Friday December 8, 2023
Secure 2.0 Increases Retirement Accounts
The Secure 2.0 Act of 2022 was signed into law in late December 2022. It included several benefits that enable employees to increase their retirement account value. These provisions include a change in the required minimum distribution (RMD) age from 72 to 73, an increase for "catch-up" contributions starting in 2025 and the opportunity to work longer and delay RMDs.
- Required Minimum Distribution (RMD) — Starting on January 1, 2023, the age for RMDs increased from 72 to 73. This enables individuals who have other savings or income to allow their retirement accounts to grow until they reach age 73. They will be required to start their distributions by April 1 of the following year. The RMD age will increase again to age 75 on January 1, 2033. An additional benefit is that RMDs are not currently mandated for Roth IRA accounts. Starting in 2024, there will be no RMDs for Roth 401(k) accounts.
- Increased Catch-Up Contributions — Individuals over age 50 are permitted to make additional contributions to their traditional IRA or Roth plan. The additional IRA contribution limit is $1,000, but the 401K catch-up contribution limit was $6,000 for 2022. This increased to $6,500 for 2023. Starting in 2025, employees who are 60 through 63 years of age will be able to make increased catch-up contributions of up to $10,000 each year. This $10,000 amount is indexed for inflation starting in 2026. The larger contributions for these four years will substantially increase retirement plans prior to the time for retirement payouts.
- Delayed RMDs with Part-time Work — An individual who works part-time may delay distributions from the company-sponsored qualified retirement plan if he or she is not a 5% or more owner of the business. The IRS has not defined the "still-working" standard with a minimum number of hours per week, so as long as the employer is willing to continue the individual as an employee, the deferral of RMDs is permitted. The IRS states that the RMDs are delayed until April 1 of the year after "the calendar year in which the employee retires." Because there is no specific hourly requirement, so long as the employer and employee agree that the individual is "still employed," the deferral should qualify.
If an individual has been able to pay off his or her auto, credit card and mortgage debt by retirement, he or she may have sufficient savings and other income to delay withdrawals from a retirement plan. This may permit a substantial increase in the plan. If an individual with a $1 million plan at a starting distribution age of 73 is able to delay taking RMDs until age 78, the plan balance could increase by 36% compared with the normal balance after distributions. The assumption is based on total earnings of 7.5% on the plan balance and a contribution of $15,000 into the plan each year.
Many individuals are now planning to work past age 70. A survey indicated that 37% of workers would be interested in working at least part-time after age 70. The other benefit of working is that the individual has additional income that may be contributed each year to the company 401(k) plan.
The still-working exception applies only to the qualified plan of the employer. If the employee has IRAs or 401(k) plans from another employer, those RMDs will be mandated. However, some employers may be willing to permit an employee to work part-time and roll over the other qualified plans into the company's 401(k) plan. This may enable an employee to delay RMDs on all of his or her retirement plans.
The ability to delay RMD from employer-sponsored plans may be an excellent option for individuals who have managed their finances well, become debt-free by retirement and are able to agree with their employer to work on a part-time basis. These individuals have the ability to increase their retirement plans by perhaps 50% before taking withdrawals. The larger retirement plans substantially increase the security of the individual because the withdrawal age is now more senior and the plan is potentially much larger.
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