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If you are nearing retirement age, there are some upcoming changes enacted as part of a government funding bill that you may be interested in.
Dozens of retirement-related provisions known as Secure 2.0 have been included in omnibus credits package that authorized Congress last week. While the changes collectively aim to improve outcomes for savers and retirees, some of them may be particularly helpful to near-retirees.
The edges, [the changes] present many retirement planning opportunities that near-retirees would want to be aware of,” said Joel Dickson, head of consulting methodology for Vanguard and a member of its retirement policy group.
Catch-up contributions are set to change
Under current law, anyone age 50 or older can make “catch-up” contributions to their 401(k) account. The limit, which changes from year to year with inflation, is $6,500 in 2022 and $7,500 in 2023. These amounts are in addition to the regular 401(k) contribution limits: $20,500 for 2022 and $22,500 for 2023.
Beginning Jan. 1, 2025, people between the ages of 60 and 63 will be allowed to make catch-up contributions to their company plan up to $10,000 — or 150% of the regular contribution, depending whichever is greater — and that amount will be indexed to inflation.
Be aware that if your income exceeds $145,000 (indexed to inflation), all catch-up amounts, regardless of your age, will need to be paid into a Roth account. Unlike contributions to traditional 401(k) plans, money placed in a Roth 401(k) Or an Individual Retirement Account does not give you tax relief, but qualified retirement withdrawals are tax exempt.
This Roth requirement means “if you don’t have a Roth option in your plan, catch-up contributions would not be allowed,” Dickson said. “So there would have to be changes of plan in those cases to allow that.”
The IRA catch-up amount could increase year over year
Meanwhile, for IRAs, which come with lower contribution limits — $6,000 for 2022 and $6,500 for 2023 — the annual catch-up amount has remained at $1,000 since 2006.
Under Secure 2.0, it will be indexed to inflation from 2024, which means it can increase every year.
Is this a huge change? No, but it brings him closer to another [contributions] which are indexed to inflation,” Dickson said.
Matching contributions could go to the Roth account
Currently, when employers provide their workers with a “matching” contribution — say, a 100% contribution up to 5% of earnings — it must be paid into a traditional 401(k) account rather than a Roth account. This means that these matches are taxable when withdrawn in retirement.
Next year that will change.
If their plan allows it, [workers] may elect to have employer matchings designated as Roth contributions,” Dickson said.
The required distribution age will increase, creating possible scheduling opportunities
under the legislation in force, minimum required distributions — the sums that must be withdrawn annually from certain retirement accounts — as of age 72.
Secure 2.0 changes this to 73 in 2023 and then to 75 in 2033. The penalty for not taking these RMDs will also change, from next year: In general, it will increase to 25% of the amount that should have been be withdrawn, down from the current 50%.
Even if RMDs are far in the future for you, the delay in which they must begin can provide opportunities for planning, Dickson said.
Even though you are not obligated to take distributions, some people may find that they want to take distributions [early in retirement] Or convert some of these assets to Roth to manage their lifetime tax liability and therefore increase the tax income they generate after retirement.
Another change: Roth accounts in 401(k) plans and other employer-sponsored plans will be exempt from RMDs starting in 2024. While Roth IRAs come with no RMDs for the lifetime of the owner, this has was not the case for Roth 401(k) s.
Other changes will also affect retirement planning
Because there are over 90 provisions in Secure 2.0, there are other changes that could impact your retirement planning. For example, there are changes related to eligible annuities and charitable distributions that may affect how you financially plan for retirement.
Additionally, if you have loss of track of a retirement plan you had with a previous employer, be aware that Secure 2.0 directs the Department of Labor to create, within two years, a national searchable online database of “lost and found.”
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