New Opportunities for Retirees and Near-Retirees - SECURE Act 2.0

By Chris Hostetler

You’ve saved your money, diversified your investments, and built a nice little (or big) nest egg. Now here comes a new law, the SECURE Act 2.0, changing the rules of retirement savings. The good news for savers near or in retirement is that most of SECURE 2.0’s provisions offer greater flexibility than previous rules, and there are some new opportunities available.

The updates I’d like to highlight come in two main categories: required minimum distributions and catch-up contributions.

1. Required Minimum Distributions (RMDs)

• The beginning age for RMDs is delayed. Effective Jan 1, 2023, RMDs begin at age 73. In the coming years, the beginning age will be pushed even further back, rising to age 75 on Jan 1, 2033. Put another way, nobody should be taking their first RMD for 2023 (except for certain inherited IRAs).

  Over the last few years RMDs have begun at age 72, and before that it was 70½, so the new rule is more flexible. This means you can be more strategic when choosing when to take taxable distributions from your retirement accounts.

  By choosing to start your distributions at a later age, you may be able to defer taxation on those dollars, which could help you grow your portfolio more.

  Another strategy is to use these extra years to make Roth conversions, transferring money from your traditional IRA to a Roth IRA. This would increase your taxable income in the year of conversion but potentially reduce future tax bills by minimizing your RMDs later on. Roth conversions can work particularly well if a) you haven’t started taking RMDs yet, b) you don’t need the money right now to pay for your living expenses, and c) your income is likely to be higher in future years when RMDs start.

• The penalty for missing RMDs is reduced. Prior to SECURE 2.0, a missed RMD would result in a stiff penalty of 50% of the missed distribution, in addition to any taxes that would have been due on that distribution. The penalty is now 10-25%, depending on whether you identify and correct the error within a certain period of time.

  It is still important to take all of your Required Minimum Distributions every year. At Hilltop, we make a concerted effort to track distributions and make sure our clients all take their RMDs each year, and we’ll continue to do this. But it’s nice to know the IRS won’t be quite as hard on anybody who misses a distribution. The previous rule was pretty severe, and everybody makes mistakes, so we’re heartened to see a softer approach here.

2. Catch-up contributions

• 401(k) and other employer-provided plans allow additional catch-up contributions for savers ages 60-63, starting in 2025. If you work beyond age 60, this is a nice option to sock away some extra funds before you retire. It’s odd that this special provision is available for only 4 years, but that’s not a typo. You’ll just have to pay attention to make use of this small window of opportunity.

  The amount that’s legislated is also quirky: the bill states that this extra catch-up amount is the greater of $10,000 or 150% of the standard catch-up contribution for savers over age 50. However, the standard catch-up is already $7,500 in 2023, so it is unclear why the amount of $10,000 was included in the bill. We expect to receive clarification on the amount before this provision is effective in 2025.

  There is also an important caveat for high earners. Starting in 2024, if your annual income from an employer is more than $145,000, any catch-up contributions you make will be designated as Roth contributions. This is true for both the age 50+ and the ages 60-63 catch-up provisions. Although a Roth helps minimize taxes when you distribute the funds later on, it means there are no additional tax savings when you make the contribution.

• IRA catch-up contributions are now indexed to inflation (starting in 2024). As before, if you’re over age 50 you may contribute an extra $1,000 each year to a Traditional or Roth IRA, assuming your earnings and income qualify for contributions. But the catch-up amount hasn’t changed in years, and the new rule allows this provision to automatically increase in the future with inflation.

• Bonus highlight: The “Backdoor Roth” strategy lives on. Ok, this is not an update … but it’s important to recognize what did not change in the SECURE Act 2.0: the “Backdoor Roth” is still allowed! This strategy allows you to get funds into a Roth IRA even if you’re above the income limit for making contributions. A related strategy, the “Mega Backdoor Roth 401(k)” can allow you to put funds into the after-tax side of your retirement plan even if you’ve hit the annual salary deferral limit. Some lawmakers have indicated that they view these strategies as loopholes in the tax law and that they’d like to take away these options, but SECURE 2.0 has left them alone. In short, these strategies can be a great fit if you have high income, are maxing out your basic retirement savings options, and are looking for ways to build up your Roth retirement savings.

It takes a lot of hard work to prepare for a fulfilling and comfortable retirement, and it can be frustrating when the rules are changed late in the game. However, we believe the provisions in SECURE 2.0 are beneficial for most people near or in retirement.

If you are nearing retirement and want to be confident in your plan, we would love to talk with you! To see more about how we might help, check out our Hilltop Wealth Management service.

This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.   

Hilltop Wealth Advisors does not provide tax advice.  The tax information contained herein is general and is not exhaustive by nature.  Federal and state laws are complex and constantly changing.  You should always consult your own legal or tax professional for information concerning your individual situation. 

The information contained herein is believed to be true as of the date of publication. It may be rendered out of date by subsequent legal or tax-rule changes, as well as variable economic and market conditions.