Greg Spears | Dec 23, 2022
JUST IN TIME FOR Christmas, a sweeping new retirement law has passed both houses of Congress, and should be signed into law this weekend. Dubbed the SECURE Act 2.0, it makes dozens of significant changes to the employer-based savings systems that millions of workers depend on for retirement.
Under the new law, some workers will be able to save far larger catch-up contributions during the home stretch of their working years. Meanwhile, retirees can delay taking required minimum distributions until age 73 starting in 2023. Younger workers with college loans may get an employer match for paying those debts. And people facing a financial emergency will find it easier to take money from retirement savings.
Many of the provisions won’t take effect for a year or two—and sometimes even longer. With that caveat, here are 11 changes that could affect you sooner or later.
1. Delayed RMDs. Here’s one provision that has an immediate effect. The new law delays the first required minimum distribution (RMD) from tax-advantaged retirement savings accounts from age 72 to 73 starting next year. In subsequent years, the RMD age will be raised even further, reaching 75 in 2033.
But postponing withdrawals might be a Pyrrhic victory—one that comes at great cost. Income tax rates are low now and scheduled to rise in 2026. Some retirees might owe less by taking smaller, more frequent withdrawals rather than bigger slices later at steeper tax rates.
2. Higher catch-ups. Starting in 2025, the maximum catch-up contribution limit is raised from $6,500 in 2022 to at least $10,000 a year—but only for workers ages 60, 61, 62 and 63. The law stipulates that this “super catch-up” will be a moving target that’s at least 50% more than the regular catch-up contribution amount. In the meantime, the regular catch-up is getting a $1,000 inflation increase to $7,500 in 2023, so the super catch-up would then pencil out at $11,250.
If workers made maximum contributions plus super catch-ups, they could pack $133,000 into their retirement plan at work in just four years. But wait, there’s more. For the first time, IRA catch-ups will be indexed to inflation starting in 2024. That catch-up has been stuck at $1,000 a year since 2015.
3. Roth catch-ups. In a big switch, catch-up contributions to employer retirement plans—but apparently not to IRAs—would have to be made with Roth after-tax dollars, except for workers who make less than $145,000. This is the biggest tax increase in the new law, and it helps pay for some of the other tax breaks it bestows.
Every retirement plan has a cadre of super-savers who try to contribute the maximum each year. These new catch-up provisions will make it more expensive to join this club. To hit the max, workers ages 60 through 63 would need to contribute well over $30,000 a year—without the benefit of a tax deduction on the catch-up portion.
4. No RMDs on Roth savings. Starting in 2024, Roth money in a 401(k) would not be subject to RMDs, as it is today. Roth IRAs were already exempt from RMDs. That’s led to a big exodus of Roth money from employer plans to IRAs. Rollovers can invite mischief in the wrong financial advisor’s hands, so this is a win for older investors—and tax simplification.
Read about all the changes on HumbleDollar