As Americans, we’re simply not saving enough for retirement. In fact, one study predicted that by 2050, the United States would face a $137 trillion deficit in retirement incomeˡ.
As a result of this lack of appropriate saving and planning, policymakers deemed it necessary to step in and take action. As a result, the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act of 2022 became law and, as a result, has implemented changes to the retirement system.
How does this impact you? Below are some of the notable changes.
Required Minimum Distributions (RMDs)
• Legislation has increased the age at which you must take required minimum distributions (RMDs). Previously, RMDs were to start at age 72. This has been increased to age 73 in 2023. In 2033, however, this will increase to age 75. Those born between 1951 and 1959 now must take distributions at 73. Those born in 1960 or after have an RMD age of 75.
• Another change to RMDs is regarding penalization if you do not take your required distribution. Previously, the penalty was 50% which has now been decreased to 25%. Additionally, the penalty will be reduced to 10% if the Individual Retirement Account (IRA) owner files a corrected tax return in a timely manner and withdraws the previous RMD.
Catch-Up Contributions
• Higher catch-up contributions are another notable change. Starting in 2025, people 60 to 63 years old will be able to make an annual $10,000 catch-up to employer sponsored plans and this amount will be indexed to inflation. Also worth noting, for those making $145,000 or more, these contributions must be made into Roth accounts or after-tax money must be used.
• Catch-up contributions to IRAs are currently $1,000 for those 50 years and older. Going forward this number will also be indexed to the cost of living.
Qualified Charitable Distributions (QCDs) and Qualified Longevity Annuity Contracts (QLACs)
• Legislation has also expanded which types of charities may receive Qualified Charitable Distributions. As of 2023, those age 70 ½ and older may elect a one-time QCD up to $50,000 (adjusted for inflation) to Charitable Remainder Unitrust (CRUTs), Charitable Remainder Annuity Trusts (CRATs), or charitable gift annuities. These distributions count toward RMD calculations but must come directly from an IRA before the end of the calendar year.
• Another change has been made to Qualified Longevity Annuity Contracts. Premium limits have increased to $200,000 from $145,000. Previously, there was a requirement that limited premiums to 25% of your retirement balance. This has since been eliminated.
Employer-Sponsored Retirement Accounts
• In 2025, businesses starting new 401(k) and 403(b) plans must automatically enroll eligible employees with a contribution rate of 3%. Portability is also affected as plan providers now must offer the option to transfer low balance retirement accounts to employees’ new plans as they change jobs. The thought is to encourage lower-balance employees to keep their savings in retirement accounts as opposed to cashing out their savings.
• Matching contributions from employer-sponsored plans have also changed. Historically, matching was made on a pre-tax basis. Going forward, employers can give employees the option of receiving matching vesting contributions into Roth accounts.
• In 2024, employers will be able to match student loan payments their employees make by funding retirement accounts.
Education and Emergency Savings
• Qualified 529 accounts, which are vehicles for education savings, are also affected. Going forward, you may roll over a 529 plan into a Roth IRA for the beneficiary after 15 years. You are still subject to annual Roth contribution limits and an aggregate lifetime limit of $35,000.
• Lastly, starting in 2024 retirement plans can add an emergency savings account for employees who are not highly compensated. Contribution limits are $2,500 per year and the first four each year are tax and penalty-free.
If you haven’t started saving for retirement or feel that you need to catch-up, reach out to a knowledgeable advisor. If you have additional questions regarding the SECURE 2.0 Act and how your retirement plan may be affected, please contact your First Bank Wealth Management Team.
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ˡ Solving the Global Pension Problem, December 16, 2019
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