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Save more, spend smarter, get more out of your money
President Biden signed the Comprehensive Budget Bill into law in December 2022. This included a bipartisan bill to facilitate retirement savings. The SECURE (Setting Every Community Up for Retirement Enhancement) 2.0 Act builds on his previous SECURE Act legislation passed in 2019. Not all changes in the SECURE 2.0 Act affect you, but it’s important to note the changes. Here’s a quick rundown on some of the biggest updates.
Change in Minimum Required Distribution (RMD)
Many retirement accounts require a minimum distribution (RMD). The two most common types of accounts covered by RMD are 401(k) accounts and IRA accounts. The IRS wants to make sure the money in these retirement accounts is withdrawn and spent (and therefore taxed). The SECURE 2.0 Act will increase the age at which you must begin withdrawing from an IRA or 401(k) plan. Prior to January 1, 2023, an account holder was required to begin receiving her RMD at her age of 72, but as of New Year’s, that age will be raised to her 73, and by 2033 In 2018 she will be raised to 75 years old.
Increase in catch-up contributions
Both workplace plans (such as 401(k) and 403(b) plans) and IRAs have annual contribution limits. To ensure that workers approaching retirement age have adequate savings, new legislation allows older workers to make additional contributions. For example, a worker over the age of 50 can now contribute an additional $7,500 annually to the IRA, an increase of $1,000 from his previous maximum. The SECURE 2.0 Act will index these amounts to future inflation. Beginning in 2025, the maximum 401(k) catch-up contribution for employees aged 60 through her 63 will increase to $10,000 annually.
Auto Enrollment in 401(k) Plans
Even if retirement is not particularly near, the SECURE 2.0 Act will make changes that may affect you. One such change is that, beginning in 2025, new 401(k) and 403(b) workplace retirement plans will be required to automatically enroll eligible employees. This does not apply to existing 401(k) plans, but is likely a step. On the right track in helping Americans take steps to save for retirement. Employees can opt out if they do not want to register.
Emergency savings with Roth IRA
A Roth IRA is a great way to save for retirement, especially for those who are young or currently have low tax rates. A Roth IRA allows you to donate after-tax money to grow your account tax-free. As long as you withdraw the money for retirement (or some other qualifying event), you don’t have to pay federal income tax on your distributions.
Roth IRAs are an attractive option for young people, but they also have some drawbacks. One drawback is that it can be difficult to access the funds in the event of an emergency. There are situations where he can withdraw money from the IRA without penalty, but in many cases, withdrawals require him to pay a 10% penalty plus income tax. The SECURE 2.0 Act allows Roth IRA participants to access up to $1,000 annually for eligible personal or family emergencies. Workplace plans can also set up a Roth-qualified emergency account that can fund up to $2,500 annually.
How to Convert a 529 Plan to a Roth IRA
A 529 plan is a great way to save money on college and higher education, but what happens if your child decides they don’t want to go to college? We help answer this question by allowing you to roll over your 529 plan assets to a Roth IRA as long as you don’t exceed your maximum contribution limit. There are no taxes or penalties for making such rollovers and they are not treated as beneficiary income.
A 529 plan rollover to a Roth IRA is considered a contribution to the Roth IRA and is subject to the Roth IRA’s annual contribution limits. The maximum amount that can be rolled over from a 529 plan to a Roth IRA is $35,000. Despite some of these limitations, this could be an attractive option for those who end up not using all their funds on the 529 plan.
Conclusion
The SECURE 2.0 Act was signed into law in January 2023. This will update a number of retirement savings and finance laws. Make sure you understand how these new laws will affect your particular financial situation. If you have any questions, contact a trusted financial advisor to help you stay in the best possible financial position. Please make it possible.
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Save more, spend smarter, get more out of your money
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