February 20, 2023

With the late 2022 adoption of a $1.65 trillion omnibus package to keep the government funded, lawmakers made the SECURE ACT 2.0 the law of the land. The new law includes big changes to retirement account rules. Many of them affect workplace plans as opposed to individual retirement accounts. Some of the rules are effective immediately, while others don’t kick in until 2024, and in some cases, a decade from now.

One change is another increase in the age for required minimum distributions (RMDs). Last year, RMDs had to start by age 72. This year it’s 73. So, if you’re 72 this year, you can wait another year before taking an RMD. In 2033, the RMD start age will increase to 75.

These changes won’t have much effect on those already taking out RMDs to fund their retirement lifestyles. But there could be an impact on wealthier people who will have more time for Roth conversions and other planning strategies.

Another positive RMD-related change is smaller penalties for not taking RMDs. There used to be a 50% penalty attached to untaken RMDs, but as of this year it’s reduced to 25%. And if an RMD error is quickly corrected, the penalty drops to 10%. 

The SECURE ACT 2.0 also gives more leeway for so-called “early” or “premature” distributions from retirement accounts prior to age 59-and-a-half. However, the effective dates and withdrawal limits vary.

Starting now, you can take money without penalties to help pay for terminal illness care. There is no limit on these withdrawals. You can also withdraw up to $22,000 to deal with federally declared natural disasters.

The new law also created a new type of account – Pension-Linked Emergency Funds – which will start in 2024 and can help employees save up to $2,500 for emergencies through payroll deductions. The funds can be withdrawn “early” without penalty and employers can choose to match contributions.

Finally, survivors of domestic abuse can withdraw up to $10,000 or 50% of their vested balance without penalty beginning in 2024. The money is taxable but can be repaid and subsequently refunded over a three-year period.

All in all, there are many positive changes for retirement savers. Still, be careful to mind dollar limits and effective dates, and get help if you need it.