10 of the biggest changes to retirement accounts due to new 401(k) and IRA rules – Twin Cities

By James Royal, Ph.D., Bankrate.com

Congress has shaken up retirement plans once again, and the changes benefit a wide swath of Americans saving for their golden years through IRAs or employer plans such as 401(k)s.

The SECURE Act 2.0 became law in the last days of 2022, and the new rules provide assistance for retirement savers, small businesses and many others. In fact, the changes are so wide that many of them didn’t officially begin until 2024 or later. The law is a sweeping follow-up to 2019’s SECURE Act, which itself shook up retirement funding and planning.

It’s worth noting that while the new law permits the following features, in many cases employers have to set up their retirement plans such as 401(k)s to actually enable those features. So you’ll want to check with your employer to see if they offer the new features and when.

Here are ten of the most important changes in the SECURE Act 2.0 and what you need to know.

1. The age for required minimum distributions rises

The SECURE Act 2.0 changes the age for when savers must begin taking required minimum distributions (RMDs) from retirement plans, not once but twice. The age to start taking RMDs has now become 73, as of 2023, up from age 72. Then starting on Jan. 1, 2033, the age for beginning to take RMDs jumps to 75. The law applies to 401(k) plans, 403(b) plans and IRAs, among others.

“Probably the biggest change in the SECURE Act 2.0 is the change to RMDs,” says Brian McGraw, CFP and senior wealth adviser with Hightower Wealth Advisors in St. Louis. “It’s the one that retirees and soon-to-be retirees want to get right.”

Due to the changes in the law, no one needed to start taking their RMDs in 2023. But if you had already started taking your RMD, you were not off the hook for taking it in 2023.

“People who are already taking RMDs still have to take them, but those who haven’t started don’t need to start for another year,” says McGraw.

How retirement savers are impacted: The extra time could let you compound your money inside a tax-advantaged account for even longer, meaning you could have more money when it comes time to withdraw it.

2. No more RMDs on employer-sponsored Roth accounts

Starting in 2024, employer-sponsored Roth accounts such as the Roth 401(k), no longer have required minimum distributions. This change aligns the withdrawal rules for employer-sponsored plans with those for the Roth IRA, which has no RMD. Previously, many advisers suggested that clients roll over Roth 401(k) accounts to a Roth IRA to avoid RMDs.

How retirement savers are impacted: This change simplified the withdrawal rules for the Roth 401(k) and helpfully aligned them with those of the Roth IRA.

3. Lower penalties for missing RMDs

If you don’t meet your RMD, you’ll be hit with a penalty. Previously, that penalty was a whopping 50% of the amount that you didn’t withdraw. The new law reduces that penalty to 25%. If you miss an RMD from an IRA, you may be able to reduce that penalty to 10% if you correct the deficiency in a timely manner and refile your taxes.

How retirement savers are impacted: The lower penalty means more money can stay in your pocket, though it’s easy enough to avoid this penalty in the first place.

4. Automatic enrollment and escalation in retirement plans

Starting in 2025, newly created 401(k) and 403(b) plans will be required to automatically enroll eligible employees with a minimum contribution of at least 3%. Plans must include an auto-escalation feature that raises the savings rate by 1% annually, up to a maximum of 10% or 15%, depending on the plan. However, the employee may opt out of the plan.

“Perhaps the biggest hurdle employers face in helping their employees invest for retirement is simply getting people enrolled in retirement plans,” says Edward Gottfried, Betterment at Work’s director of product.

How retirement savers are impacted: “Auto-enrollment and auto-escalation don’t just increase retirement savings but also contribute to better financial outcomes for employees: Employees who start out auto-enrolled more frequently contribute more than the amount they were auto-enrolled at then decrease that amount,” says Gottfried.

5. Larger catch-up contributions

“One of the bigger things for savers is the larger catch-up contributions,” says McGraw. “If you’re between [age] 60 and 63, you’ll be able to contribute up to $10,000 as a catch-up contribution.”