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President Biden signed a sweeping budget bill in December 2022 that included bipartisan legislation that will help make it easier for people to save for retirement. The SECURE (Setting Every Community Up for Retirement Enhancement) 2.0 Act builds on the previous SECURE Act passed in 2019. While not all changes in the SECURE 2.0 Act will affect you, it is important to be aware of the changes. Here’s a quick look at some of the biggest updates.
Changes to Required Minimum Distributions (RMDs)
Many retirement accounts have required minimum distributions (RMDs). The two most common types of accounts subject to RMDs are 401(k) and IRA accounts. The IRS wants to ensure that the money in these retirement accounts is withdrawn and spent (and therefore taxed). The SECURE 2.0 Act raises the age at which you must begin paying out your IRA or 401(k) plan. Prior to January 1, 2023, account holders were required to start taking RMDs at the age of 72, but as of the New Year, that age increased to 73 and will increase to 75 by 2033.
Increase in catch-up contributions
Workplace plans (like 401(k) or 403(b) plans) and IRAs both have limits on how much you can contribute each year. To give workers closer to retirement age a chance to make sure they have enough savings, the new law allows older workers to make additional contributions. For example, workers age 50 and older can now contribute an additional $7,500 per year to IRAs, $1,000 more than the previous maximum. The SECURE 2.0 Act indexes these amounts to future inflation. Beginning in 2025, the maximum 401(k) catch-up contribution for workers ages 60-63 will increase to $10,000 annually.
Automatic enrollment in 401(k) plans
Even if you’re not particularly close to retirement, the SECURE 2.0 law is making changes that may affect you. One of those changes is that starting in 2025, new 401(k) and 403(b) plans for postretirement benefits will require mandatory employees to be automatically enrolled. While this wouldn’t apply to existing 401(k) plans, it’s probably a step in the right direction to help Americans take steps to save for their retirement. Employees could opt out if they did not wish to be enrolled.
Emergency savings in a Roth IRA
A Roth IRA can be a great way to save for retirement, especially for younger people or those currently in low tax brackets. A Roth IRA allows you to deposit after-tax money, which then accumulates in your account tax-free. As long as you’re withdrawing the money for retirement (or some other qualifying event), you don’t have to pay federal income taxes on your distributions.
While a Roth IRA can be an attractive option for young people, it does have some downsides. A downside is that it can be difficult to access this money if an emergency arises. While there are some situations where you can withdraw money from your IRA without penalty, in many cases you will have to pay a 10% penalty and income tax on all withdrawals. The SECURE 2.0 Act allows Roth IRA participants access to up to $1,000 per year for qualifying personal or family emergencies. It also allows workplace plans to set up a Roth-qualified emergency account that can be funded with up to $2,500 per year.
A way to convert 529 plans into a Roth IRA
A 529 plan can be a great way to save money on college and college expenses, but what if your child decides they don’t want to go to college? The SECURE 2.0 Act helps answer this question by allowing you to transfer assets in a 529 plan into a Roth IRA as long as the account has been open for at least 15 years and does not exceed the maximum contribution limits. No tax or penalty will be incurred on such a transfer and will not be treated as income for the beneficiary.
The transfer of a 529 plan to a Roth IRA would be considered a contribution to a Roth IRA and is subject to Roth IRA annual contribution limits. There is a maximum of $35,000 that can be transferred from a 529 plan to a Roth IRA. Despite some of these limitations, this can be an attractive option for people who don’t end up using all of the funds in a 529 plan.
The final result
The SECURE 2.0 Act was enacted in January 2023 and includes a number of updates to legislation related to retirement planning and financing. Make sure you understand how these new laws may affect your specific financial situation. If you have any questions, consult your trusted financial advisor to ensure you remain in the best possible financial shape.
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