Jan 12, 2023
SECURE Act 2.0: Summary of key retirement provisions
The second iteration of “Setting Every Community Up for Retirement Enhancement” (referred to as SECURE Act 2.0) was signed into law on December 23, 2022, as part of the federal government’s $1.7 trillion omnibus spending bill. While no one feature in the sequel is as marked as the elimination of the Stretch IRA, which was part of the original SECURE Act passed in 2019, SECURE Act 2.0 includes many provisions that affect those preparing for (or living in) retirement. These include further delaying the onset of required minimum distributions and increasing contribution amounts into retirement plans.
Changes to required minimum distributions
After previously increasing the beginning age of required minimum distributions from 70.5 to 721 in the first SECURE Act, SECURE Act 2.0 delays the starting age still further, as follows:
- Those turning 72 after 12/31/2022 will need to take their first distribution by age 73.2
- Those turning 74 after 12/31/2032 will need to take their first distribution by age 75.3
Note that there appears to be a typo in the bill—it will likely be adjusted to “those turning 74 after 12/31/2033” in future legislation.
Qualified charitable distributions
Those interested in making qualified charitable distributions (QCDs), or tax-free distributions of retirement plan assets to eligible charities, are still able to do so after attaining age 70.5. SECURE Act 2.0 includes a provision that will adjust the $100,000 annual maximum of QCDs for inflation beginning in 2024.4 In addition, taxpayers have a one-time opportunity to make a QCD into a split-interest entity, such as a charitable remainder trust or charitable gift annuity.5
Employer-sponsored Roth retirement accounts
Greater numbers of employer plans have begun offering Roth account options in addition to the pre-tax options. However, small business retirement plans have traditionally been constrained in the types of retirement accounts available. SECURE Act 2.0 has expanded plan options to include Roth versions of the SEP IRA and SIMPLE IRA starting in 2023.6 Please note that custodians and employers may need time to update plan offerings and election options to take these new options into account.7
For plan participants with Roth employer plans: while their employee contributions may have been made into Roth accounts, their employer matches have historically gone into pre-tax accounts. SECURE Act 2.0 permits employer contributions to be likewise contributed into Roth accounts, though these amounts will be included in the employee’s income (i.e., you pay the tax on these contributions rather than the employer!).8
Changes to retirement plans and contributions
For employees already maximizing the amount of retirement plan contributions plus any eligible catch-up contribution, SECURE Act 2.0 makes additional catch-up amounts available.
- Individual Retirement Accounts: Beginning in 2024, the $1,000 catch-up contribution permitted after age 59.5 will be inflation-adjusted in increments of $100.9
- Employer-sponsored retirement plans: Beginning in 2025, workers between the ages of 60 and 63 may contribute an additional amount equal to the greater of $10,000 or 150x “the standard” catch-up contribution.10 These additional catch-up contributions will be inflation-adjusted starting in 2026.11
An additional stipulation for high-income taxpayers (i.e., those earning more than $145,000) is that catch-up contributions must be made into Roth accounts versus pretax (note this rule applies to 401(k), 403(b) and governmental 457 plans only).12 This rule effectively eliminates the tax benefit of deferring additional income while in a high tax bracket, with the goal of paying lower taxes in retirement as income falls.
Also note that if your employer doesn’t offer a Roth version of your plan, no employee will be allowed to contribute catch-up contributions, regardless of their previous year’s income.13
- SIMPLE IRA/401(k): Beginning in 2024, the catch-up contribution is increased by 10%.14 In addition, beginning in 2025, workers between the ages of 60 and 63 can contribute an additional amount equal to the greater of $5,000 or 150x “the standard” catch-up contribution.15 These additional catch-up contributions will be inflation-adjusted starting in 2026.16
529 Plan to Roth IRA rollover
A common concern for parents funding 529 plans is deciding what to do with extra funds, given the penalties imposed for non-qualified distributions. SECURE Act 2.0 created a provision to repurpose dollars intended for education to retirement if unused. Starting in 2024, account owners may roll over 529 funds into a Roth IRA17—subject to the following stipulations:
- The 529 plan must have been in existence for 15 years or longer.18
- The receiving Roth IRA is for the benefit of the 529 plan’s beneficiary rather than the 529 plan’s owner.19
- Contributions to the 529 plan (or earnings on these contributions) made within the past five years are ineligible to be moved into the Roth IRA.20
- The overall maximum that can be moved from a 529 into a Roth IRA is $35,000.21
- Annual IRA contribution limits are in effect—meaning the full $35,000 can’t be moved over in one transfer; it will need to be transferred gradually.22
While, at first look, there are no monumental changes contained in this bill, SECURE Act 2.0 contains many smaller adjustments to both distribution rules and savings options that present new opportunities for retirement planning and managing taxes in retirement.
In addition, many of these changes are phased in slowly over the next few years, giving ample time to adjust and implement your financial plan using the new tools and resources provided within SECURE Act 2.0. We encourage you to work with your financial advisor and tax advisor to discuss adjustments for your personal plan.
ABOUT THE AUTHOR
As an Associate Wealth Advisor at the firm, Eileen is responsible for conducting financial planning analyses, formulating investment recommendations, and assisting the Wealth Advisors in developing and presenting strategies to help clients in reaching their financial goals. Eileen graduated from Virginia Tech with a Bachelor of Science in Finance and concentration in Financial Planning. Prior to joining the firm in 2020, Eileen spent five years at a wealth management firm in Columbia, South Carolina, specializing in closely held family businesses. She earned the CFP® designation in 2016. Eileen has volunteered as an instructor and mentor with Rock the Street, Wall Street, a nonprofit organization aimed to equip high-school girls with the skills to succeed financially and pursue a career in mathematics. She also serves on the Genesis Committee for the National Association of Personal Financial Advisors (NAPFA), sharing the finance career path with students and engaging young planners in a peer-to-peer networking group.
In her free time, Eileen enjoys traveling, taking cooking classes, and learning French.
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