Secure 2.0 Act - Major Changes to Retirement Planning & RMDs

In today's episode, we dive into the newly passed Secure 2.0 Act and its impact on retirement calculations, from changes to contribution limits, RMDs, and new rules for 401k. This legislation has the potential to shake up the way we plan for retirement. So join us as we break down the details and help you understand how the Secure 2.0 ACT might affect your retirement.

Secure Act 2.0 Increases RMD Age Requirement to 73 and 75 in 2023 and 2033

The Secure Act 2.0, which was recently passed, includes changes to the age at which individuals are required to take distributions from their retirement accounts, also known as Required Minimum Distributions (RMDs). Historically, the age at which RMDs were required was 70 and a half, but the original Secure Act raised that age to 72.

The latest version of the Secure Act, however, has made another change to the RMD age requirement. Starting in 2023, individuals will not be required to take RMDs until age 73. In 2033, the age requirement will increase further to 75.

Many financial experts have been discussing the possibility of this change for some time, and it is seen as a positive development for investors. This change allows for individuals to keep their retirement savings invested for longer and potentially grow their nest egg.

However, it is important to note that the 2033 implementation date for the age 75 RMD requirement means that some retirees will miss out on this change and may be required to take early RMDs. Despite this, the change to the RMD age requirement is still seen as a win for investors as it changes the considerations and planning for retirement. Additionally, the Secure Act includes other changes that will impact retirement planning.

What is a Required Minimum Distribution or RMD?

For those who may not be familiar with the term, a Required Minimum Distribution (RMD) is a requirement set by Congress for individuals to withdraw a certain amount of money from their retirement accounts. The purpose of this requirement is to prevent individuals from using their retirement accounts as a personal piggy bank and to ensure that taxes are paid on the money in these accounts.

RMDs are required for a variety of retirement accounts, including 401ks, traditional IRAs, and even some annuities. The amount that must be withdrawn is determined by the IRS and increases over time. The purpose of RMDs is to make sure that the money in these accounts is eventually depleted, and taxes are paid on the withdrawals.

However, this requirement can be a burden on retirees. For example, if an individual only needs to withdraw $20,000 or $30,000 a year to supplement their income, but the IRS requires them to withdraw a much larger amount, it can bump them up into a higher tax bracket and affect their other sources of income such as social security.

The Secure Act 2.0 has made changes to the RMD age requirement, allowing individuals to delay taking RMDs until age 73 in 2023 and age 75 in 2033. This change is seen as a positive development for investors as it allows them to keep their retirement savings invested for longer. However, some financial experts advocate for abolishing RMDs entirely as they can deplete retirement savings and bump retirees into higher tax brackets. As financial planners, retirees, and investors, it is important to be aware of these requirements and take steps to protect our retirement savings from unnecessary depletion.

Ways to Mitigate The Tax Burden of RMDs

While the changes to RMDs in the Secure Act 2.0 are positive for retirees, the question of whether or not the genie can be put back in the bottle remains. However, there are strategies that can be employed to help mitigate the tax burden in retirement and control the income that is received during retirement.

One key strategy is to be strategic about where income is received from in retirement. This may mean deferring social security benefits or taking them earlier and using retirement accounts to supplement that income. By controlling the income that is received during the years leading up to RMDs, individuals can offset it with credits, deductions, or exclusions on their tax return.

Another important change in the Secure Act 2.0 is the decrease in the penalty for not taking RMDs. The penalty has been reduced from 50% to 25%, which changes the calculus for retirees. It may now make more sense for some individuals to not take an RMD in a given year if it results in a lower tax bill. Additionally, the penalty for correcting a missed RMD has been reduced to 10%, making it easier for individuals to fix any mistakes they may have made.

It is important to note that the IRS has yet to release the rules for these changes, so it is crucial for individuals to stay informed and consult with a financial advisor to determine the best course of action for their retirement planning. It is also worth noting that a lot of the software and online tools available for retirement planning are not yet updated to reflect these new rules and regulations, which may significantly change the assumptions and plans these tools provide.

Contribution Limits Get a Boost

The Secure Act 2.0 also includes an increase in catch-up contributions for certain types of retirement accounts in 2025. This change is in line with recent updates to the tax code, which have been inflation-adjusted to better reflect the needs of individuals and to keep pace with the cost of living.

Historically, tax brackets and contribution limits were fixed dollar amounts and were not updated frequently enough to keep pace with inflation. This made it difficult for individuals to save enough for retirement and for catch-up contributions to be meaningful.

The Secure Act 2.0 addresses this issue by updating the contribution numbers and making them inflation-adjusted. This means that Congress will not need to pass a law every year or every time to update these numbers, and they will automatically reflect reality and people's needs. Additionally, this change transfers control of these updates to the IRS, which is generally more favorable to individuals saving for retirement.

Overall, the Secure Act 2.0's increase in catch-up contributions, along with the other changes it made, is a positive development for individuals saving for retirement and it shows a shift towards retirement planning and tax code that is more beneficial for individuals and less controlled by Congress.

Want to Learn More

For those looking for more information on the Secure Act 2.0 and its impact on retirement planning, there are several resources available.

One resource is this article that I have written on the Secure Act 2.0, which provides more detail on the changes and their impact on retirement planning. Additionally, I will be offering webinars and more articles in the coming weeks that delve deeper into the different areas of the Secure Act 2.0 and how they impact retirement planning.

I am also working on a tool to help individuals with social security and retirement planning in the context of the Secure Act 2.0. This tool will help individuals stress test their retirement plans and make informed decisions in light of the changes.

Fidelity also has a really great article that you can check out here: https://www.fidelity.com/learning-center/personal-finance/secure-act-2

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