The SECURE Act 2.0
The SECURE Act (Setting Every Community Up for Retirement Enhancement Act) was designed to help individuals and families save for retirement. Recent revisions to the SECURE Act could have a significant impact for pre-retirees and retirees and their retirement plans. Take a few minutes to read through several of these changes and how they can help you achieve your retirement goals.
Required Minimum Distributions (RMDs)
When you reach a certain age, the government requires that you take money out of your qualified accounts such as a 401(k) or a traditional IRA. The most notable change with the SECURE Act 2.0, is that the government pushed back the required beginning date or the first year that you’re supposed to take out your required minimum distribution. With the updates that were enacted earlier this year, some individuals are going to be eligible to start taking their required minimum distributions at age 73. This gradually increases to 75 over time as well.
Changes to RMD Penalties
When you think about the penalties associated with not taking a required minimum distribution, it’s always been a bad thing to skip or miss it. If you are subject to a required minimum distribution, make sure you satisfy that before the end of the calendar year.
Before the SECURE Act 2.0 law went into effect, you would have been hit with a 50% penalty and taxed on any missed RMD payment. The new law has reduced that penalty to 25%. If you’re timely in correcting the issue, which is making sure you take out the RMD within a certain time frame and follow through the required steps, the penalty could be reduced to 10%. While it’s still not a good thing to miss an RMD payment, the penalties have been lessened a little bit by the government.
Catch-Up Provisions
Under the previous law, if you were 50 or older and participating in your employer’s plan, a 401(k) for example, you could contribute an additional $7,500 on top of the maximum annual amount to that plan. With the SECURE Act 2.0, the government has created a small window for individuals to save a little bit more money.
Starting in 2025, if you meet the age requirements, you’ll be able to contribute an additional $10,000 or up to 150% of what that annual catch-up contribution was into your retirement plan for that year. Again, be mindful of that window which the government defines as being between the ages of 60 to 63. Our current assumption is that at age 64, you will have to follow the regulations of the original catch-up contribution.
Impacts to Your Financial Plan
When you think about the dynamic of what the government has done, not only have they pushed back requirements in distribution ages, but they have introduced other ways for you to take advantage of reviewing your contributions. When you start taking out money in the future, the changes could lessen the effect of taxes and how that might impact other areas of your financial plan.
Consider Working with a Financial Professional
The SECURE Act 2.0 has introduced several new outlets where financial planning from both an investment management savings rate and reviewing your taxable income again all start to converge. There are unique windows of opportunity where you can take advantage of qualified charitable distributions for RMD planning or use advanced annuity concepts, like a qualified longevity annuity to help mitigate RMD taxes down the road. There are different phases leading up to retirement and how much money you could maximize when it comes to a retirement plan.
There are a lot of moving parts within the SECURE Act 2.0, and it could be easy for someone who is managing their own retirement plan to make a mistake. Consider working with a financial professional to help you navigate these changes so that you can achieve your retirement and lifestyle goals.
At Financial Dynamics, we offer a suite of financial and lifestyle management services that can be customized to help you create your retirement plan. Our advisory team is committed to helping you make informed decisions about your money so that you can feel confident about your future.
Advisory services offered through J.W. Cole Advisors, Inc. (“JWCA”). Financial Dynamics & Associates, Inc. and JWCA are unaffiliated entities.
