The Changes to Retirement Rules in SECURE Act 2.0

Colin Gerrety, CFP®, CIMA®
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In late December 2022, Congress passed a massive omnibus spending bill, dubbed “SECURE Act 2.0,” that included several big changes to retirement plans.

This legislation comes in the wake of the original SECURE Act from three years ago (SECURE = Setting Every Community Up for Retirement Enhancement). The original Act raised the age at which retirees must start drawing from their retirement accounts from 70 1/2 to 72. It also curtailed the “stretch IRA,” changing how retirement accounts can be inherited.

While this article won’t cover every provision in the several thousand pages of legislation, here’s what investors should know.

What’s in SECURE Act 2.0?

Required Minimum Distribution (RMD) Changes

The new law raises the RMD age to 73 this year, and it will go up to age 75 in the year 2033. This means if you were born between 1951 and 1959, your relevant age is 73. If you were born in 1960 or later, your relevant age is 75. This is the age by which you are required to start taking distributions from retirement accounts like IRAs, 401(k) plans, and 403(b) plans.

Different rules still apply if you continue working for the employer sponsoring your retirement plan past your RMD age, and there were no big changes to the RMD rules for inherited retirement accounts.

Roth Changes

There are a number of changes to Roth retirement accounts that are listed below. As a refresher, post-tax Roth contributions involve no tax deduction upfront for contributions, but the benefit is potential tax-free distributions later. This is in contrast to Traditional retirement contributions, which generally involve an upfront tax deduction but are taxed upon withdrawal.

  • Starting in 2024, high wage earners (wages over $145,000 in the prior year from the employer sponsoring the plan) will no longer be allowed to make pre-tax catch-up contributions to 401(k) and similar accounts. Instead, those contributions must be Roth contributions. This doesn’t apply to normal 401(k) contributions – only catch-up contributions for those over age 50.
  • Starting in 2024, Roth accounts in qualified retirement plans like 401(k)s will no longer have Required Minimum Distributions (RMDs). This is similar to how Roth IRAs are treated now, but the RMD relief is expanded to include other types of plans like 401(k)s, 403(b)s, and the Federal Thrift Savings Plan (TSP).
  • SEP Roth IRAs are now allowed, while prior rules only allowed for pre-tax SEP IRAs.
  • Starting in 2024, beneficiaries of 529 college savings plans can roll over a portion of their 529 balance into a Roth IRA tax-free, subject to the normal annual Roth contribution limits ($6,500 this year for those under 50). This is allowed only for 529 plans that have been in existence 15+ years, and contributions from the past 5 years cannot be rolled over. To prevent abuses, the new rule is also subject to a lifetime limit of $35,000 per beneficiary; however, this option will likely prove quite useful for old 529 accounts with a leftover balance after college.

Funky Catch-Up Contributions

Starting in 2025, individuals aged 60-63 will be able to increase their catch-up contributions into employer retirement plans like 401(k)s to the greater of $10,000 or 150% of the regular catch-up contribution amount for savers aged 50+ ($7,500 in 2023). During this short age window, savers can likely make $11,250+ in additional contributions starting in 2025. What’s odd is that the increase only applies to individuals in the year they turn 60, 61, 62, or 63. In any other year the normal catch-up limits apply.

Beneficiary Rule Updates

The new law expands the options for IRA beneficiaries who receive an account from their deceased spouse. In addition to treating the account as their own or remaining a beneficiary of the inherited IRA, spouses can now elect to be treated as if they were the deceased spouse themselves and take distributions based on the decedent’s life expectancy rather than their own. This could be useful for beneficiaries who are older than their deceased spouse due to the lower age-based distribution requirement.

Miscellaneous

SECURE Act 2.0 also includes a multitude of miscellaneous provisions like:

  • Indexing to inflation the $100,000 maximum on Qualified Charitable Distributions (QCDs) from IRAs.
  • Indexing IRA catch-up contributions to inflation.
  • Extending the deadline for Solo or Individual 401(k) accounts to be created up until the individual’s tax-filing deadline (without extensions) rather than 12/31 of the prior year.
  • Reducing the penalty for missed RMDs from 50% down to 25%. If the missed RMD is corrected during a specific “correction window,” the penalty is further reduced to only 10%.
  • Allowing employers to match student loan repayments as 401(k) contributions.

This list is by no means all-inclusive. Again, it is a huge bill with tons of miscellaneous provisions, many of which will phase in over the coming years. Plus, there are many details behind each of these bullet points above. Prior to acting upon any of these new provisions, please strategize with your CPA and your financial advisory team.

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