4 key rule changes that could impact your retirement plan

Every year brings new regulations or laws that may alter your financial plan. At the end of 2022, retirement savings tax incentives changed dramatically with the SECURE 2.0 Act. Some provisions went into immediate effect, impacting certain people with savings in qualified retirement plans such as IRAs and 401(k)s. Here are four important updates.

1. Required minimum distributions (RMDs) start later.

If you were born after 1950 and have tax-deferred contributions in an IRA, a 401(k), or another employer-sponsored retirement plan, there are new dates for when you’re required to start taking taxable withdrawals:

• If you were born in 1951 through 1959, the RMD age is now 73.
• If you were born in 1960 or later, the RMD age is now 75.

Planning impact: You’re not required to wait until you turn 73 or 75 to make retirement plan withdrawals. If you need the money now, and you’re 59 ½ or older, you may withdraw without penalty. But if you don’t need the money now, you can delay the tax impact of the withdrawal, says H.L. Norwich, an advice and planning strategist for Truist Wealth.

2. The penalty for failing to take RMDs is reduced.

Consider this: Amid a busy year, you may have forgotten to withdraw your required minimum distribution by the deadline. When this happens, you’re penalized—but now the penalty is reduced.

Previously, failure to take an RMD resulted in the shortfall receiving a 50% excise tax. Beginning in January 2023, the unwithdrawn amount is subject to a reduced excise tax of up to 25%. And if you self-correct by reporting the shortfall and paying taxes on it within two years after the RMD was missed—and before the IRS issues a deficiency notice—the excise tax is reduced to 10%.

Planning impact: The change doesn’t impact your strategy—but it does acknowledge that mistakes happen. “They’re giving some relief now if you make this mistake, catch it, and correct it fairly quickly,” Norwich says. Your advisor can help you proactively schedule your RMDs to avoid this penalty.

3. Catch-up contributions for highly compensated employees must go to Roth accounts.

Employer-sponsored retirement plans with elective salary deferral features—such as 401(k), 403(b), or 457(b) plans—may currently allow participants to contribute elective deferrals on a pretax basis or as Roth after-tax contributions. Employees who are 50 and older may contribute more than the regular annual limit. This is referred to as a catch-up contribution.

In 2023, the maximum catch-up contribution is $7,500, after the employee has already contributed the regular maximum amount of $22,500. Typically, employees make these contributions on a tax-deferred basis, with later distributions subject to ordinary income tax. Beginning in 2024, however, employees who earned over $145,000 in the previous year must direct any catch-up contributions to their plan’s Roth account using after-tax dollars (later withdrawals will be tax-free). The threshold for “highly compensated” and the catch-up contribution limit will both be indexed for inflation.

Beginning in 2025, the catch-up limit for participants between 60 and 63 will be 50% more than the regular catch-up limit.

Planning impact: Starting in 2024, Roth catch-up contributions for highly compensated employees will be mandatory for all employer-sponsored retirement plans. “This year, plan sponsors that have highly compensated participants and currently only offer a pretax catch-up contribution feature must either adopt plan amendments to implement Roth catch-up contribution provisions or eliminate the existing catch-up contribution feature,” says John Marold, senior vice president and fiduciary resource director at Truist Wealth. “If you own a business that sponsors a plan, discuss the new tax changes with your advisor and set a compliance plan into action.”

4. Beneficiaries of 529 accounts may roll over money to their Roth IRAs.

Parents and grandparents who put money into 529 educational savings accounts may worry about over-contributing and seeing the money get “stuck” if it isn’t fully used for the beneficiary’s education expenses. Nonqualified 529 plan withdrawals result in ordinary income tax on the earnings portion of the distribution, plus a 10% withdrawal penalty. Starting in 2024, unused funds in a 529 plan may be rolled over to a Roth IRA for the beneficiary’s own retirement savings.

These rollovers will be subject to the usual annual limit on IRA contributions, with a lifetime aggregate limit of $35,000. The 529 account must have been open for at least 15 years when the rollover occurs, and the amounts rolled over can’t exceed the total contributions (plus earnings) that were made at least five years prior to the rollover.

“A lot of our clients like to fund 529 plans for their grandkids,” Norwich says. “The kids might be two or three years old, and who knows if they will go to college or what kinds of scholarships they might receive. So it’s nice to know that if the children don’t end up using the money for education expenses, they can roll that over to jump-start their retirement savings.”

Planning impact: Family members may consider excess funding of 529 plans above the amount needed to cover education expenses in order to jump-start Roth retirement savings for their beneficiaries, Norwich says.

There are many more changes in the SECURE 2.0 Act, as well as other unrelated policy changes each year that influence retirement planning. It’s important to consider whether they impact your plan—and another reason to review your strategy every year with your wealth and tax advisors.

What is the SECURE 2.0 Act?

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 aimed to make retirement savings easier for average Americans and more flexible for all. The SECURE 2.0 Act updates are directed more toward employers that sponsor retirement plans, but they also impact people who have retirement savings.