What does Secure 2.0 mean for your federal retirement planning

over the next decade, Lockdown 2.0 Code It would change the rules about when federal retirees must withdraw from their savings and how those withdrawals are calculated.

The law, which includes dozens of provisions, was passed on December 29 as part of the $1.7 trillion overall spending bill It is an amalgamation of several bipartisan bills that build on a similar law from 2019. Taken together, the legislation is intended to make retirement planning easier and less subject to penalties, according to lawmakers.

Sen. Ron Wyden (D-Ore.), who previously chaired the Senate Finance Committee, said Dec. 20. statment.

One of the provisions affects required minimum distributions, or mandatory annual withdrawals from tax-deferred savings accounts, Like traditional Savings plan or IRA. Federal retirees, like private retirees, must withdraw portions of their savings each year.

“The policy behind this rule is to ensure that individuals spend their retirement savings during their lifetime and not use their retirement plans for estate planning purposes to transfer wealth to beneficiaries,” according to Invoice text.

The previous law is based on how much an individual must withdraw as an RMD total balance For traditional and Roth savings plan.

Because RMD ratios depend on the entire account said Chris Kolick, founder ProFeds and a federal employee retirement benefits expert, in an interview.

That will change by 2024. The new law lifts the predeath distribution requirement for Roth V accounts employer plans, Like a 401(k)w or TSP.

It also helps build generational wealth, Kolick said, because beneficiaries can leave a tax-free Roth account for their children.

A one-year delay in withdrawing an RMD

The law also gives some retirees one year to delay mandatory withdrawals by raising the starting age to 73 from 72 in 2023. The age to start taking RMDs will rise again to age 75 in 2033.

If the retiree turns 72 before January 1, that individual will continue to take RMDs as scheduled. But if a retiree turns 72 this year and has already set a date for a required withdrawal, they may want to update their withdrawal plan, Fidelity Investments writes in blog post.

Kowalik warned that while this sounds like good news, it’s just kicking RMD down the road. For some retirees who take that money anyway to meet the rising cost of living, the change may be moot.

“It’s just one more year that they’re going to be late, but in reality, they’re likely to take just as much, if not more, out of their accounts despite not being told they have to,” she said. “Because they need the money to live. Or go have fun in retirement and go do the things they want to do.”

There is another problem that Kowalek warned retirees to look out for.

RMDs are taxed when withdrawn. By raising the withdrawal age, she said, this is one year less than the government has to collect its dues.

If a retiree is late getting distributions, Kowalek said there is a risk of that pressure Remaining withdrawals in fewer years.

said Michael Hunsberger, company owner Next Mission Financial Planning, LLCin an article by fortune trader.

On the other hand, the new RMD rule gives more time to strategize for retirement — for those who can afford to wait.

Earlier this month, the TSP Program, the Primary Retirement Savings and Investment Plan for Federal Employees and Service Members, Mailed updates to RMD accounts for those who will be 73 or older this year.

Changes to withdrawal penalties and other features

The law also lowers the penalty for not taking an RMD to 25% of the mandatory withdrawal, down from 50%. This penalty drops to 10% if the error is corrected “in time” for IRAs.

Secure 2.0 also gives small businesses a tax credit if they open up benefits to military spouses, who lawmakers note often don’t work long enough to be eligible for or vested in a company retirement plan. The law now gives small employers a tax break if they make their military spouse immediately eligible to participate in the plan within two months of employment, offer them any matching or non-selective contribution they would normally qualify for in two years of service, and make them 100% vested in all employer contributions. the work.

The legislation also points to higher consumer prices last year and requires the Labor and Treasury secretaries to study the impact of inflation on retirement savings and report to Congress within 90 days.

Other highlights of the law (abstract is here) includes:

• Expansion of automatic enrollment in retirement plans
• An upper limit on catch-up contributions applies at ages 60, 61, 62 and 63
• Penalty-free withdrawals for certain emergencies, domestic violence situations, qualifying disasters, and terminally ill individuals
• First responders, such as law enforcement officers, firefighters, paramedics, and emergency medical technicians, can exclude from gross income some disability pension or pension payments after they reach retirement.
• An online searchable lost and found retirement savings database maintained by the Department of Labor to help savers, who may have lost track of their pension or 401(k) plan, to look up contact information for their plan administrator