How you can better prepare for retirement this year—and beyond

Lawmakers may be divided on many issues, but the good news for savers is that there's bipartisan support for new laws that expand access to retirement plans for many Americans. New retirement legislation—Secure Act 2.0—was signed into law in December, bringing with it some significant benefits for investors with employer-sponsored 403(b) or 401(k) plans, as well as individual retirement accounts.

The new law builds on the game-changing Secure Act of 2019, and includes provisions not only for people who are behind in their retirement savings goals, but also for those who already sock away the maximum each year and want to invest more on a tax-deferred basis and keep it growing longer. 

"This legislation is historic," says Chris Spence, Managing Director, Federal Government Relations at TIAA, who played an essential role working with Congressional lawmakers to shape the new law to best serve investors. "It's about three times bigger than the Secure Act 1.0 and, at its core, is aimed at improving access to retirement plans and improving savings rates."

Some provisions are effective immediately; others will be rolled out in the coming years. Your advisor can help you work through the implications for your own retirement savings, but here's a quick look at changes likely to affect you:

You can keep your money invested even longer

The longer you wait to take distributions from your retirement accounts, the more your savings can grow. The new law raises the age at which required minimum distributions (RMDs) begin, from 72 to 73 this year, and again, to 75, in 2033.

You won't be penalized as much if you under-withdraw

The penalty for taking an RMD after the calendar year in which it is due, or not taking enough, has been notoriously harsh: 50% of the amount under-withdrawn. Effective for 2023, the new law cuts the penalty to 25%, and to 10% if the error is corrected within two years.

It's easier to catch up on savings if you're close to retirement

Currently, if you're 50 or older and have a defined contribution account such as a 403(b), 401(k) or 457 plan, you can invest a $7,500 catch-up contribution on top of the $22,500 contribution allowable for all ages. Starting in 2025, the limit for people aged 60-63 will be even higher: the greater of $10,000 or 150% of the standard catch-up limit for 2024.

Traditional and Roth IRA catch-up contribution rules remain largely unchanged; however, the previously static $1,000 catch-up limit will be subject to annual inflation adjustments.

Simple IRA plans currently allow a $3,000 catch-up contribution on top of the $15,500 maximum; for those age 60-63, this limit will rise to the greater of $5,000 or 150% of the standard 2025 limit.

There's a twist, however: If your income is $145,000 or more, you must invest your catch-up contributions on an after-tax basis in a Roth IRA. "If a certain amount of your retirement contribution needs to go into a Roth, that will impact your retirement tax planning strategies, so you'll want to speak to a planner about that," Spence says.

You have more opportunities for tax-smart charitable giving

Currently, if you're over age 70 ½, you may make a so-called qualified charitable donation (QCD) directly from your IRA to a qualified nonprofit organization, thereby avoiding paying taxes on the withdrawals. If you're at RMD age, such contributions (up to $100,000) can count toward your required distribution. 

Starting in 2024, the $100,000 cap will be indexed to inflation. Also, you can elect to place up to $50,000 of your QCD, one time, into a split-interest entity, such as a charitable remainder annuity trust, charitable lead annuity trust or charitable gift annuity. These trusts benefit both donor and charity with income to the former and the remaining lump sum to the latter. 

You can redirect unused college savings

If you've been socking away money for your child or grandchild's college education in a 529 plan, you may now be able to put any unused funds toward their retirement savings. Starting in 2024, money in a 529 plan that's not needed for education can be rolled into a Roth IRA tax-free, as long as the Roth is in the name of the beneficiary.  

There are some strict conditions: Annual rollovers can't exceed the annual contribution limit for a Roth IRA, which is $6,500 in 2023. Total lifetime rollovers per beneficiary can't exceed $35,000. What's more, contributions made in the past five years can't be rolled over, and a plan must have been established at least 15 years ago to be eligible under the new rollover rules. 

You may be able to take advantage of a new Roth option

Effective immediately, employer matching contributions and nonelective contributions can be made to Roth accounts on an after-tax basis. Up until now, such contributions to workplace retirement accounts have been pre-tax only.

But a major caveat, Spence explains, is that there are administrative complexities involved, so this may not happen in your workplace right away, if at all. "It's totally up to the employer as to whether they want to offer this option," he says.