We have some news that we’re throwing out today regarding the Secure Act 2.0 and some of its changes that might be impactful for you. You should know what these changes are so you can take advantage of your opportunities.
We work so hard to earn money, and then we turn around and give so much of it to the IRS, only for them to throw it away; our government drives me up a wall.
In this Secure Act 2.0, there is a huge budget reconciliation; basically, we’re going to spend another trillion dollars we don’t have. The government calls this act the Secure Act 2.0, but my nickname for it is the “Unsecure Act” because any time the government names things, it often ends up being the opposite. For example, the Inflation Reduction Act increased inflation. I wish Congress was as good at balancing a budget as they are at putting acronyms together.
Let’s look at some of the changes in this new act. First, they pushed back the age that you’re required to take money out of these accounts to seventy-three. Starting immediately, the age goes back by one year. I’m not sure why they don’t just do it now, but after ten years the age will be pushed back to seventy-five.
A second change has to do with a tax code penalty. You might not be aware of this, but one of the harshest penalties in the tax code is if you don’t take out your required minimum distribution. That penalty is 50%. This act cuts that penalty in half to 25%, which is still harsh, but it’s half what it was. I doubt that it collected a lot of money for them, or they might not be as willing to reduce it.
The third change I want to mention is a good thing, which almost makes me think they did it by accident. One of the stupidest rules in the tax code is that Roth 401Ks or Roth 403Bs have required distributions. In 2024, Roth 401Ks will no longer have required distributions. I don’t know why this change doesn’t go into effect right away. Why do we have to wait a year?
A fourth change could end up being either good or bad for you depending on the advice you’re getting from your financial advisor. The double-edged sword here is that starting in 2023, contribution limits for 401K’s increase for everyone by $2,000. The maximum in 2022 is $20,500. If you’re over the age of fifty, you can go up to $30,000 in your retirement plan. If you’re between the ages of sixty and sixty-three, beginning in 2025 you can catch up by as much as $10,000 in contributions. The different rules will go into effect at various intervals over the years. If it’s going to be the rule, why not just make it the rule? That idea is hard for politicians. There’s a reason that used car salespeople rank ahead of politicians in trustworthiness.
The bottom line is that you can put more money into your 401K. If you are putting money in your 401K pretax, meaning you’re getting a tax deduction today, and you’re paying tax later in life, you’re doing exactly what the government wants you to do. You’re paying the maximum amount of tax. You may save tax today in small amounts while you’re planting the seed, but down the road when you have your harvest, the tax rates will be even higher, and you will have a much heavier tax burden. We can be confident taxes will go up over time because our government spends money willy-nilly whether they have the money or not. The deficit is out of control, and every year it gets bigger. If you’re putting more and more money in your 401K and saving tax today, that means you’re going to pay a whopping price down the road.
On the other hand, what if you have a financial advisor who knows what they’re talking about with taxes? Maybe your advisor looks at your situation and, instead of having you contribute pretax, has you use the Roth option in your 401K and contribute after tax. This option is, as my children might say, frickin’ awesome. As soon as my 401K allowed me to do it, I switched to only contributing to my Roth version. I’m over the age of fifty and I’m going to pay the maximum amount, $30,000, into a Roth 401K. Why am I doing this? I will pay some tax now, but I sure as heck would rather have tax-free income in retirement. I’d rather pay a little tax today and save a boatload of tax later. Your future self will thank you.
I feel if you’re smart, you’re using the Roth version. If you’re not smart, you’re using the pretax version. This is a general rule of thumb because it can be different based on your situation. We want you to keep as much of your money away from the IRS tax monsters as possible.
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