Mind on Money: Recent changes to retirement planning rules

Mind on Money: Recent changes to retirement planning rules

The $1.7 trillion omnibus spending bill passed late last year during the final weeks of the prior Congress included some important changes to the rules and laws pertaining to retirement planning. This legislation, termed the Secure Act 2.0, enhances and upgrades stipulations of the IRS code governing a variety of different retirement accounts and it will be important for American investors to understand these new provisions. Here are some highlights.

Perhaps the most timely aspect of the new rules pertains to Required Minimum Distributions, or RMDs, from traditional IRAs and qualified retirement plans such as 401(k)s and 403(b)s. As most retirees know, the government mandates that owners of these accounts begin withdrawing funds at age 72. The funds withdrawn are subject to regular income tax in the year they are distributed from the retirement account. The new rules, effective immediately in 2023, change the age when RMDs must be withdrawn to 73, and then eventually to 75 in 2033. They also reduce the tax penalty for RMD mistakes from 50% of the required withdrawal to 25% if the taxpayer corrects the missed distribution within two years.

In addition, the new law coordinates the RMD rules for Roth IRAs and Roth 401(k)s. Previously, balances in Roth IRA accounts were not subject to RMDs, but balances in Roth 401(k)s were subject to withdrawal rules at age 72. Starting next year (2024), both Roth IRAs and Roth 401(k)s are not subject to RMDs at any age. This is a welcome improvement, and clears up some common confusion.

Another interesting change involves the poorly adopted federal savers credit, or retirement match, for lower income households. This credit, provided for those earning under $71,000, enables savers to claim a credit on their tax return for contributions made to an IRA, Roth IRA or employers sponsored retirement plan such as 401(k) or 403(b). This federal “match” can be up to 50% of a $2,000 contribution, or $1,000.

Under previous rules the credit was provided in the form of a non-refundable tax credit, meaning if the saver owed no federal income tax, then the credit provided no benefit. The new rules enable the federal match to be deposited directly into the taxpayer’s retirement account, regardless of tax liability. This too is a welcome enhancement to this program and has the potential to help many Americans better prepare for retirement. The rules on this credit are a bit complicated in my opinion, so those thinking this may apply to them will want to mention it to their tax advisor or tax preparer.

Another added benefit for savers in the new rules creates an expanded “catch up” contribution for those aged 60 to 63 participating in employer-sponsored retirement plans such as 401(k)s and 403(b)s. The new catch-up contribution of an additional $10,000 for workers in this age range will do a lot to help rally some retirement savers over the retirement finish line. This new rule comes into effect in 2024.

Perhaps the most innovative new rule allows retirement savers to access up to $1,000 per year from their retirement accounts for an emergency, without incurring a tax penalty. Unlike the current hardship withdrawal rules, which are difficult to navigate and do not avoid the 10% early withdrawal tax penalty, the new emergency withdrawal will be self-certified and will allow retirement account owners to pay back the withdrawn amount over a period of up to three years. As I’ve experienced many younger savers with healthy 401(k) balances but no emergency savings, I think this is a smart change and may just help some American families avoid taking on expensive credit card balances.

These are just a few of the important provisions in this recent legislation. In reviewing the new law, my opinion is the changes in this law are the most substantial retirement planning rule changes in a generation. I would strongly suggest employers sponsoring retirement plans for their employees put meeting with their plan advisors to review the new rules high on the “to do” list. For individual retirement savers, we will be discussing provisions of the new rules for some time to come. There is much to learn.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. This material may contain forward looking statements; there are no guarantees that these outcomes will come to pass.

Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.