of Roth-designated accounts in employer retirement plans (such as 401(k), 403(b), or 475 plans) were subject to required minimum distributions. At a certain age, owners of these accounts had to begin taking distributions from their retirement savings, whether they wanted to or not.
SECURE 2.0 eliminates this rule. Effective for taxable years beginning after December 31st, 2023, Roth accounts under employer retirement plans are no longer subject to RMD rules. (Note that this rule change does not apply to distributions required with respect to years beginning before January 1st, 2024.)
RMD penalties are more forgiving.
The thing about required minimum distributions is that they’re, well, required. And there are hefty penalties for those who fail to follow the rules.
SECURE 2.0 makes those penalties a little less painful, reducing the penalty for failure to take RMDs from an IRA from 50% to 25%. The new law also makes it possible to reduce your penalty. If you correct your failure in a timely manner, the excise tax is lowered from 25% to 10%.
This rule is effective for taxable years beginning after 2022.
Catch-up limits are getting a boost.
The idea behind catch-up limits is pretty simple: As workers approach retirement age, they are permitted to put away more money into their retirement plan, helping them “catch up” on their savings while reducing their taxable income. (For taxpayers, one of the biggest benefits of this policy is that individuals can potentially avoid moving into a higher tax bracket by deferring a larger portion of their salaries to retirement via catch-up contributions.)
Under current law, employees aged 50 and up may make contributions up to $7,500 in excess of the otherwise applicable limits.
SECURE 2.0 gives this provision a boost. Under the new rules, individuals aged 60-63 can contribute up to $10,000 or 50% more than the regular catch-up amount in 2025 (the limit is set by the bigger of these two figures). The new rules also account for inflation, indexing the 60-63 limits after 2025.
This policy is effective for taxable years beginning after December 31st, 2024.
The IRA catch-up limit is being indexed for inflation.
One of the most important aspects of SECURE 2.0 is that it accounts for inflation in areas where 1.0 didn’t.
On example? Under current law, an individual age 50 or older can make up to $1,000 in additional pre-tax contributions to their IRA. Effective for taxable years beginning after December 31st, the new policy indexes the limit for inflation, allowing taxpayers to contribute funds based on their real value.
High earners will pay more taxes on some contributions.
Under the new policy, individuals earning more than $145,000 (indexed for inflation) are subject to Roth tax treatment for all catch-up contributions to qualified retirement plans. (Previously, these individuals could make contributions on a pre-tax basis, if permitted by the plan sponsor. This policy allowed some individuals to avoid higher tax brackets; the new policy does not.)
Now, contributions must be made on a post-tax basis, meaning that high earners cannot deduct contributions from their yearly income. Under the new rules, the individual pays taxes upfront; at retirement age, they can draw earnings and contributions tax-free.
The good news? The effective date for this rule has been kicked back to 2026.
It’s going to be easier to roll education funds into retirement.
With education costs rising, saving for college is more important than ever. At the same time, many Americans are hesitant to use one of the best tools for funding education, 529 accounts. They fear that, if they pay into a 529, their money will later become trapped in the account until they pay hefty withdrawal penalties. The result? Americans are saving less for college at a time when school is more expensive than ever.
SECURE 2.0 aims to encourage saving for education and retirement alike. The act amends the Internal Revenue Code, allowing for tax-free and penalty-free rollovers from 529s to Roth IRAs. Now, the money you don’t spend on education can be saved for retirement, without major fees.
There are some stipulations. Up to $35,000 can be transferred over an account holder’s lifetime, and rollovers are subject to annual contribution limits. Also, a 529 account must have been open for more than 15 years before a rollover can occur.
This provision is effective for taxable years after December 31, 2023.
Retirement plan limits are being adjusted for inflation.
The IRS recently released dollar limitations for retirement plans that become effective January 1st, 2024. Here are some of the key changes:
- The participant pretax contribution limit for IRC Section 401(k) and 403(b) plans increases from $22,500 to $23,000.
- The deferral limit for deferred compensation plans of state and local governments and tax-exempts increases from $22,500 to $23,000.
- The defined benefit plan annual benefit limit increases from $265,000 to $275,000.
- The defined plan contribution increases from $66,000 to $69,000.
How It All Adds Up
Saving for retirement is essential. But the rules are always changing, so a good plan is a flexible one.
In such a dynamic climate, it’s important to regularly reevaluate your strategy, adjust your tactics accordingly, and partner with a financial expert you trust.
At Dugan + Lopatka CPAs, we partner with businesses and owners, building relationship built on trust and transparency. Located in the Chicago suburbs, we offer a full suite of accounting services, from wealth management and tax prep to outsourced accounting, business advisory, and more.
Contact us today to learn how we can help you turn complexity into clarity, and clarity into confidence.