The confiscatory 50 percent penalty for missing an RMD will be reduced to 25 percent. Image: elisank79/Shutterstock.com
About three years ago the SECURE Act was passed and, stealing a line from Harry Callahan (aka “Dirty Harry”), I asked readers, “Do you feel secure – well, do ya punk?” The recently passed Consolidated Appropriations Act contains a portion that finance nerds call SECURE 2.0. This is because (apologies again to Harry Callahan), every law has to know its limitations.
This article will serve as a brief outline as to the changes contained in SECURE 2.0, while future articles will explore those changes in more depth.
• The age for required minimum distributions will increase to 73 in 2023 and will climb to 75, but not for a decade.
• The limit for IRA catch-up contributions has been indexed for inflation. It had been stuck at $1,000 since 2006.
• Beginning in 2025 those who are 60, 61, 62 and 63 will be able to make enhanced catch-up contributions to their retirement plans.
• Beginning in 2024 all plan catch-up contributions for higher income participants will have to be Roth contributions.
• There will be additional exceptions to the 10% early withdrawal penalty. Details are not yet available.
• Beginning in 2024, any leftover money in a 529 plan can be rolled over into a Roth IRA as long as the 529 has been open for at least 15 years. There is a $35,000 limit.
• The confiscatory 50% penalty for missing an RMD will be reduced to 25% (still no bargain, but better than before). If the missed RMD is taken in a timely manner, the penalty will drop further to 10%.
• Qualified Charitable Distributions will be expanded.
It was expected that SECURE 2.0 would eliminate the back-door Roth IRA conversion and clarify the rules about RMDs for non-spousal beneficiaries, but nothing about these topics made it into the final legislation.
Some of the above changes will apply to all of us, and all of them will apply to some of us, but we shouldn’t let the ever changing tax law keep us from achieving our goal of a comfortable retirement. Save early and save as much as you can through your TSP and outside IRAs and you’ll find yourself in a good position when you stop working.
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