The SECURE Act 2.0 (short for “Setting Every Community Up for Retirement Enhancement”) was included in the omnibus spending bill that was recently signed into law. This legislation aims to build upon the original SECURE Act to improve and expand upon the retirement savings options available to Americans.
There are wide-ranging changes included in the SECURE Act 2.0 that have important implications for our retirement planning. Here are a few highlights from the bill that we’ll want to plan around.
Much of this is new, so we’re going to do our best to summarize key takeaways as accurately as possible. Of course, please consult with your financial advisor and CPA before taking any action related to any of these changes.
RMD Age Increases Again
A key provision of the SECURE Act 2.0 is a change to the required minimum distribution (RMD) age. Currently, thanks to SECURE Act 1.0, individuals must begin taking RMDs from their traditional individual retirement accounts (IRAs) and employer-sponsored retirement plans, such as 401(k)s, at age 72.
However, the SECURE Act 2.0 increases the RMD age to 73 or 75, depending on the year you were born. This means that retirees could have an additional three years before they are required to start taking money out of their retirement accounts.
This change is certainly beneficial for those who want to continue saving for retirement for as long as possible and don’t need the money in their accounts right away. It’s also beneficial for those who plan to employ strategic Roth IRA conversions — this new law increases the “gap years” between retirement and RMD age.
Increasing the RMD age could also be helpful for those who are still working and earning income past age 72, as they may not need the money from their retirement accounts to meet their expenses.
Roth IRA Transfers from 529 Plans
Under the SECURE Act 2.0, individuals would also be allowed to transfer funds from a 529 college savings plan to a Roth IRA, tax-free. This provision aims to give people more flexibility and choice in how they save for different types of expenses, such as higher education and retirement.
Currently, 529 plans are specifically designed for saving for higher education expenses, such as tuition, fees, and certain room and board costs. They offer tax advantages, including the ability to withdraw funds tax-free for qualified education expenses. However, before now, they could only be used for education-related expenses.
By allowing individuals to transfer funds from their 529 plans to a Roth IRA, the SECURE Act 2.0 aims to give people more options for saving and investing for multiple financial goals. It will be especially helpful for those who have saved more than they needed for higher education expenses and want to redirect those funds toward retirement savings.
It’s important to note that there are some restrictions and limitations on this provision. For instance:
- The 529 plan must have been maintained for 15 years or longer,
- Any funds contributed over the last 5 years are ineligible,
- No more than the annual IRA contribution limit can be moved in any given year, and
- The lifetime maximum amount an individual can move is $35,000.
Catch-Up Contribution Changes
The SECURE Act 2.0 includes a provision that will increase the catch-up contribution limit for certain retirement accounts, starting in 2025. Catch-up contributions are additional contributions that individuals can make to their retirement accounts once they reach a certain age, and are designed to help people save more for retirement if they haven’t been able to save as much earlier in their career.
Under the SECURE Act 2.0, the catch-up contribution limit for 401(k), 403(b), and most 457 plans would be increased from $6,500 to the greater of:
- $10,000, or
- 150% of the plan’s regular catch-up contribution.
However, this increased catch-up limit is only for participants between ages 60 and 63, which is really strange. Do 64-year-olds not need to save too?
It’s best to think of these as turbo-charged catch-ups for people in their early 60s. The regular catch-up limits for people in their 50s will remain in place.
With the SECURE Act 2.0, employer plan catch-up contribution limits, along with normal IRA catch-up contribution limits, will begin to be indexed for inflation going forward.
Keep in mind that there are limits on how much you can contribute to your retirement accounts in total each year, so don’t forget to plan with your financial advisor and CPA to maximize your catch-up contributions.
Changes for Roth Accounts
The SECURE Act 2.0 includes a number of provisions that could potentially affect Roth accounts. Some key changes that the Act would make to Roth accounts include:
- Elimination of RMDs for Roth accounts in qualified employer plans. (Think 401(k), 403(b), 457, and other employer plans.) RMDs were never required for Roth IRAs that aren’t inherited.
- Creation of SIMPLE and SEP Roth IRAs. Before the SECURE Act 2.0, SIMPLE and SEP plans could only have pre-tax funds.
- Employer matches / contributions are now eligible for Roth accounts. Of course, these employer contributions would be included in the employee’s income.
Overall, the changes proposed by the SECURE Act 2.0 could give individuals more flexibility and options for saving and investing their money in Roth accounts.
Other Changes of Note
As we continue to unpack all that’s included in the SECURE Act 2.0, there are a few other high points worth mentioning:
- Solo 401(k) plans can finally make retroactive deferrals in their first year (just like SEP IRAs).
- Qualified Charitable Distribution (QCD) limits are now indexed for inflation.
- The consequences of making retirement account mistakes have been reduced.
- Emergency access to retirement funds before age 59-1/2 has been greatly expanded.
- Many more changes that we will continue to unpack as 2023 unfolds.
One last thing to mention — there’s nothing in the SECURE Act 2.0 that limits the use of back-door Roth IRA contributions… Just throwing that out there…
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