Retirees can invest longer in their retirement thanks to the Secure 2.0 law (iStock)
Americans who contribute to Individual Retirement Accounts (IRAs) may see their investments grow longer before they have to start making government-mandated withdrawals.
Indeed, the Secure 2.0 law raised the minimum distribution age (RMD) required for IRAs to 73 years old, from 72 years old. This change came into effect on January 1, 2023. In addition, the RMD age will increase again to 75 from January 1. , 2033.
An RMD is the amount of money people investing in IRAs must withdraw each year after reaching age 73. It is calculated by dividing the IRA balance as of December 31 of the previous year by a life expectancy factor. These life expectancy factors are found on the IRS Uniform Life Table or the Joint IRS Life Expectancy and Last Survivor Table.
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THE SECURE LAW 2.0 AIMS TO OVERHAUL THE RETIREMENT SAVINGS SYSTEM: WHAT IT MEANS FOR YOU
Secure 2.0 Act: Changes to RMD Tax Penalties
Typically, people who do not take the appropriate RMD will face a 50% tax penalty on the amount not withdrawn. The Secure 2.0 law has reduced this penalty to 25%.
The penalty may drop to 10% for people who correct the RMD issue in a timely manner. “The penalty may be waived if the account holder establishes that the shortfall in distributions was due to a reasonable error and reasonable steps are taken to remedy the shortfall,” said a post by IRS declared.
Currently, those with Roth IRAs do not need to make minimum withdrawals from these accounts. Starting in 2024, the Secure 2.0 Act will extend this functionality to Roth 401(k) plans and other Roth accounts under workplace retirement plans.
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SECURE 2.0 ACT: STUDENT LOAN PAYMENTS WILL COUNT FOR 401(K) MATCHING CONTRIBUTIONS
A summary of the Secure 2.0 law
The Secure 2.0 law, enacted at the end of 2022, brings major changes to retirement savings law.
Here are some highlights brought by Secure 2.0, including provisions that are to come into force in the coming years.
- Companies will be required to automatically enroll their eligible employees in 401(k)sfrom 2025
- From 2025, catch-up contributions to workplace retirement plans like 401(k) will increase to $10,000 for employees age 60 to 63.
- Part-time employees who have worked for at least two consecutive years with at least 500 hours of annual service will be able to enroll in their employer’s 401(k) plans
- Individual account plan sponsors can create “emergency savings accountswhich allow non-high-paid employees to make after-tax Roth contributions to a special savings account under the pension scheme, starting in 2024.
The Secure 2.0 Act, which follows on from the Secure Act of 2019, is part of a $1.7 trillion omnibus spending package that was signed into law in late 2022.
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SECURE 2.0 ACT: AMERICANS WILL BE ABLE TO MAKE TAX-FREE TRANSFERS OF 529 PLAN FUNDS TO ROTH IRAS
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