The Top 5 Financial Planning Changes Ahead if you're 50+

The SECURE 2.0 Act has been a long time coming since the original version debuted in 2019. In fact, 2.0 was expected to pass in 2021 and I even wrote a blog about it’s perspective changes… but nothing happened! Finally as of December 2022 – it’s law, and it’s vaguely what we expected. The legislation is primarily meant to strengthen Americans’ ability to retire by enhancing savings options by building off of the original SECURE Act. You may not remember the original SECURE Act by name, but you may have felt it’s impact for how it changed the required minimum distribution age from 70.5 to 72 and required that most non-spouse beneficiaries of an IRA distribute the account within 10 years vs their lifetime. For us planners (and our clients), those were two biggie changes. 

The SECURE 2.0 Act follow up further expands on these original changes, but also addresses a lot of other circumstantial tidbits that don’t impact the majority. To me, it feels like these updates were shoehorned in because they’d never be priority enough to create law as a one-off. And while that’s fine, it makes the Act a bit mind boggling to absorb given the amount of directions it goes in. So for that reason, we’re going to focus on the changes that impact the majority so we don’t get bogged down by the changes that seem extremely situational. 

Lastly, be aware that many updates aren’t immediately in effect which also makes this confusing. The changes will be rolled out over time. I’ll be sure to underline the dates for anything not immediately impacting us. 

1. Required Minimum Distributions (RMDs) are once again changing…

  • Wealthy retirees loved the RMD being pushed out from 70.5 to 72, so politicians have agreed to do it again. The age at which owners of retirement accounts must start taking RMDs will increase to 73 starting January 1, 2023 (now). It again pushes out to age 75 starting in 2033.
    • If you turned 72 in 2022 or earlier, you will need to continue taking RMDs as scheduled. 
    • If you’re turning 72 in 2023 and have already scheduled your withdrawal, you may want to consider updating your withdrawal plan. 
  • Starting in 2023, the steep penalty for failing to take an RMD will decrease from 50% to 25% of the RMD amount not taken. In my opinion, 50% was criminal, so this is a big win and a huge stress relief for those missing an RMD since it can happen for a variety of non-intentional reasons. The penalty will be reduced to 10% for IRA owners if the account owner withdraws the RMD amount previously not taken and submits a corrected tax return in a timely manner. 
  • Roth accounts in employer retirement plans (aka – Roth 401(k)), will be exempt from the RMD requirements starting in 2024. This was already easily avoidable by rolling a Roth 401(k) into a Roth IRA, so this simply ends having to take that extra step and helps to keep rules consistent. 

2. Higher catch-up contributions. 

Once you hit age 50 you are able to make a “catch-up” contribution into employer retirement plans, like a 401(k). Right now it’s $7,500. Starting January 1, 2025, individuals ages 60 through 63 years old will be able to make catch-up contributions up to $10,000 annually to a workplace plan, and that amount will continue to be indexed to inflation.  

  • Age 50-59: $7,500 catch-up
  • 60-63: greater of 150% stated catch-up or $10,000 
  • 64-Retirement: $7,500 catch-up (weird, I know)

High-earners: In 2024, if you earn more than $145,000 in the prior calendar year, all catch-up contributions at age 50 or older will need to be made to a Roth account in after-tax dollars. Individuals earning $145,000 or less, adjusted for inflation going forward, will be exempt from the Roth requirement. This is somewhat of a bummer as many people who can afford to do the catch-up are higher earners looking to benefit from deferring taxes. It also sounds like an administrative headache as many more people now will have a mix of Pre-tax and Roth dollars. 

IRAs currently have a $1,000 catch-up contribution limit for people age 50 and over. It’s been $1,000 for as long as I can remember, unlike employer plan catch-ups that have indexed for inflation periodically. Starting in 2024, that $1,000 limit will also be indexed to inflation, meaning it could increase every year, based on federally determined cost-of-living increases.

3. Matching for Roth accounts. 

Employers will be able to provide employees the option of receiving vested matching contributions to Roth accounts. Before, matching was done on a pre-tax basis, which again complicated things a bit if you were utilizing a Roth 401(k) but receiving pre-tax matches. 

4. Qualified charitable distributions (QCDs). 

The $100,000 limit on QCDs for people 70.5 or older will start indexing for inflation beginning 2024Newly added is a one-time gift up to $50,000 to a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity. This is an expansion of the type of charity, or charities, that can receive a QCD.  

As a reminder, QCDs are when you make gifts to eligible charities (or charitable vehicles) DIRECTLY from your retirement account when you’re 70.5 or older. What’s donated also goes toward your RMD as an added perk. By doing a QCD you avoid recognizing the taxable income and therefore negate the need to deduct the gift. You may think… what’s the difference? There is a huge difference because to deduct charitable contributions you must itemize. And since the standard deduction has been so high, it’s made itemizing unnecessary for many taxpayers and therefore you don’t benefit (from a tax perspective) by having made the gift. Therefore, you can take the higher standard deduction + receive the benefit of the charitable gift by making a QCD.  

5. Qualified longevity annuity contracts (QLACs) are expanding. 

QLACs are deferred income annuities purchased with retirement funds typically held in an IRA or 401(k) that begin payments on or before age 85. The dollar limitation for premiums increases to $200,000 from $145,000 starting January 1, 2023. The law also eliminates a previous requirement that limited premiums to 25% of an individual’s retirement account balance.

While SECURE 2.0 provides increased opportunities to save for retirement, everyone’s financial situation is different. Powwow is here to help to see how these changes may impact your plans.