Over the next decade, the Secure 2.0 Act will change the rules about when federal retirees must withdraw their savings and how those withdrawals are calculated.
The law, which includes dozens of provisions, was passed Dec. 29 as part of a $1.7 trillion overall spending bill and is a consolidation of several bipartisan bills that lay the foundations for the 2019 fiscal year. planning easier and with fewer penalties, according to lawmakers.
“The Finance Committee has worked in a bipartisan way to improve the pension system, building on our successes in 2019, and I am pleased that our legislation was included in the year-end spending package,” said Sen. Ron Wyden (D.-Ore.), former chairman said the Senate Finance Committee in a Dec. 20 statement.
One provision affects required minimum distributions or required annual withdrawals from tax-deferred savings accounts, such as a traditional Thrift Savings Plan or IRA. Federal retirees, like private sector retirees, must withdraw a portion of their savings each year.
“The underlying policy of this rule is to ensure that individuals spend their retirement savings during their lifetime and do not use their retirement plans for estate planning purposes to transfer wealth to beneficiaries,” the bill reads.
The previous law based how much an individual must withdraw as an RMD on the total balance in the traditional and Roth Thrift Savings Plan.
Because RMD interest is based on the entire account instead of just the traditional TSP, retirees can use up their savings faster by withdrawing a larger chunk, Chris Kovalik, founder of ProFeds and an expert on federal employee retirement benefits, said in an interview.
That will change in 2024. The new law eliminates the distribution-before-death requirement for Roth accounts in employer plans, such as 401(k)s or TSPs.
It also helps build generational wealth, Kovalik said, because beneficiaries can leave a Roth account tax-free to their children.
One year RMD withdrawal delay
The law also gives some retirees a year to delay mandatory withdrawals, raising the starting age to 73 in 2023 from 72. In 2033, the age to take RMDs will rise again to age 75.
If a retiree turns 72 by January 1, that individual will continue to take RMDs as scheduled. But if a retiree turns 72 this year and has already planned the required withdrawals, they may want to consider updating their withdrawal plan, Fidelity Investments wrote in a blog post.
Kovalik cautioned that while this sounds like good news, it only hits the RMD down the road. For some retirees, who are still taking that money to cope with the high cost of living, the change may not make sense.
“It’s another year that they can defer, but in reality they’re probably going to take just as much, if not more, out of their accounts even though they haven’t been told they have to,” he said. “Because they need money to live. Or go have fun in retirement and go do whatever they want to do.”
There’s another catch Kovalik warned retirees to watch out for.
RMDs are taxed when they are withdrawn. He said that by raising the withdrawal age, that’s one less year the government has to collect on its debt.
If a retiree delays taking distributions, Kovalik said, there is a risk of squeezing the remaining amounts into fewer years.
“People who don’t plan can end up paying more in taxes because they have to withdraw more money in a shorter period of time from accounts that are still years away from joining,” says Next Mission Financial Planning, LLC. owner Michael Hansberger. article for Wealthtender.
On the other hand, the new RMD rule allows more time to develop a retirement strategy for those who can afford to wait.
Earlier this month, TSP, the primary retirement savings and investment plan for federal employees and service members, mailed RMD calculation updates to those who will be 73 or older this year.
Changes to withdrawal penalties and other milestones
The law also reduces the penalty for not collecting AMD from 50% to 25%. That penalty drops to 10% if the error is corrected “in time” for IRAs.
The Secure 2.0 Act also gives small businesses a tax break if they open benefits to military spouses, who lawmakers say often don’t work long enough to be eligible for or contribute to a company pension plan. The law now gives small employers a tax break if they make military spouses immediately eligible for the program within two months of being hired, offer them any matching or non-elective contributions they would normally be eligible to make during their two years of service, and give them 100 % guarantees. in all employer payments.
The legislation also cites high consumer prices over the past year and requires the secretaries of the Labor and Treasury departments to study the impact of inflation on retirement savings and report to Congress within 90 days.
Other highlights of the law (summary here) include:
- Expanding automatic enrollment in pension plans
- Higher payout limit applicable at ages 60, 61, 62 and 63
- Penalty-free withdrawals for certain emergencies, domestic violence cases, qualified disasters and terminal illnesses
- First responders, such as law enforcement officers, firefighters, paramedics, and emergency medical technicians, may exclude certain service-related disability pension or annuity payments from gross income after retirement.
- Lost-and-Found Retirement Savings Online Search Database, managed by the Department of Labor, to help savers who may have lost track of their retirement or 401(k) plan locate their plan administrator’s contact information.
Molly Weisner is a staff reporter for the Federal Times, where she covers employment, policy and contracting related to the government workforce. She previously made stops at USA Today and McClatchy as a digital producer, and worked at The New York Times as a copywriter. Molly majored in journalism at the University of North Carolina at Chapel Hill.