What Does SECURE Act 2.0 Mean for You?
By Jake Preston
Retirement emerges again as a bi-partisan issue in Congress. SECURE Act 2.0 was signed into law by President Biden on December 29, 2022 as part of a larger spending package passed by Congress. If you remember, the original SECURE Act passed in 2019 and included some significant changes for retirement investors. While SECURE Act 2.0 does not include drastic changes (such as the elimination of the stretch IRA included in the original SECURE Act) the sheer volume of changes in the law make it critical to understand.
The bill is over 350 pages long, which is tough to cover in a blog post! While by no means exhaustive, below are what we believe to be the most significant provisions in SECURE Act 2.0 that have the potential to impact your financial picture.
Beginning Age for RMDs Pushed Back Again
The original SECURE Act moved the starting age for RMDs from qualified accounts (e.g., Traditional IRAs, 401(k)s, 403(b)s, etc.) from 70.5 to 72. SECURE Act 2.0 further pushes back the starting age at which RMDs must begin. For those born between 1951 and 1959, the age at which RMDs begin is now 73. For those born in 1960 or later, the RMD age is pushed back to 75.
Pushing back the starting age for RMDs is mostly a positive change since further delaying starting withdrawals allows for the implementation of advanced planning techniques like Roth conversions. It is important to begin planning for RMDs in advance so as to avoid a larger-than-expected tax liability.
RMDs No Longer Required from Roth Accounts in Employer Retirement Plans
Beginning in 2024, SECURE Act 2.0 eliminates RMDs for Roth accounts in qualified employer plans. Under previous law, while RMDs were not required from Roth IRAs, employer plan Roth accounts, such as Roth 401(k)s, Roth 403(b)s, governmental Roth 457(s), and the Roth component of the TSP were subject to the “regular” RMD rules.
Good news: for those who have already started taking RMDs from an employer plan Roth account, the language of SECURE Act 2.0 indicates that participants can simply stop taking those distributions in 2024.
Reduction of the 50% Penalty for an RMD Shortfall
Effective in 2023 and future years, SECURE Act 2.0 reduces the 50% penalty for an RMD shortfall to 25%. However, the penalty is further reduced to 10% if the shortfall is corrected within a certain period of time.
529-to-Roth IRA Transfers
This provision caused the most headlines about SECURE Act 2.0. Section 126 allows individuals to move 529 plan money directly into a Roth IRA beginning in 2024 provided certain conditions are met. Those conditions include the following:
- The Roth IRA receiving the funds must be in the name of the beneficiary of the 529 plan (not the owner who may be the parent or grandparent).
- The 529 plan must have been in existence for at least 15 years.
- Any contributions (and earnings on those contributions) within the last 5 years are ineligible for transfer.
- The annual transfer limit is the IRA contribution limit for the year, less any “regular” IRA contributions made that year.
- The maximum lifetime amount that can be transferred during an individual’s lifetime is $35,000.
The thought behind allowing this type of transfer is to allow funds that were initially earmarked for education expenses to be redirected for retirement savings.
Creation of SIMPLE Roth IRAs and SEP Roth IRAs
SECURE Act 2.0 allows for the creation of both SIMPLE Roth IRAs and SEP Roth IRAs, effective January 1, 2023. Contributions to a SIMPLE Roth IRA or SEP Roth IRA would be included in the participant’s income. While participants in SIMPLE IRA and SEP IRA plans have possessed the ability to convert pre-tax amounts to Roth IRAs in the past, this provision allows for greater efficiency and eliminates the need for those conversions.
While this provision is already effective, it will take time for custodians, employers, and the IRS are able to implement the procedures and policies needed to establish these types of accounts.
Employers Can Now Make Roth Matching Contributions
Effective upon passage of the law, SECURE Act 2.0 allows employers to deposit matching and/or nonelective contributions to employees’ designated Roth accounts (e.g., Roth accounts in 401(k) and 403(b) plans). It is important to note that those amounts would be included in the employee’s income in the year of contribution.
Matching Provisions for Student Loan Payments
Effective beginning in 2024, employers will be able to amend their plans to allow employer matching contributions for amounts paid by participants toward their student debt.
IRA & Qualified Retirement Plan Catch-Up Contributions to be Indexed for Inflation
Since the passage of the Pension Protection Act in 2006, the IRA catch-up contribution for those over the age of 50 has remained at $1,000. It has not been adjusted for inflation. SECURE Act 2.0 allows the IRA catch-up contribution to be indexed for inflation, beginning in 2024. Inflation adjustments will be made in increments of $100, meaning the catch-up contribution will likely be $1,200 when it is effective in 2024.
Regarding employer plans, effective beginning in 2025, catch-up contributions for plans such as 401(k) and 403(b) will be increased for those who are age 60, 61, 62, or 63. The contribution limit will be increased to the grater of $10,000 (indexed for inflation) or 150% of the “regular” catch-up contribution amount for plans in 2024. The catch-up contribution is currently $7,500 for 2023.
The volume of changes resulting from the passage of SECURE Act 2.0 can be intimidating and highlight the importance of working with a financial planner equipped to help you navigate the ins and outs of these changes as well as to understand how they apply to your unique situation. If you would like to speak with an advisor at Beacon Wealth Consultants, you can contact us by either emailing email@example.com or calling (540) 345-3891.
Jake Preston, CFP® CKA® is a Christian financial planner in Roanoke, VA specializing in comprehensive financial planning and faith-based investing. In addition to serving clients, Jake is the Director of Advisory Services at Beacon Wealth Consultants where he oversees all aspects of financial planning for the company.