Are you getting close to retirement and trying to stay on top of any changes to the retirement laws that may impact your goals and strategy? With the Secure Act 2.0 now signed into law, there are numerous retirement-related provisions included in the Omnibus Appropriations package that may be of interest to you.
What is new?
Changes regarding catch-up contributions
Catch-up contributions allow you to put more money in your retirement savings accounts than the amount usually permitted for the year. This may enable people who have delayed saving or, for those that haven’t started yet, to “catch up” in pursuit of their retirement goals. There are two significant changes to the catch-up contributions. First, effective in 2024, all catch-up contributions for individuals earning more than $145,000 per year (indexed) must be made on a Roth, or after tax basis. This does not apply to SIMPLE plans.
Second, starting Jan. 1, 2025, those ages 60-63 can contribute the greater of 150 percent of the standard amount for 2024 or $10,000. Beginning in 2026, the $10,000 will be indexed to inflation. [i]. [ii]
Currently, catch-up contributions to a 401(k) account for anyone 50 or older are $6,500 (2022), scheduled to rise to $7,500 in 2023. These amounts are in addition to regular 401(k) contribution limits: $20,500 (2022) and $22,500 (2023). [iii]
IRA catch-up amounts could increase from year-to-year
The limit on annual contributions to an IRA will be $6,500 in 2023, up from $6,000 in 2022. The catch-up contribution limit for individuals age 50 and over, however, is not subject to an annual cost-of-living adjustment in 2023 and will remain at $1,000. Under Secure Act 2.0, the catch-up contribution limits for IRAs will be indexed to inflation beginning in 2024. This amount is poised to increase yearly. [iv]
The required distribution age will increase
Currently, required minimum distributions (RMD) – amounts that must be withdrawn annually according to the law – begin at age 72. However, with the clearing of the Secure Act 2.0, this age is expected to rise to 73 in 2023 and then to age 75 in 2033. Along with a change in age, the penalty for failing to make a required minimum distribution is also subject to change beginning next year. Currently, the penalty for failing to take an RMD will decrease to 25 percent of the RMD amount, from 50 percent currently, and 10 percent if corrected in a timely manner for IRAs. [v]
Also, Roth accounts in 401(k) plans (different from Roth IRAs, which come with no RMDs during the owner’s lifetime) and other employer-sponsored plans will be exempt from RMDs starting in 2024. Additionally, beginning immediately, for in-plan annuity payments that exceed the participant’s RMD amount, the excess annuity payment can be applied to the following year’s RMD. [vi]
Matching contributions could go to your Roth account
Generally, when employers provide their workers with a matching contribution of a specific percentage match up to a percentage of the employee’s income, it must be made to a traditional 401(k) account as opposed to a Roth account. Because of this, matches are subject to taxation when withdrawn at retirement.
This will change next year, allowing employer matches to be appointed as Roth contributions. [vii]
Keep in mind that there are more than 90 provisions in Secure Act 2.0, including qualified charitable distributions and annuities, as well as other changes that may impact your retirement strategy and planning. Consider consulting a financial professional to help you navigate these new provisions and identify opportunities that may work for you and your retirement goals.
[vi]From Fidelity, "And beginning immediately, for in-plan annuity payments that exceed the participant's RMD amount, the excess annuity payment can be applied to the following year's RMD." (morningstar.com)
This material was created for educational and informational purposes only and is not intended as ERISA, tax or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
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