How SECURE Act 2.0 Can Enhance Your Retirement Savings

SECURE Act 2.0 Passage Allows for Enhanced Retirement Savings: Increase in RMD Age from 72 to 73 Effective 1/1/2023 and Then to Age 75 Effective 1/1/2033.

Edward A. Zurndorfer

SECURE Act 2.0 measure, past into law on December 30,2022 as part of the $1.65 trillion government funding bill, includes 92 provisions designed to increase the number of Americans saving for retirement and incentives to increase the size of their “retirement nest eggs”. For federal employees, one of the more significant provisions is the increase in the required minimum distribution (RMD) age. This column discusses the details associated with the increase in the required beginning date (RBD). The RBD is the age at which retired federal employees must take his or her first Thrift Savings Plan (TSP) RMD, and if they own traditional IRAs, the age that they must take their first traditional IRA RMD.

What Are the Rules Regarding the RMD for the TSP and Traditional IRAs?

When a federal employee is a TSP participant and is retired from federal service, the retiree is not required to take any distributions from his or her TSP account until the retired employee reaches his or her RBD. If the retired employee previously participated in a qualified retirement plan, such as a 401(k) or a 403(b)-retirement plan, then he or she is not required to take any distributions from the qualified retirement plan until he or she reaches their RBD. The same is true with respect to a traditional IRA (this includes a contributory and rollover traditional IRA, a SEP traditional IRA and a SIMPLE traditional IRA).

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There is one exception with respect to an individual taking his or her RBD when it comes to the TSP and qualified retirement plans. That exception is when a federal employee continues in federal service past his or her RBD (and is therefore eligible to continue contributing to his or her TSP account), then the retired employee (who past his or her RBD) must take his or her first RMD no later than April 1^st following the year the employee retires.

This is not the case when it comes to traditional IRA owners. A traditional IRA owner must take his or her first RMD no later than April 1^st following the year he or she becomes (depending on when the traditional IRA owner was born) age 70.5, age 72, age 73 or age 75, as will be discussed below.

There have been changes in recent years to the RBD. Before January 1, 2020, the RBD was April 1^st following the later of the year an individual retired from his or her private employer (who sponsored the qualified retirement plan) or from federal service for TSP participants, or age 70.5.  When SECURE Act 1.0 was passed into law in December 2019, the RBD was changed as follows: Effective January 1, 2020, for individuals born after June 30,1949, the RBD is April 1^st following the later of the year an individual retires from his or her private employer/federal service (for TSP participants), or age 72. With the passage of SECURE Act 2.0, effective January 1, 2023, the RBD is changed as follows: For individuals born after December 31,1950 and before January 1, 1960, the RBD is April 1^st following the later of the year an individual retires from his or her private employer/federal service (TSP participant), or age 73. For individuals born after December 31, 1959, the RBD is April 1^st following the later of the year an individual retires from his or her private employer/federal service (TSP participant), or age 75 (effective January 1, 2033).

A traditional IRA owner has the same RBD for traditional IRA RMD purposes whether the traditional IRA owner is retired or not. A traditional IRA owner’s RBD is determined solely by the traditional owner’s date of birth, as shown in the following table:

Traditional IRA Owner Required Beginning Date (RBD)^*

*The deadline for a traditional IRA owner to take his or her first required minimum distribution (RMD) from his or her traditional IRA (includes contributory, rollover, SEP IRAs and SIMPLE IRAs).

What are the Tax Consequences of TSP and Traditional IRA RMDs for Federal Annuitants?

Federal annuitants (CSRS or FERS) who are TSP participants (almost all are) and who are traditional IRA owners (many annuitants are) are encouraged to fully understand the tax consequences of having to take RMDs. The following are some of the tax and other consequences of having to take TSP and traditional IRA RMDs:

1. The larger the TSP and traditional IRA RMD, the more taxable income, possibly pushing the TSP participant/traditional IRA owner into a higher federal and/or state marginal tax bracket.
2. The larger an individual’s TSP and traditional IRA RMD in any year, the larger the individual’s adjusted gross income (AGI) in that year. A larger AGI could possibly result in a larger Medicare Part B monthly premium that the Medicare beneficiary must pay two years later. Note that a Medicare Part B beneficiary must pay a monthly premium for Medicare Part B. The monthly premium varies from year to year, depending on the beneficiary’s AGI from two years before. Medicare has what is called “income tiers” that determine a beneficiary’s monthly premiums. If the beneficiary was in the lowest “income tier” in a particular year, the beneficiary pays the lowest monthly premium called the “base” monthly premium for that year. For 2023, the base premium is $164.90 per month. As a beneficiary’s AGI increases, the more the Medicare beneficiary pays in a monthly premium, call an Income-Related Monthly Adjustment Amount (IRMAA).
3. Additional income resulting from a larger TSP RMD and traditional IRA RMD could result in a federal annuitant being subject to additional federal taxes such as the Net Investment Income Tax (NITT).
4. Additional income resulting from a larger TSP RMD could cause a federal annuitant to be “phased out” of benefiting from federal and state tax credits and deductions that are subject to AGI limits.
5. Retired TSP participants are encouraged to make start making withdrawals from their traditional TSP accounts a few years before their RBD in order to decrease the traditional TSP account balances by the time they reach their RBD. In so doing, they will likely decrease the amount of their TSP RMD. The increase in RBD from age 72 to age 75 resulting from the SECURE Act 2.0 passage gives TSP participants additional time to make their traditional TSP withdrawals.  

How Will Increasing the TSP/traditional IRA RBD Enhance Federal Employee Retirement Savings?

Both current federal employees and recently retired federal employees stand to gain from the increase in the TSP and traditional IRA RBD. The benefits for increasing the RBD include:

1. Assuming a federal annuitant does not have to make any withdrawals from his or her TSP and/or traditional IRA account in order to pay monthly expenses, the increase in the RBD allows for additional time in which the traditional TSP and traditional IRA to potentially grow tax deferred. For the Roth TSP, the increase in RBD allows for additional time for the Roth TSP to potentially grow tax-free.
2. For federal employees, particularly those employees in their 50’s and early 60’s, the increase in RBD may be a reason for employees to continue working in federal service and delaying their retirement from federal service. In so doing, they will be able to continue contributing more over time to the TSP, resulting in additional TSP savings to potentially grow tax-deferred (traditional TSP) or tax-free (Roth TSP). This is especially important because another provision passed into law as part of SECURE Act 2.0 allows employees ages 60 through 63 to make larger “catch-up” contributions starting January 1,2024. The “catch-up” contribution limit will increase for employees aged 60 through 63 (from the current $7,500) to the greater of: (1) $10,000 or (2)150 percent of the regular “catch-up” limit, which would be $11,250 in 2023.

Finally, the following is some information with regard to the increase in the RBD and how the increase affects current qualified retirement plan/TSP and traditional IRA owners:

1. Any federal annuitant who is currently a TSP participant (and perhaps a traditional IRA owner) currently subject to RMDs under the age 70.5 or age 72 rules (that is, they were born before January 1,1951) is not impacted by the SECURE Act 2.0 passage and must continue their existing RMD schedule.
2. With respect to traditional IRAs, the increase in the RBD applies to an individual’s contributory, rollover, SEP and SIMPLE traditional IRA. These traditional IRAs the individual either contributed to or rolled over traditional IRA or qualified retirement plan monies.  The increase in the RBD does not apply to “inherited” IRAs.  An “Inherited” IRA is an IRA that an individual inherits from another individual, such as a parent or a sibling. There are different rules for “inherited” IRAs. These rules are contained as part of SECURE Act 1.0 and SECURE Act 2.0 and will be discussed and explained in future FEDZONE columns.

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Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

SECURE Act 2.0 Can Enhance Your Retirement Savings