U.S. spending bill brings changes to retirement savings accounts for older Americans

Jan. 15—The federal government spending package included changes to how many Americans save for retirement. The Secure Act 2.0 was combined with the spending package to be part of an omnibus bill.

Older Americans will be able to delay taking money out of their retirement accounts if they want, and they can also contribute an increased amount in the last few years before retiring.

Required minimum distributions

The legislation changes the rules for when retirees must begin withdrawing money from their retirement accounts.

The Secure Act 2.0 follows the Secure Act 1.0 passed in 2019. The 2019 Setting Every Community Up for Retirement Enhancement Act raised the age retirees must begin taking money from their retirement accounts to 72. The Secure Act 2.0 raises that age to 73 starting in 2023 and again to 75 in 2033.

Cody Vaughn is a certified financial planner and a St. Joseph financial adviser with Thrivent. He said this is a change most of his clients are interested in knowing about.

"That gives an opportunity for individuals in our community to save money for a longer period of time before being required by the IRS to pull money out of their IRAs," Vaughn said.

Smaller minimum distribution penalties

Retirees are also facing a smaller penalty for not taking their funds out. Before, retirees would have to pay a 50% tax of the amount not taken.

Now, it is 25%. The tax will be reduced to 10% if the holders take the full amount and report the tax by the end of the second year after it was due and before the IRS demands the payment.

"So, let's say you just forgot, life happens, (and) you didn't pull out your total required minimum distribution in that given year. Instead of having a 25% penalty, you're now down to a 10% penalty," Vaughn said. "Not many people run into that issue, but it's always nice to save on those penalties."

Additionally, there are no requirements for retirees to withdrawal money from work-based Roth 401(k)s.

Increased catch-up contributions

Starting in 2025, people 60-63 years old will be allowed to contribute an additional minimum of $10,000 or 50% more than the regular catch-up amount that year, whichever is higher. This applies for most workplace retirement accounts each year.

In 2024, all catch-up contributions for those making more than $145,000 will only be allowed in after-tax contributions, like Roth accounts. Those making less than $145,000 a year will be allowed to choose between pretax accounts or Roths.

The IRA catch-up contributions will also now be indexed every year for inflation.

Financial adviser's recommendations

Vaughn makes two recommendations to people about these changes.

First, learn what your benefits package is and what might be changing.

"See what things are available to you and what aren't," Vaughn said. "Some employers will jump on board with some of these things immediately. Some of them will take a little bit of time."

Second, Vaughn recommends talking with a professional, an adviser, to help you make a plan.

"Moving forward and not having a plan on how to save for emergency or save for an investment or save for a house or save for retirement, you know, you're kind of going in blind to reach that goal," Vaughn said. "If you sit down with an adviser who works in this field, they can help you. What's the first step, second step, third step to get you there."

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