What’s in the SECURE Act 2.0?
In December of 2019 Congress passed a piece of legislation called the “Setting Every Community Up for Retirement Enhancement (SECURE) Act”. It was quite broad, impacting many areas of retirement planning. Some of the more notable areas impacted were the starting age for Required Minimum Distributions (increased to 72 from 70.5) and the way inherited IRA distributions would work. In December of 2022 Congress was at it again, passing the SECURE Act 2.0. Many of you have probably heard of this act, or at least about some of the changes that it is bringing about. Once again, it is extremely broad. While there is no way we could even begin to cover all of the changes, we wanted to call to your attention a few of the items that we have been hearing about and getting questions on the most.
Changes to Required Minimum Distributions
The Required Minimum Distribution (RMD) is the age at which you are required to begin drawing a prescribed amount from your retirement accounts each year. Once again the starting age for RMD’s has been increased. Effective immediately for 2023, the starting age for RMD’s is 73 for those born between 1951 and 1959. Beginning in 2033 the starting age for RMD’s will be 75. There are three groups we want to mention specifically:
- If you were 72 in 2022 or earlier then you have (or should have) already started your RMD’s. This change to the law does not impact you.
- For those of you who turn 72 in 2023 (meaning you had been planning to start RMD’s this year), you WILL NOT need to take your first RMD’s in 2023. You will begin your distributions in 2024. This means that, generally speaking, no individuals will have to start new RMD’s from their retirement plans in 2023.
- If the law doesn’t change before 2033, the last group who will start at 73 are those born in 1959, who will turn 73 in 2032. Those born in 1960 and later will start at age 75. However, they will not turn 75 until 2035. This means that, generally speaking, 2033 and 2034 will once again have no individuals required to start new RMD’s from their retirement plans.
Additional RMD Notes:
- Effective starting in 2023, the penalty for a missed RMD distribution is reduced from 50% to 25%. Furthermore, it is reduced to only 10% if the error is corrected within the ‘Correction Window’, which generally begins on January 1st of the following year and ends at the earliest of: The notice of deficiency being mailed to the taxpayer OR When the tax is assessed by the IRS OR The last day of the 2nd tax year after the tax is imposed.
- These changes do not impact Qualified Charitable Distributions (QCD’s), which are tax-free distributions from your IRA to public charities. These can still begin at age 70.5. If you are charitably inclined and are above 70.5 it is still possible that QCD’s could make sense for you even if your RMD’s do not start until a later date.
Changes to Employer Sponsored Plans
There were a number of changes made to Defined Contribution Employer Sponsored Plans (401(k)’s, 403(b)’s, SIMPLE plans and SEP plans). Highlights include:
- Beginning in 2023, SIMPLE and SEP plans may permit Roth accounts (allowing after-tax contributions with tax-free distributions in the future). The plan must be amended to allow such contributions, so if you are an employee with such a plan it may take some time before it is actually available to you. If you are an employer with such a plan, or a small-business owner who does not currently have a plan, it may make sense to explore whether a SIMPLE or SEP plan that allows for Roth contributions would enhance the value of your plan for you and your employees.
- Beginning in 2024, retirement plan participants who are making catch-up contributions (the additional contributions allowed for those over age 50) and whose wages are above $145,000 will be required to make their catch-up contributions as Roth contributions. This requirement will be waived if the plan does not allow for Roth contributions in general. Also note that this applies to employer plan catch-up contributions, not IRA catch-up contributions.
- Effective in 2024, the SECURE Act 2.0 creates a new “Emergency Savings Account” that can be linked to an employer sponsored plan. If such an account is offered in your plan you may choose to make salary deferral contributions into the savings account to build emergency savings while still receiving any matching funds the employer may offer. These accounts are limited to short-term/stable value holdings and are capped at $2,500.
- Beginning in 2024 an employer may amend their plan to allow employer matching for amounts paid by participants toward their student debt. If you or someone you know is working on paying down student debt, this provision could allow you to continue working on your debt paydown while still building your retirement savings through employer matching contributions.
Changes to 529 and ABLE Accounts
- Perhaps the changes that have gotten the most attention are the ones surrounding 529 College Savings Accounts. Up to this point, distributions from a 529 plan that were not used to pay for education were subject to income taxes plus a 10% penalty. Beginning in 2024 it is possible, within restrictions, to move 529 plan money directly into a Roth IRA. This has the potential to be very useful for college savers as it eliminates the concern of ‘What if I fund a 529 for my child and they later get a scholarship or decide not to go to college?’. The transfer restrictions include:
- The Roth IRA must be in the name of 529 plan beneficiary
- The 529 plan must have been maintained for 15 years or longer. It remains for the IRS to clarify whether a change in beneficiary triggers a new 15-year time frame. This is unfortunate as it is one of the first questions we often get when discussing this issue.
- Any contributions to the 529 in the previous 5 years are ineligible to be moved to the Roth.
- The amount that can be transferred in any year is limited to that year’s Roth contribution limit LESS any regular IRA or Roth contributions for that year (ie – you can’t fully fund a roth and also transfer funds from the 529 to the roth)
- The maximum amount that can be transferred is capped at a lifetime amount of $35,000.
- While not impacting as many people, a change to the rules regarding ABLE accounts could have a significant impact for some individuals and we wanted to mention it. Created in 2014, ABLE accounts allow individuals with disabilities to have a tax-free savings account that does not impair their ability to receive government assistance. In order to qualify to use an ABLE account, the individual must have become disabled prior to turning 26. The SECURE Act 2.0 changes this limit so that individuals must have become disabled prior to turning 46. Unfortunately this change is not slated to become effective until 2026. While the delay is somewhat frustrating, we do feel that this is a positive change nonetheless.
Of course, this is by no means an exhaustive list of the changes brought about by the SECURE Act 2.0. If you have questions on these or other changes we would be happy to discuss them with you. We wish you all a wonderful spring!