At the end of December, Congress passed the SECURE Act 2.0 as part of the omnibus spending bill. The Act does not result in any substantial planning changes the way the original 2019 SECURE Act did (which eliminated lifetime stretch IRAs, to our collective dismay), but it does make nearly 100 smaller changes to the tax code. These changes revolve around retirement plans and expand the use and flexibility of Roth assets (“after-tax” retirement dollars), expand the conditions under which retirement account holders can access their retirement funds, and generally make it easier for employees and employers to establish and contribute to retirement accounts. The purpose of this article is to cut through the noise and focus on the provisions and planning considerations most relevant to our clients.
Required Minimum Distributions
Effective immediately, the starting age for Required Minimum Distributions (RMDs) is pushed back from age 72 to 73 for people born between 1951-1959, and to age 75 for people born in 1960 or later.
- Planning Note: Those turning 72 this year (born in 1951) will get a year of reprieve from taking RMDs. Those who have already started taking RMDs will continue to do so unchanged.
- Planning Opportunity: These later start ages create additional opportunities for annual tax planning. Clients who will be pushed into higher tax brackets because of RMDs may benefit from accelerating income into these additional RMD-free years when taxes can be paid at lower rates.
401(k) Catch-Up Contributions
Those over age 50 can still make additional contributions to their 401(k) plans, known as “catch-up” contributions. In 2023, that amount is $7,500. SECURE 2.0 makes the following changes:
- Beginning in 2024, employees earning more than $145,000 are required to make catch-up contributions on a Roth-basis. They are no longer able to make pre-tax, traditional catch-up contributions.
- Planning Opportunity: High income earners will no longer receive a tax deduction for their catch-up contributions; however, it remains a valuable way to save for retirement because it is better to have retirement dollars saved in a Roth account than a brokerage account. Assets in a Roth account grow tax-free for life. Assets in a brokerage account are subject to taxes on income and capital gains.
- There is a new, special catch-up contribution age category that will go into effect in 2025 which allows plan participants between ages 60-63 a higher catch-up contribution of $10,000. This amount is adjusted for inflation annually.
Impact on Roth Assets
The SECURE Act 2.0 greatly expands the availability and flexibility of Roth assets:
- Employer contributions to 401(k)s are now eligible for Roth treatment (starting 2023).
- Planning Note: The contributions are included in gross income. This provision only applies to matching and non-elective contributions, not profit-sharing contributions.
- Roth SIMPLE IRA and Roth SEP-IRA plans can now be opened (starting 2023).
- 529-to-Roth IRA transfers: Beginning in 2024, you can transfer up to $35,000 of 529 funds to a Roth IRA. There are still many unknowns about the flexibility and limitations of this strategy, which won’t be settled until regulations are issued by the IRS. For now, it seems clear that the 529 account must be in existence for 15 years to qualify and that only contributions that have been in the 529 account for more than five years are eligible to be transferred. Furthermore, transfers to the Roth IRA are subject to annual IRA contribution limits.
- Planning Opportunity: This could become an interesting estate and retirement planning opportunity for parents or grandparents who are looking to jump start a child’s retirement savings or ensure that excess 529 contributions get used.
Other Retirement Plan Provisions
- There are many new exceptions to the 10% early withdrawal penalty from retirement accounts, but they only apply to small subsets of the population. For example, private-sector firefighters over age 50, those with 25+ years of service with the same company over age 50, people in disaster areas, people with terminal illness, victims of domestic abuse, etc.
- There are several other opportunities to access retirement funds during times of need also included in SECURE 2.0, but the amounts are generally small, or in the case of the new Emergency Savings Account, not eligible for highly compensated individuals (defined as a greater than 5% owner or earning more than $135,000 compensation).
Strategies Not Impacted by the SECURE Act 2.0
It is also important to note what didn’t make it into SECURE 2.0 since there were many tax proposals under consideration during 2022.
- The starting age for Qualified Charitable Distributions (QCDs) remains at age 70.5.
- Backdoor and Mega Backdoor Roth contributions are still permitted.
- Roth conversions remain available to all. There are no income limitations.
- Retirement account owners are not required to distribute assets from their account if it exceeds a certain balance.
- There is no change to the $10,000 cap on deducting state and local taxes, the so-called “SALT” limitation.
- There are no restrictions on Qualified Small Business Stock (QSBS), nor any changes to the taxation of carried interest.
As always, please reach out to your advisor if you’d like to discuss how the provisions and planning opportunities in the SECURE Act 2.0 may be relevant to you.
For the full official summary, read more here.