The Secure Act 2.0 Affects Your IRA or 401(k) Retirement Plan
You or your employer has been contributing to your traditional IRA or 401(k) since the beginning. Yet now, the Secure Act 2.0 changes affect traditional IRA and 401(k) savings. Surveys of Americans taken by the Federal Reserve revealed only 75% of non-retirees have any retirement savings. Less than half feel their retirement savings are on track. To try to solve this shortage at a time when a large crop of baby boomers are looking at retirement, congress created Secure Act 2.0. It was signed into law in late December 2022 and is meant to enhance retirement in every community.
401(k) Catch-up Contributions for Over 60 Year Old Workers
For years the IRS has allowed slightly higher contributions for employees over 50 who are behind on savings and still trying to meet their retirement goals. As of 2023 American employees could contribute $22,500 to a qualified workplace retirement plan (401(k) or 403(b). Over 50 year old employees could contribute an additional $7,500 per year to their qualified retirement plan.
Secure Act 2.0 introduces a new category of catchup contributions for workers from 60 to 63 years old. Beginning in 2025, the new catch-up contribution limit for this new category is $10,000, which is 150% of the over 50 employee catch-up contribution limit. Today the catchup contributions can be deposited in either pre-tax accounts or after-tax Roth accounts. In 2024, all catch-up contributions must be deposited in Roth accounts. Alternatively, there is an exception for employees who gross $145,000 or less.
IRA Catch-up Contributions
Now let’s Look at IRAs. The standard contribution limit in 2023 is $6,500. People fifty and over can deposit an extra $1,000 of IRA catch-up contributions. Secure Act 2.0 changes the formula. Secure Act 2.0 ties Contribution limits to inflation. The annual cost of living contributions increases will be rounded DOWN to the nearest $100. So if the cost of living adjustment would raise the limit from $1,000 to $1250, the actual contribution limit would go from $1000 to $1200. Since you are responsible for adhering to the limits, you need to be aware of this change.
Secure Act 2.0 and RMDs
In general, Catch up contributions are being changed to reflect the new reality of workers employed longer and having fewer access to pensions. Americans have found it difficult to save for retirement in early low income years and during later child-rearing years Secure Act 2.0 is designed to help older Americans scramble to catch up their retirement savings. Required Minimum Distributions (RMD)s under current regulation have to be collected when a worker reaches 72. Wh you have a healthy savings in your IRA, these distributions could significantly boost your annual income…and your tax liability.
If you turn 72 after 2022 but before 2030, you RMDs begin when you reach 73 years old. If you turn 73 after 2030 and 74 before 2033, RMDs begin the year you turn 74. Lastly, if you turn 74 after 2034, your RMDs begin at age 75.
You can mitigate your tax bill by optimizing your RMD strategy. Though some believe this is one of the toughest areas of retirement planning, we disagree.