SECURE ACT 2.0
On December 23, 2022 the Federal government passed the Secure 2.0 Act, new legislation aimed at strengthening the retirement system and helping bolster Americans’ financial readiness for retirement. Some key features of the Secure 2.0 Act include increasing the age at which retirees must begin taking required minimum distributions (RMDs) from IRA and 401(k) accounts, and changes to the size of catch-up contributions for older workers with workplace plans. Additional changes allow people to save for emergencies within retirement accounts, enable easier retirement account movement from employer to employer, and help younger people to save while paying off student debt.
Notable RMD Changes
- The age at which retirement account owners must begin taking RMDs has increased from 72 to 73, effective in 2023. Investors who turned 72 in 2022 or earlier will need to continue to take RMDs as scheduled. If an individual turned 72 in 2022 and delayed their RMD until 2023, they are still required to take it by April 1, 2023, plus take their 2023 distribution in 2023.
- Starting in 2023, RMD penalties for those who fail to take their distribution will decrease from 50% to 25% of the RMD amount not taken. The penalty is reduced to 10% for IRA owners if corrective action is taken in a timely manner.
- Starting in 2024, Roth accounts held in employer retirement plans will be exempt from RMD requirements.
- The Secure 2.0 Act will eventually increase RMD age to 75 in 2033.
2023 Contribution Limit Increases
- Traditional IRA and Roth Contribution limits have increased from $6,000 to $6,500. Those who are 50 and over still have a $1,000 contribution catch-up limit.
- The basic salary deferral amount for 401(k) and similar workplace plans is $22,500, with a $7,500 catch-up amount for those 50 or older.
- Contributions an employer can make to an employee’s SEP-IRA cannot exceed the lesser of 25% of the employee’s compensation or $66,000 for 2023, an increase from $61,000 in 2022.
- The amount individuals can contribute to their SIMPLE retirement accounts is increased to $15,500. For employees age 50 or over, a $3,500 catch-up contribution is also allowed.
- The contribution limit for employees who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan will increase to $22,500. It will increase to $30,000 in 2023 for those age 50 or older.
- Additional information on 2023 changes for retirement plan contributions can be found on the IRS website.
Designated Beneficiaries of Inherited IRAs
- Beneficiaries who are not considered eligible designated beneficiaries (EDBs) and subject to the 10-year rule will now be required to take distributions in years 1 through 9 and then deplete the account by December 31 of the 10th year of death. Per IRS Notice 2022-53 (which has not been published but indicates the intent to issue final regulations), beneficiaries who failed to take distributions in 2021 and 2022 will NOT be subject to a 50% penalty. The IRS has not yet issued any guidance or instruction indicating that those who did not take distributions in 2021 and 2022 are required to make up those distributions.
While the SECURE 2.0 Act and 2023 contribution limit increases provide additional opportunities to save for retirement, every investor’s financial situation is different. As always, please consult a tax professional to understand how these changes apply to you.