How Secure Act 2.0 Changes RMDs
In 2019, the U.S. government recognized the importance of helping people save for retirement. They drafted and passed a law designed to help simplify opening and maintaining retirement accounts.
The original SECURE Act expanded American workers’ access to employer-sponsored retirement plans and extended the age requirements for required minimum distributions (RMDs). These small changes help people open retirement plans, increase their wealth-building potential, and get closer to their retirement income goals.
Recently, Congress passed a new version of the act that includes additional changes to further help Americans save for retirement. These major changes affect the rules surrounding RMDs, when they must be taken, and how.
So, let’s look at the top 3 changes in SECURE Act 2.0.
401(k)s, IRAs, and Roth accounts
Before we discuss how SECURE Act 2.0 impacts your retirement, it might be helpful to talk about the different account options.
A traditional 401(k) is an employer-sponsored retirement plan. You sign up for the account through your employer and make contributions directly from you paycheck. 401(k) contributions usually get invested into a diverse portfolio of stocks, bonds, and index funds.
A traditional IRA is an individual retirement account you open on your own. With the exception of SEP and SIMPLE IRAs, they’re not sponsored by an employer. So, contributions don’t happen automatically. areWhere a 401(k) locks you into choices made by your employer, an IRA offers you a wider array of investment options. This helps you shop around for an account that suits your retirement goals.
Contributions to traditional accounts are made with pre-tax dollars. Because they’re tax deductible, contributions could potentially move you into a lower tax bracket for that year. However, any distributions you take are considered taxable income.
You also have the option of opening either a Roth IRA or Roth 401(k). They work largely the same as traditional accounts. However, contributions to Roth accounts are made with after-tax dollars. While this means you must pay income taxes on them upfront, you can take tax-free distributions.
Because all of these accounts are intended to provide retirement income, any withdrawals made before age 59 1/2 are subject to a penalty fee.
3 Ways SECURE Act 2.0 Changes RMDs
SECURE Act 2.0 offers many benefits for Americans hoping to save for retirement. Some of the newest changes affect the legal requirements surrounding taking distributions.
These three changes help retirees in a couple different ways. First, the changes help retirement savings last longer as life expectancy continues to rise. Second, they help reduce the burden in the event a mistake is made by a taxpayer.
The 3 major changes the SECURE Act 2.0 makes to RMDs are:
Eliminates Roth 401(k) RMDs
Beginning in 2024, those who own a Roth 401(k) will no longer be required to take RMDs.
This hasn’t traditionally been the case. In previous years, a Roth 401(k) was subject to the same RMDs as most other retirement plans. If you reached age 72 and had money in a Roth 401(k), you had to take distributions or be subject to penalties.
However, Roth IRA accounts were not subject to RMDs. Because of this, many of those who owned a Roth 401(k) would roll over their funds into a Roth IRA to avoid RMDs and the penalties associated with them.
Under this new act, that’s no longer the case. By eliminating required distributions, Roth 401(k) savers can experience indefinite investment growth without the added responsibility of performing a rollover or becoming subject to additional penalties.
Extends the age limits for RMDs
The original SECURE Act extended the age limit for RMDs from 70 1/2 years old to 72. The new 2.0 rules further extend the age limit. However, there might be some confusion over how the new limit works.
This is because the change comes in two tranches. Starting in 2023, RMDs are required starting at age 73. This means that if you turn 73 years old in 2023, you must begin taking distributions from traditional IRAs, 401(k)s, and other retirement accounts subject to RMDs. However, because the law is still brand new, there’s a grace period. Those turning 73 and above in 2023 have until April 1, 2024 to take their first distribution. This grace period only affects 2023’s RMDs. Every subsequent year, distributions must be made by December 31 of that year.
Please note that if you wait until 2024 to take your first RMD, you must take two distributions within that year. You have until April 1 to take 2023’s distribution. 2024’s distribution must be withdrawn before December 31.
The RMD age limit goes up again 10 years later. Starting in 2033, RMDs will only be required for those 75 or older.
RMD penalty reductions
RMDs are enforced with penalty taxes. Traditionally, failure to take a required distribution resulted in a penalty equal to 50% of the amount not withdrawn. For instance, if you were required to take a $1,000 distribution but only withdrew $500, your penalty would be 50% of the portion you failed to withdraw. In this instance, you failed to withdraw $500 and would have to pay a $250 penalty fee.
SECURE Act 2.0 reduces these penalties.
Under the new law, the penalty gets reduced down to 25% of the amount not withdrawn. However, you do have the opportunity to correct this error for a reduced penalty. If you withdraw the remaining portion within the second year after failing to take the RMD, the penalty gets reduced to 10%. For example, if you fail to withdraw the full RMD amount in 2023, you have until the end of 2025 to complete the distribution and receive a lower penalty.
Earning this lower penalty requires additional paperwork. To qualify for the 10% penalty, you must submit Form 5329 with a written explanation.
Other SECURE 2.0 Changes
In addition to changes to RMDs, SECURE 2.0 offers additional benefits to American retirement savers. Some of these other changes include:
Increased catch-up contributions
Catch-up contributions increase contribution limits for those nearing retirement. This helps ensure build up your retirement savings to meet your goals in those last, crucial working years. These increased contributions are currently limited to $7,500 for those 50 or older. Beginning in 2025, those ages 60 to 63 may increase their annual contributions to $10,000.
The IRA catch-up limit of $1,000 remains unchanged.
However, all catch-up limits (including for IRAs) will be indexed to inflation, meaning they could go up every year.
Roth employer match
Previously, employer match programs have been limited to traditional, pre-tax contributions. However, SECURE 2.0 will allow employers to offer after-tax matching contributions to their employees’ account balance. While employees will carry the tax burden of these Roth contributions, it can help lower their income tax bill when they take distributions during retirement.
Starting in 2025, SECURE Act 2.0 requires employers with new 401(k) and 403(b) plans to automatically enroll their employees into the plan. This will help more workers begin saving for retirement. However, employees will have the ability to opt out of retirement plans if they wish.
Additional contribution match
The law adds an additional matching contribution of up to $2,000 for qualified savers. Qualifying for this extra benefit depends on your age, tax filing status, and modified adjusted gross income (MAGI) for the tax year.
No maximum age for IRA contributions
Previously, Americans older than 70 1/2 years old could no longer contribute to their IRA plans. Under SECURE 2.0, anyone contribute to their IRA no matter their age. IRA contributions are still limited to $6,500 for those younger than 50 or $7,500 for those over 50. Those who earn less than that in a year can contribute an amount equal to their earned income.