Recent Changes to Retirement Account Rules for Seniors

This article describes recent changes caused by SECURE 2.0, a new law about retirement accounts, including when to take withdrawals, RMDs, Roths, conversion of 529 education savings accounts, and catch-up contributions.

A law passed by Congress on December 29, 2022, changes how workers save and retirees withdraw from their retirement plans. It’s called “SECURE 2.0” because it builds on the law passed three years earlier on December 20, 2019, called “SECURE.” The acronym represents “Setting Every Community Up for Retirement Enhancement.”

This legislation represents the most comprehensive overhaul of retirement provisions affecting seniors and their nest eggs in 15 years. For our summary of SECURE 1.0, see Impact of SECURE Act on Retirement Planning.

Here are some of the key changes affecting individuals in 2.0:

Beginning 2023

You can delay taking Required Minimum Distributions (RMDs) to 73

Before SECURE 1.0, RMDs from traditional IRAs and workplace retirement accounts were required at age 70 ½. SECURE 1.0 changed that to let folks defer taking RMDs even later -- at age 72. It makes sense because people live longer and retire later. SECURE 2.0 further delays the beginning date for taking RMDs to age 73, and over the next ten years, the law permits delay to age 75 in 2033. So, if you don’t need your retirement funds to live on, you can let them grow for a rainier day. And remember, the RMD must be taken before April 1 of the year following which you reach 73, and every year thereafter by December 31st.

Workers with earned income can contribute to an IRA at any age.

The old rule prevented workers from contributing to an IRA after age 70 ½. Under SECURE 2.0, that age limit is removed. If the worker has earned income, he or she can contribute to an IRA regardless of age.

Penalty for failure to take your RMD timely reduced by half

Before SECURE 2.0, failure to take the RMD by December 31st resulted in a 50% penalty. A costly mistake. Beginning in 2023, that penalty is reduced to 25%, still expensive but less painful by half.

Failure to take the RMD timely If you are already taking your RMDs, you must continue doing so.

You can elect post-tax treatment of employer contributions to your Roth

Also, in 2023, if you are in the accumulation phase of your retirement planning, in other words, saving for retirement, your employer can update its plan to allow you to choose the tax status of the employer’s contribution. That means you can elect to have the part your employer pays as pre-tax or post-tax. If it is post-tax, the amount the employer contributes to your account is included in your annual gross income. The aim here is to simplify the taxable status of the funds within your Roth retirement plan.

Beginning in 2024

Catch-up contributions are Roth & taxed-- for high-income individuals.

It’s the reality that many of us haven’t achieved all our goals for retirement savings, and maybe we feel a bit behind. IRS rules permit “catch-up contributions” to a retirement plan (401k, 403b, etc.) for people who are 50 or older at the end of the calendar year. In 2023, an individual can save an additional $7,500 to their retirement plan, over and above the $22,500 contribution limit. That’s the background. Here’s the news – if the employee earned $145,000 in the prior year, catch-up contributions can only be made as Roth contributions and will be subject to income tax. Aha! Tax revenue!

Roth accounts of all kinds are not required to take RMDs

Whether you have a Roth 401k or Roth IRA, now you can either take a withdrawal or not. Under this new law, you can skip RMDs for any Roth accounts. It’s logical. Those funds have already been taxed. This permits you to maximize your tax-free growth on Roth investments.

Leftover 529 education saving accounts can be rolled to a Roth IRA

If you established a 529 account for a child or grandchild and, hey, maybe they got scholarships or maybe college just wasn’t for them, either way, you can convert that leftover 529 to a Roth IRA for that designated beneficiary after the account has been in effect for 15 years. It’s a nice leg-up for the beneficiary, and it makes sense. There are some hoops to jump through -- no more than $35,000 can be converted, and the conversion must be accomplished over time and within the annual contribution limits for Roths.

Beginning in 2025

Catch-up contributions increased for people 60-63

Catch-ups are limited to $7,500 for people 50+, but in 2025, people aged 60-63 can contribute even more – up to 50% more. It’s all indexed for inflation, but if that were this year, the figure would be $11,250. That window closes when the account holder turns 64 and catch-ups resume at the rate for people 50-59.

Have you lost your IRA? Check out the Lost and Found

Eventually, in 2025, the Department of Labor will create a searchable national database to help connect people with their lost retirement funds. Maybe you changed jobs, moved, another company bought out your employer, and you’re unsure if you have some retirement savings. Once created, theoretically, you can check the lost and found database.

So What!?!

Does any of this matter to you? If you’re already taking RMDs, probably not. But if you are 50 or older, now may be a great time to sit down and review your retirement goals and estate plan. Our three Certified Elder Law Attorneys specialize in advising people who are nearing retirement age. Give us a call to learn more.