Happy New Year!!! Each year passes by us all too quick and with the close of 2022 came some significant changes that may impact an individual’s plan for saving for their retirement.
On December 29, 2022 President Biden signed into law (after Congress passed) the ‘Consolidated Appropriations Act (CCA) of 2023
.’ - referred to as the ‘Secure 2.0 Act of 2022’. This Act for the most part does not take effect until 2024, so as an individual, you have time to strategize and talk to your Financial Advisor for proper planning to be prepared for retirement. As there are different areas that were changed within the Secure 2.0 Act of 2022, we will highlight below just a few of those areas and how these may affect you as an individual.
If you are an individual who has just recently retired or you have plans to retire in a few years, you can now wait longer before you are required to withdraw funds from your retirement accounts. What does that mean for you?
For example, if you have a Traditional IRA, an individual must take a Required Minimum Distribution (RMD) which is a withdrawal that is mandatory by a certain age or penalties are imposed by the IRS. If you were born in 1950 or earlier, you must start to take your RMD at age 72 (was 70 ½ prior to 2020). With the Secure 2.0 Act of 2022 there is a change in one’s age that pushes back the RMD age – the change will now be:
- For those who reach age 72 after December 31, 2022 and age 73 before January 1, 2030 (i.e. those born between the years 1951-1959), RMD’s will be mandatory at the age of 73.
- For those who reach age 75 starting in 2033 (i.e. those born in years 1960 or later), RMD’s will be mandatory at the age of 75.
By delaying the mandatory RMD it will provide you the opportunity to keep those funds invested and growing, as every dollar withdrawn raises one’s taxable income.
The other change with the Secure 2.0 Act of 2022 is around penalties imposed from the IRS for not taking your RMD. The penalty will drop from 50% of your RMD to 25%, and to 10 percent if corrected within two years.
Changes to New Employer-Sponsored 401(k) and 403(b) Plans
Beginning in 2025, the Secure 2.0 Act of 2022, in an effort to encourage employees to save for retirement, will require employers creating a new 401(k) or 403(b) plans to automatically enroll an employee into the company’s plan at a starting rate of 3% of pay. The employee will have the option to opt out, if requested.
Increased Retirement Catch-Up Amounts
Once you turn 50, retirement gets closer and closer. Making increased contributions to your retirement accounts is essential if you want peace of mind going into retirement.
If you are 50 years or older, you can now add an additional $1,000 to your individual IRA. Going forward, this catch-up amount will be indexed for inflation starting in 2024.
If you are 50 years or older and participating in an employer sponsored retirement plan – 401(k), 403(b), or 457(b), you can add a catch-up contribution of $7,500 in 2023. Starting in 2025, if you are age 60 to 63, you can add up to 50% more of the catch-up limit. For example, if the 2025 catch up limit is $9,000, and you are age 60, you can add a catch-up limit of $13,500.
RMDs for Roth IRAs
RMDs from Roth IRAs are not required during the life of the account holder. However, lifetime RMDs are required for Roth 401(K)s and other defined contribution plans. Thankfully, beginning in 2024, the Secure 2.0 Act of 2022 will exempt in-plan Roth accounts from RMDs during the life of the participant.
Qualified Charitable Distributions
Are you charitably inclined and currently taking required minimum distributions?? Individuals who are currently taking required minimum distributions can make a Qualified Charitable Distribution (QCD) of up to $100,000 per year from their individual IRA. Starting in 2024, this annual limit will be indexed to inflation. A new option has been added which allows IRA owners in RMD to make a one-time charitable contribution to a charitable gift annuity, charitable remainder trust or charitable remainder annuity trust from their IRA. These distributions count towards your RMD but are not considered taxable income when distributed from your IRA.
Effective in 2024, with the Secure 2.0 Act of 2022 any unspent college/education funds in a 529 Plan can now be rolled over into a ROTH IRA. The account must be in the name of the beneficiary the 529 Plan was created for and must have been in existence for 15 years. If contributions in the last 5 years were made to the 529 Plan, those contributions cannot be transferred to the ROTH IRA. The maximum of $35,000 of unused 529 Plans can be transferred to a ROTH IRA during one’s lifetime.
If you work part-time, you may now be able to take part in contributing in your employer’s retirement plan. Prior to the Secure 2.0 Act of 2022 long-term part-time workers had access to retirement plans as well as the ability to participate in an employer sponsored plan if they worked at least 500 hours per year with at least 3 years of service. With the Secure 2.0 Act of 2022 it will now change to 2 years of service.
As the Secure 2.0 Act of 2022 has several changes there will be more to come in future issues of Ledyard’s Advisor Thoughts in 2023.
We encourage you to reach out to your Financial Advisor to assist you in achieving your retirement goals, as the years escape us all too quickly. We at Ledyard National Bank/Ledyard Financial Advisors would be happy to have you contact us so we can help you Plan Well for you to Live Well in your retirement years.
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