New Retirement Bill Means Big Changes for Retirement

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Over the holidays Congress passed SECURE Act 2.0, part of a larger 4,000-page bill preventing a government shutdown, the $1.7 trillion Consolidated Appropriations Act of 2023. While certainly not as potent for IRAs that the original SECURE Act was, there are still notable changes affecting employers, retirees and beneficiaries. Maybe not all effective immediately.

Here are some highlights. (Make sure you read to the end for the 5-star tip)

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RMD age will increase to 73 for 2023: It will ultimately rise to 75, but not for another 10 years.

IRA catch up indexed: Individuals who are age 50 or over can make an additional catch-up contribution of $1,000. This amount will be indexed for inflation starting in 2024.

Supercharged plan catch up contributions: Starting in 2025, individuals who are ages 60, 61, 62, and 63 will be eligible to make larger catch-up contributions to their plans.

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Savers Match introduced: The underutilized Saver’s Credit, which was intended to help lower income savers, has been overhauled and will be a government match paid directly to retirement accounts. But that won’t be effective until 2027.

More Roth IRA changes: The trend toward “Rothification” continues as Congress seeks immediate tax revenue. SEP and SIMPLE plans can allow Roth contributions beginning in 2023. Further, all plan catch-up contributions for age 50-or-over higher income employees must be Roth contributions, starting in 2024. Finally, beginning immediately, plans can allow employer matching contributions to be made on a Roth (after-tax) basis.

New easing of the 10% early distribution penalty: Congress recognizes that funds may need to be tapped early. SECURE 2.0 creates new exceptions to the 10% early distribution penalty for disaster relief, domestic abuse, terminal illness and emergency need. Some of these are effective immediately, others down the road.

Higher SIMPLE contributions: Beginning in 2024, higher salary deferrals to SIMPLE IRAs will be allowed as well as additional nonelective contributions.

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Rollovers from 529 plans to Roth IRAs: In response to concerns that unused funds could be trapped in a 529 plan, Congress is allowing 529 plan funds to be rolled over to Roth IRAs. The limit is $35,000 and the 529 plan must be open for more than 15 years, effective in 2024.

Expanded QLACs: The 25% of assets limit is repealed, and up to $200,000 can be used from an account balance to purchase a QLAC.

Penalty for missed RMDs reduced: The hefty 50% penalty for missed RMDs is reduced to 25%. If the missed RMDs are corrected in a timely manner, the penalty is further reduced to 10%.

Expanded QCDs: A one-time, $50,000 qualified charitable distribution (QCD) to a charitable gift annuity, charitable remainder unitrust, or a charitable remainder annuity trust is permitted. The QCD limit of $100,000 will be indexed for inflation beginning in 2024.

What Should You Do?

If a person has a Traditional IRA and is at the age when lifetime required minimum distributions (RMDs) apply, then that person must withdraw a portion of that account annually. The amount to be withdrawn is based on the year-end balance from the previous year and a life expectancy factor as determined by one of the life expectancy tables.

The rationale for RMDs is, the IRS permitted the account owner to delay paying taxes on the IRA dollars for potentially decades. Now it is time for the account owner to keep his end of the bargain and pay up. BUT, when it comes time to take YOUR money out of YOUR IRA account, it will be the present administration that will determine the tax rate YOUR money will be taxed at.

What does this mean? 20%? 30%? Higher, given the trajectory of the growing urgency to pay down the U.S. national debt? A rate you didn’t plan on, which means you never had control over when you would pay the tax.

Answer: All IRA monies should be systematically converted to ROTH IRAs no matter what tax bracket you are currently in. Begin the conversion now at known rates, which likely will rise with urgency.

Roth IRAs have no RMDs.

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