The Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0, which was recently passed into law, brings significant changes to the rules governing retirement plans. This new legislation aims to improve retirement security for Americans and address the challenges facing the current retirement system. Retirees and those planning for retirement should be aware of the changes brought by the SECURE Act 2.0 and how they may impact their retirement strategy. Below I have highlighted a few of those key changes.
Raised Age for Required Minimum Distributions (RMDs)
One of the key changes brought by the SECURE Act 2.0 is the increase in the age for required minimum distributions (RMDs) from traditional individual retirement accounts (IRAs). The age for RMDs has been increased from 72 to 73 in 2023 and delayed to 75 in 2033, giving retirees more flexibility to delay taking RMDs and potentially allowing their retirement accounts to grow for a longer period of time. This change can be especially beneficial for retirees in good health with pensions and having a longer life expectancy. By delaying RMDs, retirees can potentially reduce their tax liability and Medicare cost in current years but may have higher taxes and Medicare costs later in retirement. The main concept here is to have more money available to them during their retirement years.
Penalty for failing to take RMD Reduced
Starting in 2023, the penalty for failing to take an RMD will decrease from 50% of the amount not taken, to 25%. If IRA owners withdraw the RMD amount not previously taken and promptly submit a corrected tax return, the penalty will be reduced to 10%.
Expansion of Tax Credits for Small Business Retirement Plans
The SECURE Act 2.0 also provides tax credits to small businesses that establish and maintain retirement plans for their employees. This helps to incentivize small businesses to offer retirement benefits to their workers and increase retirement security for those workers. The tax credits range from $500 to $5,000, depending on the size of the business and the number of employees enrolled in the retirement plan. This change can be especially beneficial for individuals in retirement that are starting a small business and are looking to offer retirement benefits to their employees and defer their required withdrawals as well.
Long-Term, Part-Time Employees’ Eligibility for Employer-Sponsored Plans
The SECURE Act 2.0 requires employers to include long-term, part-time employees in their employer-sponsored retirement plans. This expands access to retirement benefits for workers who may not have been eligible for these plans in the past. The definition of a long-term, part-time employee is someone who has worked for the same employer for at least 500 hours per year for two consecutive years. This change can be especially beneficial for retirees that work part-time to stay sharp. They could use their work to gain access to a retirement plan and further delay RMDs. Often time we see retirees working in a nonprofit organization that would now allow them access to a plan. Deferring income could also have the potential to help build savings into a Roth 401(k) as well. Keep in mind that matching or profit sharing can now also be contributed to Roth 401(k).
Changes to Annuity Options in Employer-Sponsored Plans
The SECURE Act 2.0 requires employers to provide annuity options in their retirement plans, giving workers the option to receive a guaranteed stream of income in retirement. This helps to ensure that retirees have a steady source of income throughout their retirement years. Annuities can provide a sense of security and peace of mind for retirees, as they guarantee a set amount of income each year, regardless of market conditions. This change can be especially beneficial for retirees who are concerned about running out of money during their retirement years.
Elimination of the Age Cap for Traditional IRA Contributions
The SECURE Act 2.0 eliminates the age cap for traditional IRA contributions, allowing individuals over the age of 70.5 to continue to contribute to their IRAs. This change can be especially beneficial for retirees who are still working and want to continue to save for their retirement. By eliminating the age cap, retirees can continue to save for their retirement and potentially reduce their tax liability.
The SECURE Act 2.0 brings important changes to the rules governing retirement plans that can have a significant impact on retirees and those planning for retirement. Retirees and those planning for retirement should be aware of these changes and consider how they may impact their retirement strategy.