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6 ways the SECURE Act 2.0 affects retirees

Happy senior couple came to an agreement with a financial advisor at home.
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When the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law in 2019, it brought improvements to tax-advantaged retirement accounts and made it easier for Americans to save. The SECURE Act 2.0, signed into law in 2022, extends many of those improvements and introduces some additional ones. Many of these provisions are specifically beneficial for retirees because the changes affect distribution rules.

Understanding these updates can help you make informed decisions when it comes to your retirement plan.

1. SECURE Act 2.0 RMD age changes

Before the original SECURE Act, retirees had to begin taking required minimum distributions (RMDs) from specific retirement accounts, such as a 401(k), once they turned 70½. The SECURE Act of 2019 increased that to age 72 for individuals born in 1950 or earlier.

The SECURE Act 2.0 will change that age again, ultimately raising it to age 75 in an incremental phase-in approach over the next 10 years:

  • For people born between 1951-1959, the RMD age is 73.
  • For people born in 1960 or later, the RMD age is 75.

Raising the age for people to begin taking RMDs allows for more time for the funds to experience tax-deferred growth if you don’t need the assets for living expenses.

2. No RMDs for Roth employer-sponsored retirement accounts starting in 2024

Unlike Roth individual retirement accounts (IRAs), designated Roth accounts for workplace plans (such as Roth 401(k)s) historically have been subject to RMD rules. With the SECURE Act 2.0 RMD changes, this will no longer be the case beginning in 2024.

Eliminating this requirement means you have more choices when it comes to managing your retirement savings in a way that best helps you to accomplish your financial goals if you don't need the funds for retirement income.

3. Surviving spouses may be able to delay RMDs for longer

With the SECURE Act 2.0, a surviving spouse has the same distribution options for inherited retirement accounts that their deceased spouse would have had, even if the survivor is younger. This means they can delay RMDs longer than they would have been able to, based on their own age.

Once RMDs start based on the deceased spouse's age, the surviving spouse can use the Uniform Lifetime Table rather than the Single Life Expectancy Table, which can result in smaller RMDs.

4. Reduced RMD penalties

Failing to take the appropriate RMD would previously have meant facing a 50% penalty on the amount that should have been withdrawn.

One of the more popular SECURE Act 2.0 RMD changes cuts that penalty to 25%. If the account owner identifies the mistake and corrects it by taking the missed distribution within the correction window, the penalty will be reduced further to 10%. The correction window closes two years after the retiree becomes liable for the tax unless the IRS assesses the penalty or mails the taxpayer a letter of deficiency. Be sure to work with a tax advisor if this situation applies to you.

Calculating and taking the correct RMDs on time can be challenging, and it's important to correct any RMD mistakes. This SECURE Act 2.0 provision provides an incentive to do so.

5. Increased Qualified Charitable Distribution (QCD) limits

Qualified charitable distributions (QCDs) allow you to avoid taxation on your RMDs by directing them to a qualified charity. The annual QCD limit as of 2023 is $100,000, and that amount will be indexed for inflation in subsequent years.

The SECURE Act 2.0 also provides for a one-time annual QCD of up to $50,000 to establish certain split-interest entities. These include charitable gift annuities, charitable remainder unitrusts (CRUTs) and charitable remainder annuity trusts (CRATs). There are special considerations concerning split-interest trusts established using this provision, so it's a good idea to talk with a financial advisor to fully understand what this might mean for you.

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Charitable Strategies: Qualified Charitable Distributions (QCD)

6. Qualified longevity annuity contracts (QLAC) may be more accessible

A QLAC can benefit your financial strategy by delaying some of your IRA savings until later in life, when you might need them the most. And once you start receiving income payments, this guaranteed income continues for as long as you live.

With a traditional IRA, you normally start taking required minimum distributions (RMDs) between ages 72-75, depending on your birth year. A QLAC is subject to RMDs beginning at age 85, so by placing some of your IRA assets into one you can extend the life of your income and begin receiving annuity payments as late as age 85.

Prior law stipulated that no more than 25% of the IRA account balance up to an annual dollar limit ($145,000 in 2022) could be used to purchase an annuity. The SECURE Act 2.0 increases the dollar limit to $200,000 and indexes it for inflation beginning in 2023. It also eliminates the 25% account balance requirement.

Additionally, QLACs will now include a provision that allows a person to cancel the contract within 90 days.

Need help navigating SECURE Act 2.0 changes?

Keeping up with the details of a constantly changing regulatory environment can be stressful. Thrivent financial advisors stay up to date with the latest rules, including the recent changes introduced by the SECURE Act 2.0. Contact a local financial advisor to get help navigating the provisions of this new law with your retirement strategy.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.