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How SECURE Act 2.0 Will Affect Your Income and Taxes

The SECURE Act 2.0 was passed at the end of 2022, and there are dozens of provisions in it that may potentially affect you and your retirement savings. What we want to focus on today has to do with Required Minimum Distributions, or RMDs. 

The RMD is what forces you to draw certain minimum amounts from your tax-deferred retirement accounts, like traditional IRAs, 401k plans, SEP IRAs, etc. once you’ve reached a certain age. Last year, that age was 72. Starting this year, it increases to age 73, and then goes up again 10 years from now to age 75. 

So if you were born before 1951, your RMD age is still 72. So, anyone who had an RMD last year will have another one this year.  Anyone born between 1951 and 1959 has an RMD starting at age 73, and those born in 1960 or later won’t have to start their RMDs until age 75. What this means for everyone born in 1951 or later is that if you don’t need the money from those retirement accounts to live on, you can leave those funds where they are for at least a little longer.   

Another change that SECURE 2.0 brings is a reduction in the most draconian penalty in the entire US tax code, which charges you an extra 50 percent penalty tax on any missed RMD in any given year. That penalty has been reduced to 25 percent – still high, but not as bad as before. And, by the way, if you catch your mistake and make up for the shortfall within a brief window of time (as defined by the rules), the Act reduces the penalty down to just 10 percent.  

There’s also a change to the RMD rules with Roth 401k plans. 

For whatever reason, up until now, Roth 401k accounts were first and foremost a 401(k) plan and owners had Required Minimum Distributions, even though the account was funded was after-tax money. The only way around it was to roll your Roth 401(k) balance into a Roth IRA (which isn’t affected by RMDs). But the problem with that was that if it was a new Roth, you could wind up violating the Five-Year Rule for Roth IRAs and potentially have to pay taxes on growth in the account. 

No more! SECURE 2.0 now treats Roth 401k plans more like a ROTH IRA and excludes the ROTH 401(k) from RMD rules. 

One other provision has to do with annuities. In prior years, if your account had both an annuity and a non-annuity part, you had to do a separate calculation of the RMD for each one, which in some cases increased the amount you had to take out. Now you can combine the distributions, which should make the calculations a lot simpler. 

Earlier, we mentioned that the age for RMDs for tax-deferred accounts has been increased and you can now wait a little longer before you’re required to remove the funds and pay taxes on them.  But you still need to ask this question: is delaying distributions always a good idea? 

Maybe not – at least for some people. 

If you take advantage of the later age of RMDs offered by SECURE 2.0, your account balances could potentially be higher due to those extra years of potential investment returns. In addition, at age 75, your life expectancy factor will be smaller (24.6 rather than 27.4 at age 72). 

Why is that important? With a higher balance and a shorter life expectancy factor comes a higher required distribution. And a higher distribution means a higher tax bill for you, maybe even pushing you into the next bracket. What’s more, that higher taxable income could also increase taxes you may owe on your Social Security retirement benefits, as well as your Medicare Parts B and D premiums, which are both based on your income.  

That’s not to say it’s a bad thing, but it does mean that strategizing for RMDs is even more important now. Your Lucia Capital Group advisor can go over your situation, do a tax analysis, and maybe update your strategy to see if you can move to a position that may be more advantageous to you. And you should do this as soon as possible, because you don’t want to find out too late that you’re paying more in taxes than you might have otherwise had to. 

We do this kind of tax planning every single day here at Lucia Capital Group. How can we help you the most? Just give us a call! 

Important Information:

The information provided should not be considered specific tax, legal, or investment advice and is not specific to any individual’s personal circumstances. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.

IRA withdrawals will be taxed at ordinary income rates. Withdrawals prior to age 59½ may also be subject to a 10% penalty tax.

Roth IRA distributions of principal from a Roth IRA are tax-free; however, any earnings will be taxed at ordinary income rates and a 10% penalty tax will apply if withdrawn prior to age 59½ or within five years of the date the Roth IRA was established, whichever is longer.

Annuities are long-term investment products designed for retirement purposes. Guarantees are based on the claims-paying ability of the issuer subject to their terms and conditions. Certain terms and conditions apply, so please read insurance company materials carefully.

The information provided is based on current laws, which are subject to change at any time. Lucia Capital Group is not affiliated with or endorsed by the Social Security Administration or any government agency.

Social Security rules can be complex. For more information about Social Security benefits, visit the SSA website at www.ssa.gov, or call (800) 772-1213 to speak with an SSA representative.

Rick Plum is a registered representative with, and securities and advisory services offered through LPL Financial, a registered investment advisor and member FINRA/SIPC. The investment professionals are affiliated with LPL Financial and are conducting business using the name Lucia Capital Group, a separate entity from LPL Financial.

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