Your Financial Future: Changes to tax code
There were several changes to the tax code and a new law signed during the holiday that will have a big impact on your retirement and the taxes you pay. President Biden signed the Secure Act 2, which was part of the 4,155-page, $1.7 trillion spending bill. Secure Act 2 makes some changes to the law passed three years ago with wide bipartisan support. Washington realized at that time too many Americans have not saved enough for retirement.
Congress realized that people are working and living longer. Because of this, they have again moved back the age retirees must start taking required minimum distributions. Secure Act 1 changed the age from 70½ to 72. The new change moves the age back another year until age 73. Anyone turning 72 in 2023 is not required to take a distribution this year. In the year 2035, the age will increase to 75. Anyone already taking RMD must continue doing so. This can make more opportunities to do Roth conversions.
Starting in 2024, the legislation allows a tax and penalty-free rollover from a 529 account to a Roth IRA. More specially, after 15 years, beneficiaries of 529 college savings accounts are permitted to roll over funds from a 529 account in their name to a Roth IRA in their name. There are special rules that must be followed, but this could be a nice benefit for some people. There is also now a reduction in the penalty for missing an RMD. It will be reduced from 50% to 25%. If you realize your mistake and refile quick enough, the penalty will be 10%.
Washington was concerned that too many people did not have access to a retirement plan at work. The first Secure Act made it easier for different companies to work together on plans to help lower administrative costs. The new law requires companies in 2025 that set up new plans to automatically enroll employees at between 3 and 10% of their salaries. Employees can opt out. The new legislation also allows for automatic portability, which will encourage people with low account balances to transfer their retirement account to a new employer instead of cashing out.
It will also allow increased catchup provisions for some employees. This is letting an older employee contribute more to build their account balance. In 2025, the Secure Act 2.0 increases the catchup provision for those between 60 and 63 from $6,500 in 2022 ($7,500 in 2023 if 50 or older) to $10,000. This amount will be indexed.
The new law also provides some help with emergency money. It is important to remember that this should be a last place to look to secure these funds. Taking money out for other uses will hurt your retirement balance.
You may withdraw up to $22,000 penalty-free from an IRA or an employer-sponsored plan for federally declared disasters. Victims of domestic abuse can withdraw the lesser of 50% of an account or $10,000 penalty-free. Although these withdrawals are penalty-free they are still taxable.
Next week, we will discuss changes in the tax code that will influence how much you must pay.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.” If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.