How the Secure 2.0 Act Will Change Retirement PlanningJan 16, 2023
The Secure 2.0 Act was finally passed by Congress and signed into law by President Biden. This long-awaited update to the first SECURE Act signed by President Trump in 2019 brings significant changes to retirement planning. This law will impact millions of Americans and will change many people's retirement plans.
In this blog post, we will discuss the key points of the act that everyone should know about.
Major Changes to RMDs Giving More Time to Retirees!
The biggest change to the Secure 2.0 Act is that it increases the age when people must begin taking required minimum distributions (RMDs) from 70 to 73 in 2023 and then to 75 in 2033.
This gives retirees more time before they have to start withdrawing money from their retirement accounts which means they can keep their money invested for longer, allowing them to gain higher returns on their investments.
This is a major win for investors.
As I told InvestmentNews in 2020, I think that RMDs are short-sighted of congress and should be abolished entirely.
RMDs or Required Minimum Distributions are the amounts that an individual must withdraw from retirement accounts such as a 401(k) or IRA each year once they reach a certain age. The purpose of these required minimum distributions is to ensure that individuals do not keep their money in a retirement account indefinitely and that they use the funds for income in retirement.
Unfortunately, the way RMDs are setup, the IRS requires that retirees take an increasing amount of money from their retirement accounts.
Initially, RMDs start at about 4% a year, but quickly escalates to almost 20%. If not managed properly, these withdrawals outpace the income needs of the average retiree.
Adding insult to injury, the funds withdrawn are taxed as ordinary income. This means that for the average retiree, not only are they taking more money out of their retirement accounts than they need, but it is also pushing them to higher tax brackets.
RMD Penalty Is Reduced
As a consolation prize, congress has reduced the penalty for failing to take an RMD from 50% of the required amount to 25%. They have also provided a 10% penalty if you correct the missed withdrawal in a timely manner.
This changes the calculus of when to do Roth Conversions. It also opens the possibility of saving on your taxes, by occasionally biting the bullet, and eating the tax penalty, rather than paying a higher rate of taking your RMD.
Of course, this also complicates planning and will invalidate most retirement planning tools and plans until they can be updated for these new rules.
The Two Major Ways The Secure 2.0 Act Impacts Retirement Planning
The Secure 2.0 Act brings two major changes to retirement planning that can have a major impact on how you plan and save for your golden years:
1) Increasing the age of when RMDs allows you more time to spend down or convert your traditional retirement accounts. By increasing the amount of time you have, it significantly reduces the pressure to "convert it all."
2) The reduced penalty for failing to take an RMD opens up new tax strategies, such as purposely eating the lesser penalty rather than taking out large amounts, which could push you into higher tax brackets.
Additionally, it reduces the pressure to "convert it all." Since not only do you have until age 73 or 75...but you also have the additional early years of RMDs, where your required minimum distributions, are still low and taking a minor hit may be the better option.
Advanced Tax Planning Is Key for Success
As always, the key to success is knowledgeable tax planning. With the Secure 2.0 Act, there are more options and strategies available than ever before. It is essential to educate yourself about your options and work with a qualified tax professional that can help you navigate these new rules and regulations.
By taking advantage of all the new tools at your disposal, you can maximize your retirement savings and have more money in retirement. Whether you choose to invest it, spend it, or give it away, you will have more control over your money and where it goes!
The Secure 2.0 Act has opened up a world of opportunities for retirees — now is the time to take advantage!
Here are some resources to help you on your journey:
- Our How to Pay Zero Taxes in Retirement Guide
- The Ultimate How To Ethically Pay Zero Taxes in Retirement Course (for a limited time, only $7)
P.S. There are a number of other provisions in the Secure 2.0 Act, in this article we've covered but two of them. Stay turned for further updates.
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