On this episode of The Federal Retirement Show, Val breaks down the changes and new legislation inside Secure Act 2.0 while explaining what you need to know about RMDs and Catch-Up Contributions.

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2.24.23: Audio automatically transcribed by Sonix

2.24.23: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.

Val Majewski:
Well, welcome back to the Federal Retirement show. I'm your host, Val Majewski, with American Benefits Exchange. And today's episode, we're going to be talking about a new piece of legislation called the Secure Act 2.0 and how this affects you. And we're not going to talk about the entire act, all the legislation. I just want to hit on the highlights of how this affects you as a federal employee, your retirement, your savings, your opportunities, some of the criteria within this legislation that is both a benefit. Maybe there's some things in there that may not be a benefit to you depending on how you look at it. But let's dive into the Secure Act 2.0 and get into how these provisions affect you as a federal employee. So if you remember, the Secure Act came out during COVID and the Secure Act allowed for certain things with retirement savings. It bumped up the required minimum distribution age to 72. There were a number of provisions within the first secure Act that came out, well, this is 2.0. And this really just affects you in a couple of different ways, and most of it is pretty positive, in my opinion. The first thing is RMDs required minimum distributions. Now, if you're not familiar with these, I'll just do a brief overview. But when you retire, when you retire from the federal government and you've got money in your TSP, at a certain point you're going to be required to take that out.

Val Majewski:
You're not required to withdraw it when you first retire. You can certainly leave it in TSP. You can move it somewhere into your own IRA. You have options. But once you hit a certain age, you are required to take out a minimum distribution set forth by the government. And basically, in my opinion, it's a way for you to start withdrawing money from your the traditional side of your TSP or your IRA and start paying some taxes on that money because the traditional side of your 401. K, your TSP or any IRA that you have. Is pre-tax dollars. The money has gone in pre-tax, it's accumulated tax deferred. And now when you withdraw money, you're going to owe tax on every dollar in that account. This is a way for the government to regulate and mandate that you start taking out some money so that you can start paying some taxes again. That's the way I look at it. That's my opinion on this. But as of January 1st, 2023, according to the Secure Act 2.0, the RMD age, if you are not already taking RMDs, has increased to age 73. And will again increase to 75. Effective January 1st, 2033. So ten years from now, we'll be up to 75 years old. Now, how does this affect you? Well, you've got to understand that this is when you have to start taking out money.

Val Majewski:
You could already be taking out money. You could already be satisfying your RMD by the time you hit that age. But if you have not touched the money or if you're not regularly taking out a significant amount of the money, you will be required to do so each calendar year. Once you hit that age and again you'll be owed or owing taxes on the amount that you take out. So just to see which category you fall into, if you were born in 1950 or earlier, you have to start taking RMDs at age 72. If you're born from 1951 to 59, it's increased to age 73. And for those that are born 1960 or later, you're at age 75 at this point of when you need to start taking out the money. Now, the delaying of it is great because you don't have to touch the money, but just understand if your money increases over time, if your accounts increase, it can just be creating a larger tax liability down the road. And also, depending on which way tax rates go up, it just might be more as far as the percentage of taxes that you're going to owe down the road. But good news is you don't have to touch the money until later.

Val Majewski:
So RMDs have increased as a result of the secure Act 2.0. If you're already taking RMDs, you must continue, which is typical if you're we're subject to the 70 and one half rule a few years back or the age 72 rule. It's not like you're going to delay now till 73. If you're already taking those, you must continue. And a good provision is previous to the Secure Act 2.0. You had to also take RMDs from the Roth portion of your TSP. Now, even though the Roth portion comes out tax free, you still have to take a RMD from it. It was kind of an antiquated rule in my opinion. I don't know why they continued to make you do that, but that portion has now been eliminated. So Roth TSP will not be subject to RMDs. Catch up contributions. We mentioned this on a previous episode about the new limits with TSP, but in 2023, those that are 50 and older can now contribute up to 7500 in catch up contributions, in addition to the maximum of 22,500 per year. So those that are 50 and older can put a total of $30,000 per year into their TSP. Pretty awesome stuff. The amount will also be increased annually for inflation starting in 2024. So that 7500 is subject to increase down the road. So you'll be able to put even more money on an annual basis into your TSB.

Val Majewski:
Effective January 1st, 2020, for catch up contributions for those making more than 145,000 per year in 2023 will have to be applied to their Roth account. Pretty interesting that they put that provision in there. But its just saying if you make catch up contributions and you are making more than $145,000 this year, those catch up contributions will be directed into the Roth portion of your TSP, the tax free portion. So you're not going to get a tax deduction. In that year for your catch up contributions. Those are going to be after tax dollars going into the Roth portion. So if that's something that you counted on before taking a little extra tax deduction on your catch up contributions, that is no longer going to happen. If you are making more than $145,000. In 2025 catch up contributions for those 6263 will increase up to 150% of what it normally is right now, or up to $10,000. So catch up contributions are going to increase and in 2025, you should see them at least up to $10,000. Pretty awesome stuff. Again, ways in which you can put more money into your TSB. This new amount, whatever it is, will be indexed by inflation. So as the catch up contribution increases, it will continue to increase according to the way inflation is going. Hopefully inflation goes down by then, but it will continue to increase according to inflation.

Val Majewski:
So those are the highlights. I know that was a fairly short episode for those that have been listening and following the federal retirement show, but I wanted to give you just some of those provisions because they do affect when you're going to need to take money out of your 401. K or IRAs. And if you do plan on putting catch up contributions in and you fall into those different provisions, you just got to be aware of where that money is going to be going and how much you're able to put in. Good news is RMDs are delayed until 73 and will continue that age, will continue to go up and will eventually be 75 and catch up. Contributions will continue to increase so you can put more money towards your retirement savings. Well, thank you again for joining us on the federal retirement show. I really appreciate you following the show and learning about information regarding your benefits and retirement. If you do have any suggestions of topics that you want to hear or comments concerns, go to federal retirement show.com. Fill out the form. We'll be in touch and we'd love to connect with you regarding questions, comments, concerns, things of that nature. Again, thank you for joining us and look forward to seeing you on a future episode.

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