On December 29, 2022 President Biden enacted what is commonly referred to as SECURE 2.0, which compliments the 2019 SECURE Act. The legislation makes some sweeping changes to retirement plans, which could impact your retirement and estate planning:
Here are some key takeaways from SECURE 2.0:
- Required Minimum Distribution (RMD) Age Increase: The age for required minimum distributions has been increased to 73 beginning January 1, 2023 and will increase again in 2033 to age 75. However, individuals who reached the age 72 in 2022 must take their first RMD by April 1, 2023 and the second RMD by December 31, 2023. For individuals who turn 72 in 2023 (and thus will turn 73 in 2024), the first RMD must be taken by April 1, 2025.
- Decreased Penalty for failing to take RMD: The penalty for failing to take an RMD was decreased to 25% of the RMD amount, which may be reduced to 10% if the account owner makes a timely correction. The penalty was previously a hefty 50% of your RMD amount.
- Eliminating RMDs from a Roth 401(k): Beginning in 2024, individuals who have invested into a Roth 401(k) account will no longer be required to take an RMD. This change will align Roth 401(k) accounts with Roth IRA accounts, which already were exempt from RMD requirements.
- Catch-Up Contributions: People approaching the age of retirement may contribute more to their retirement accounts in order to “catch-up.” Those 50 years old and older are currently allowed to make catch-up contributions, up to $7,500 over the standard annual pay-in limits for retirement accounts. However, beginning in 2025, individuals aged 60 to 63 may increase their maximum catch-up contribution to $10,000 or 150% of the regular “catch-up” amount, whichever is greater.
- No change to the 10-year rule: It is important to note that SECURE 2.0 did not modify the 10-year rule, which was imposed on beneficiaries of inherited retirement accounts after passage of the 2019 SECURE Act. The 10-year rules states that an inherited retirement account must be emptied within 10-years, with exceptions for certain beneficiaries, including spouses and minor children. It was originally interpreted to mean that beneficiaries subject to the 10-year rule could take no distributions in years 1 to 9 and then empty the account in year 10. However, IRS regulations have since clarified that if the prior retirement account owner had passed the age triggering RMDs, then the inheriting beneficiary must take “annual” RMDs based on the 10-year payout rule.