If You’re A Federal Employee, Do You Know About The Secure 2.0 Act And How It Could Affect Your Retirement Planning?
Signed into law in late 2022, the Setting, Every Community Up for Retirement Enhancement (SECURE) 2.0 Act contains dozens of new provisions pertaining to retirement. These changes will likely impact how Federal employees save and withdraw funds from their retirement accounts.
Building on the original SECURE Act of 2019, which altered the rules around saving and withdrawing money from your retirement accounts, Congress designed the SECURE 2.0 Act to solve the original SECURE Act that did not adequately address retirement issues. The idea behind SECURE 2.0 is to offer comprehensive changes creating greater flexibility and accessibility for American retirement plans.
A goal of SECURE 2.0 is to help people achieve retirement success by making it easier and less costly to reach their money goals. This bi-partisan effort aims to ensure that people spend retirement savings while still alive instead of leaving that wealth to beneficiaries. Changes to “required minimum distributions” (RMDs) include extending the RMD age and increasing how much employees may add to their catch-up contributions. The legislation also gives smaller businesses more significant tax credits, reduces reporting paperwork and disclosure notices, and streamlines other administrative measures.
Secure 2.0 raises the RMD age.
If you participate in the Thrift Savings Plan and are turning 73 or older this year, you should have gotten an update for your RMD calculations from the TSP. Beginning in 2023, retirees may delay mandatory distributions as the start age moves from 72 to 73. In 2033, the RMD age will increase to 75. If you turn 72 before Jan. 1, 2023, you will have to continue taking your RMDs as scheduled. But if you turn 72 after Jan. 1 and have previously scheduled your withdrawal, you should talk to your advisor about modifying your withdrawal plan. Although delaying the RMD does buy you more time to save money and grow your accounts, it does not eliminate the requirement. You will still need to plan for the time when your RMD kicks in. Also, if you need to take out money to deal with the effects of an economic downturn, medical emergency, or family crisis, changing the withdrawal age may make little difference to your retirement strategy.
According to tax experts, there could be other unintended consequences, as often occurs when Uncle Sam gives you a break. For instance, if retirees delay starting their RMDs, they could pay for the privilege with higher taxes. That’s because delays compress their remaining withdrawals, which now have more years to compound, into fewer years. This means that while extending RMD ages gives you more opportunities for your money to grow tax-deferred, you will also have larger withdrawals when you begin taking distributions.
Since RMDs are taxable income, compression could create tax headaches when you least need them. It’s wise to consult your tax planner or financial advisor and see if taking at least a few distributions before age 73 makes sense. You could also talk to your planner about mitigating potential tax liabilities through the use of a tax-diversified portfolio plan which may include preserving assets that have beneficial tax treatments so they can help you manage any future issues. At this point in our history, it seems unlikely that taxes will go down in the future, so it makes sense to plan ahead.
Other SECURE 2.0 changes
Unfortunately, it’s easy for retirees to make mistakes with their RMDs.
To address such honest but expensive errors, SECURE 2.0 reduces penalties for failing to take your RMD. The new penalty changes from 50% to 25% of the mandatory withdrawal. If you discover and correct your mistake in what the IRS determines is a “timely manner,” the penalty decreases to 10% for IRAs.
Other highlights of the new SECURE Act include the following:
- Tax credits for small businesses if they extend benefits to military spouses.
- Expanded automatic enrollment in retirement plans.
- Higher catch-up contribution limits for those ages 60-63.
- Penalty-free withdrawals for specific emergencies such as terminal illnesses, domestic abuse, or other qualified emergencies.
- First responders such as police officers, firefighters, paramedics, and EMTs can now exclude specified service-related disability pensions or annuities from their gross income once they retire.
Bottom line: If you’re a federal employee planning your retirement, you should discover more about SECURE 2.0. The provisions of this legislation could significantly increase the efficiency of your benefits and ensure that your retirement money will last as long as you do. Contact me if you want additional resources or need other assistance.