Guess what—the folks in the U.S. Congress finally agreed on something! The ($1.7 trillion) 2023 budget bill passed in late 2022 and includes the SECURE 2.0 Act. Building upon the “Setting Every Community Up for Retirement Enhancement” (SECURE) Act of 2019, the new retirement bill makes numerous changes to existing retirement account rules.
Including tax breaks and adjustments to retirement accounts including 401(k), 403(b), IRA, and Roth accounts, the plan could have a significant impact on your retirement savings and personal finances.
SECURE 2.0 Act Summary: Retirement Savings Rules Changes
Read on for a summary of the SECURE 2.0 bill, and specifics on the rule changes that can benefit you most when it comes to saving for retirement.
Contribution Limits Are Going Up
Maximizing your yearly retirement fund contributions has two key benefits. First, you’re building a base that will grow over time thanks to compound interest and market gains. Second, you’re optimizing your tax situation, both now and in retirement.
The new retirement bill helps you achieve these goals with higher contribution limits that take effect immediately. For 2023, you can contribute $6500 to your IRA and $22,500 to an employer-sponsored 401(k) plan.
Catch-up contributions for those 50 or older will go up to $7,500 for IRAs and $30,000 for 401(k)s. However, catch-up rules will change even more in the coming years:
Starting in 2024, rather than a flat difference between normal and catch-up contributions, catch-up limits will be indexed to inflation, which should yield a bigger increase.
As of 2025, people aged 60 or older will be able to contribute an extra $10,000 or 50% more (whichever is greater), on top of the normal catch-up limits.
Required Minimum Distributions Start Later
When the original SECURE Act passed in 2019, it bumped the minimum age for required minimum distributions (RMDs) from 70½ to 72. The change gave retirees more flexibility to cover living expenses without using 401(k)s or traditional IRAs, allowing those funds to continue growing for longer.
SECURE 2.0 builds on this idea, increasing the age for RMDs to 73. On the horizon, it will be further increased to 75 in 2033.
Congress also reduced the penalty for missed RMDs from 50% of the amount to 25%. While any decrease in penalties is welcome, it’s still a hefty fine. Making sure you take your RMDs every year is key to maximizing your retirement savings.
Beginning in 2024, the new law also eliminates RMDs for employer-sponsored Roth plans, such as Roth 401(k)s. In the past, you had to roll over funds from Roth 401(k)s to Roth IRAs to avoid RMDs. While rolling over to an IRA can still be advantageous, you’ll have more flexibility with Roth employer plans.
529 Plans Are Gaining Flexibility
College costs have doubled in less than 25 years. A four-year degree at a public university now runs over $100,000, on average. Given these expenses, 529 plans have become increasingly popular to help parents (and grandparents) fund their children’s education. However, you can only use the plans for qualified educational expenses. Any other withdrawal is subject to a 10% penalty.
In the past, leftover money in a 529 was a bit of a conundrum. You could change the beneficiary to another family member, but it was still locked into funding someone’s education.
Thanks to the SECURE 2.0 Act, beneficiaries can now roll over up to $35,000 from a 529 into a Roth IRA. The transfers are still subject to yearly contribution limits, and the 529 account must have been open for a minimum of 15 years. But the ability to move the funds from education to retirement planning will provide a big boost of flexibility for college grads with funds left over.
New Emergency Withdrawal Rules
Life moves fast, and unexpected expenses can hit hard. Hopefully, you have a solid emergency preparedness plan and savings on hand.
Dipping into retirement funds for emergencies should always be a last resort. But thanks to SECURE 2.0, it’s a little bit easier to manage the process. In the past, you could only take hardship withdrawals for specific purposes. And if it was from a 401(k), the plan administrator had to approve the transaction.
Under new rules, anyone 59½ or younger can withdraw up to $1000 per year penalty free. And you have three years to repay the funds. You can’t take further withdrawals until you’ve fully repaid the money, but there are no approvals, and no required documentation to prove the emergency.
Additionally, the new law carves out two exceptions with even more relaxed rules:
Terminally ill people can make early withdrawals from retirement accounts without any penalties
Those affected by federally declared natural disasters can take up to $22,000 in early withdrawals without any penalties
Working New Retirement Rules into Your Long-term Saving Plans
While the SECURE 2.0 Act offers new benefits for building and maintaining a retirement nest egg, it’s up to you to determine how they fit into your long-term retirement plans. Building a comfortable future takes planning, discipline, and ongoing revisions as your life changes.
If you want another set of eyes to make sure you’re on the right track, a Certified Financial Planner (CFP)® can help. Rather than managing only a specific part of your finances or pushing specific investments, a CFP will take a holistic view of your financial situation and find an ideal approach that works for you.
You deserve the retirement of your dreams, and the right financial advisor can help you reach it.
Where do your retirement plans stand? Prepare yourself for a more successful retirement—download the 2023 Essential Retirement Guide today!
Disclosure: For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based upon third-party data which may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Indices are unmanaged baskets of securities and are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio nor do indices represent results of actual trading. Information from sources deemed reliable, but its accuracy cannot be guaranteed. Performance is historical and does not guarantee future results. Total return includes reinvestment of dividends and capital gains. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article. By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements, or representations whatsoever by us regarding third-party websites. Wealth Legacy Institute is not responsible for the content, availability, or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products, or services available on or through these third-party websites. The opinions expressed by featured authors are their own and may not accurately reflect those of Wealth Legacy Institute®.