How ‘SECURE 2.0’ could boost your retirement plans

Photo: Colin Devar (Shutterstock)

SECURE 2.0 was signed into law in late 2022. Standing for “Setting Every Community Up for Retirement Enhancement”, the second version of this law is designed to continue to build on improvements made in the United States. retirement system. Retirement is far away off or fast approach for you, here’s what you need to know about the impact of SECURE 2.0 on your retirement planning.

Changes to Required Minimum Distributions

Required Minimum Distributions (RMD) is the amount of money mandated by the IRS you must withdraw from your retirement account each year. SECURE 2.0 softens the blow of RMDs in several ways.

First, the age to start taking RMDs has increased to 73 in 2023 and will increase again to 75 in 2033. This gives savers an additional year for tax deferral (the previous age was 70.5 years in 2022).

Previously, failure to take your RMD by the deadline resulted in a 50% penalty. Under SECURE 2.0, the penalty for not obtaining an RMD has been reduced to 25% of the amount of the RMD. If the error is corrected in a reasonable and timely manner, the penalty may be further reduced to 10%. Additionally, if you can demonstrate that your failure to take an RMD was the result of an understandable error, you may be able to obtain a full penalty waiver. And from 2024, RMDs will no longer be required from Roth accounts in employer pension plans. These relaxed rules are great news for the many savers who may miss deadlines because of a simple oversight.

Changes to the amount of catch-up contributions for older workers

Currently, if you are at least 50 years old, the catch-up contribution rules allow you to add more money to your retirement savings accounts than the standard contribution limit for the year. In 2025, these catch-up contributions will increase for 401(k), 403(b), government plans, and IRA account holders. This gives anyone who has delayed their pension contributions (or who has not yet started saving) the chance to “catch up” before they reach retirement age.

For traditional and Roth IRAs, the catch-up contribution amount was previously locked in at $1,000. Starting in 2024, the $1,000 amount will be adjusted annually for inflation (as the base amount already is).

For 401(k) plans and other employer-sponsored plans, the catch-up contribution limit for 2022 for workers age 50 and older was $6,500 and is $7,500 for 2023. Under SECURE 2.0, most of the time, the special catch-up contribution cap for workers 60-63 is the greater of $10,000 or 150% of the “standard” catch-up contribution amount for 2024. The $10,000 $ will be adjusted for inflation each year beginning in 2026.

Changes for young workers too

Even if retirement is decades away, the provisions of SECURE 2.0 can impact how you maximize your long-term savings.

Automatic 401(k) enrollment

Starting in 2025, employers offering a 401(k) plan will be required to automatically enroll their employees in the plan, unless employees choose to opt out. The automatic registration rate will be between 3 and 10%.

Better access to emergency savings

One of the highlights of SECURE 2.0 is the ability for employees to withdraw up to $1,000 from their retirement account for emergency expenses without having to pay the typical 10% early withdrawal tax penalty. they are under 59 and a half. Companies could also allow workers to set up an emergency savings account through automatic payroll deductions, with a cap of $2,500.

For a complete summary of all the provisions included in SECURE 2.0, you can read more information hhonor. While this law clearly offers more flexibility and greater protections for savers, everyone’s retirement plan is different. Be sure to consult a financial or tax advisor to understand how SECURE 2.0 changes apply to you personally.

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