Congress passed the SECURE 2.0 Act, which introduces over 90 provisions that impact various retirement savings plans. The changes will roll out from 2023 to 2027. One key modification is the increase in the age for Required Minimum Distributions (RMDs).
The age increased from 72 to 73 in 2023 and will eventually reach 75. This delay aims to provide retirees more flexibility but poses tax implications and practical challenges. The Act has also postponed the final rules for inherited IRAs until 2025.
During this period, penalties for missed RMDs from specific inherited IRAs in 2020 through 2023 are waived. The penalty for missing an RMD has been reduced from 50% to 25%, or potentially 10%, under certain conditions. Starting in 2024, RMDs will no longer be required for Roth 401(k) accounts in employer plans, aligning them with Roth IRAs, which are not subject to RMDs.
Employers can now offer small financial incentives to encourage employee participation in retirement plans. Starting in 2024, the Act permits early “emergency” withdrawals up to $1,000 from retirement accounts without the usual 10% penalty. The SECURE 2.0 Act increases catch-up contribution limits from 2025, allowing contributions up to $10,000 or 50% more than the regular catch-up amount for those aged 60-63.
For high earners aged 50 or over, catch-up contributions must be made on a Roth basis starting in 2026.
New rules for retirement savings
Starting in 2024, employers can make matching contributions to an employee’s retirement account based on the employee’s student loan payments.
The Act also allows for limited rollovers from 529 plans to Roth IRAs beginning in 2024. There are ways to reduce your RMD and minimize the impact on your taxes. Roth conversions can reduce future RMDs by lowering the balance in your account.
Qualified Charitable Distributions (QCDs) count toward your RMDs but don’t count as income. If you continue working, your employer’s 401(k) plan may be exempt from requiring RMDs. The IRS has released its final rules on RMDs for inherited IRAs under the 2020 Secure Act.
Nonspouse beneficiaries must empty their inherited IRA accounts within ten years of the original account holder’s death. Annual RMDs are required for nonspouses if the original account holder had already started taking RMDs before their death. Due to confusion, the IRS waived annual RMDs for the years 2021 through 2024.
However, these RMDs must be taken starting in 2025 without any penalties for missed years. It’s essential to plan tax-savvy withdrawals from inherited IRAs. Consider withdrawing larger amounts annually to take advantage of lower tax brackets and avoid a significant tax burden in the final year.
Current IRA owners who wish to leave assets to nonspouse beneficiaries might want to convert traditional IRA savings into a Roth IRA, which is exempt from RMDs.
