Americans are woefully unprepared for retirement. According to a recent survey by Clever Real Estate, retirees lost 10% of their savings in 2022, ending the year with an average retirement savings of $170,726. Not only that, but the latest Census says that the number of U.S. seniors living in poverty is at a 20-year high. Only one out of eight retirees has at least the recommended savings of $555,000.
Bottom line? Retirement isn’t getting any less expensive, and if Americans don’t start doing a better job at saving, we’re facing a retirement crisis. That’s one of the reasons why President Biden signed a new piece of legislation in December: the Secure 2.0 Act of 2022.
Secure Act 2.0 is an omnibus act containing a number of provisions designed to create a bigger retirement safety net for Americans. Here’s a rundown of some of the law’s most noteworthy provisions:
- Increased age to begin taking required minimum distributions (RMDs): As of January 1 of this year, the age at which retirement account holders must, by law, begin taking RMDs increased from 72 to 73, so you’ll have an additional year to delay taking withdrawals from these accounts. If you turned 72 in 2022 or prior, you will need to continue taking your RMDs as planned. If you turn 72 this year and have already scheduled your withdrawal, you might want to reschedule it. The new law also pushes that age to 75 starting in 2033.
Another welcome change: Up until last year, there was a steep penalty — 50% — for failing to take your RMDs. This decreased to 25% in 2023, and it will go down to 10% for IRA owners if they withdraw RMDs that weren’t taken previously and submit corrected, timely tax returns reflecting this.
The rules above apply only to tax-deferred retirement savings: traditional IRA and 401k plans. Here at Ludmila CPA, we really like Roth IRAs: They are never subject to such requirements.
- Penalty-free retirement distributions: Retirement savings are meant for retirement. They are not designed for vacations or new cars, and the law was designed to deter this kind of behavior, which is why there’s traditionally been a 10% penalty to withdraw retirement money before the age of 59½. But while I don’t recommend it, sometimes you just have to dip into your retirement savings early — for example, a health crisis or a sudden loss of income. Although there have already been certain provisions for penalty-free distributions, the new Secure 2.0 Act has added penalty exemptions for withdrawals involving qualified long-term care distributions, terminal illness, presidentially declared disasters, domestic abuse, working in a public safety career, and more.
- Adjustments to catch-up contribution amounts: There are annual limits on how much a person can contribute to an IRA or 401(k). Currently (in 2023), the limit on IRAs is $6,500, and for 401(k)s this is $22,500. But the theory behind a catch-up contribution is that those aged 50 and up can add a little extra, presumably to catch-up on years you may not have saved enough. This catch-up contribution amount is currently $1,000 for IRAs (so the maximum contribution is $7,500), and for 401(k)s the catch-up contribution allowed is $7,500, meaning you can contribute a total of $30,000 for 2023. However, this has been indexed for inflation, effective for taxable years starting after Dec. 31, 2023. In other words, the catch-up amount could increase every year, as it will be based on what the federal government determines as cost-of-living increases. The Secure 2.0 Act increases catch-up amounts for SIMPLE plans for the plan participants ages 60+. However, the effective date for this provision is not until January 1, 2025.
- Rollover allowance for 529 plans: Starting a 529 education savings plan for your child is an act of faith. You want your child to attend college, and that they’ll be able to afford to go. But the problem with such accounts is that not all children grow up and decide to go to college. Then what? Using your tax-deferred appreciation in 529 funds on expenses that don’t qualify as education-related result in penalties, so you lose some of the tax benefit. The new law changes this, allowing those with 529 plans that are at least 15 years old to make direct trustee-to-trustee rollovers to Roth IRA accounts, subject to annual Roth contribution limits and an aggregate lifetime limit of $35,000.
- Part-time employee coverage: Many business owners skirt the laws protecting full-time employees by giving them just few-enough hours to be considered part-time employees, so that employers don’t have to give them benefits. But thanks to this new legislation, for plan years beginning after December 31, 2024, the definition of part-time employees who are eligible to receive employer 401(k) plans has been expanded. Employees who work at least 500 hours of service per year for two consecutive years (down from three years) qualify to receive employer-paid plans.
- Addition of emergency savings option: Our firm has always encouraged people to create emergency savings accounts. We have always followed Dave Ramsey’s Financial Peace University Plan, which says that everyone should start with creating an emergency fund of at least $1,000 to help you cover emergencies — unforeseen car repairs, for example. Now the federal government is taking steps to reinforce this behavior, by establishing an emergency Roth savings account. Starting in 2024, employers can auto-enroll their employees into emergency savings accounts to which employees can contribute through payroll, at a maximum rate of 3% of their wages. Employees would be given the option to opt out or select a different contribution rate. While we should all take steps to create such savings on our own, sometimes we need it to be automatic; this is designed for that purpose.
- Establishment of retirement savings “lost and found”: How many of us have had retirement plans started for us and then lost track of them due to a number of reasons — a job change, a change in plan provider, and others. So many of these accounts simply sit unused while their owners shrug and assume they’re lost, with no way to track them down. Thanks to Secure 2.0, the Department of Labor now has two years to create and maintain an online, searchable database of these plans, which would act as a lost and found to reunite lost plans with their original owners. Plan administrators will be required to submit annual reports to the Department of Labor that provide specific information about the plan, its participants, and trustee contact information.
We love talking to our clients about how they can save more money for retirement and other purposes. Contact us to find out how we can help!