Near the end of last year, the Consolidated Appropriations Act of 2023 was passed. This large spending bill included a retirement bill known as the SECURE Act 2.0. This retirement bill is wide-ranging, covering areas such as retirement account contributions, education savings, and charitable giving, to name a few. In this post, we highlight five key parts of the bill that may present opportunities for your retirement planning.
Required Minimum Distributions (RMDs) Pushed Back
With the original SECURE Act in 2019, the starting age for RMDs was pushed back from 70 ½ to 72. Now the starting age is being pushed back further to 73 starting in 2023 and then to 75 starting in 2025. Thus for those turning 72 in 2023, they do not need to take an RMD this year.
For those able to delay taking distributions from their retirement accounts, they have a longer window to potentially lower their taxable income. This change may provide opportunities to do additional Roth conversions or keep income down to lower Medicare premiums.
529 Plan to Roth IRA Transfers
When contributing to a 529 plan to help with college savings for a child or grandchild, one potential concern has been what will happen to the funds if the beneficiary does not use them all for education expenses. One feature of the SECURE Act 2.0 provides a potential solution. Under this bill, individuals may now move 529 plan assets directly into a Roth IRA. This would allow a beneficiary to turn extra 529 funds into tax-advantaged retirement savings.
However, there are certain conditions and requirements that must be met to be able to do this transfer, including:
- The Roth IRA which the funds are being transferred to must be in the name of the beneficiary of the 529 plan.
- Any contributions to the plan during the last five years cannot be moved to a Roth IRA.
- The 529 plan must have been in place for 15 years or more.
- The annual limit for how much can be moved from a 529 plan to a Roth IRA is equal to the IRA contribution limit for the year minus any contributions to traditional IRA or Roth IRAs made that year.
This change makes 529 plans an even more attractive education savings option.
Qualified Charitable Distribution Limits to be Increased
For those who are charitably minded, qualified charitable distributions (QCDs) allow individuals to make tax-free distributions from their IRA to qualified charities. To qualify, the distribution must go directly from the IRA to the qualified charity.
As of this year, QCDs cannot exceed $100,000 per person and count toward the individual’s RMDs for that year. Even with the increase in the age for starting RMDs, the age when you may start doing QCDs remains at 70 ½.
With the passage of the SECURE Act 2.0, the maximum annual QCD amount will now indexed to inflation. This change will start in 2024.
Roth Account Changes
The SECURE Act 2.0 includes numerous changes to expand the use of Roth-type accounts. These include:
SIMPLE IRAs and SEP IRAs will now be permitted to have a Roth option. Previously both of these accounts could only be pre-tax.
The Act also includes new rules around catch-up contributions in workplace retirement plans including 401(k) and 403(b) plans. Starting in 2024, catch-up contributions from high earners (those with wages exceeding $145,000 in the previous calendar year) will be designated as Roth contributions. Thus, such contributions will not be deductible against ordinary income in the year made.
Another change is that starting in 2024, there will not be RMDs for Roth accounts in qualified employer plans. This is already the case for Roth IRAs. With the passage of the Act, this now applies to accounts such as Roth 401(k) plans and Roth 403(b) plans.
Changes to Catch-Up Contribution Limits
The year-to-year changes in plan contribution limits have occurred every so often since catch-up contributions were introduced in 2002. However, going forward, IRA catch-up limits will be tied to inflation and changes will be in increments of $100.
For employer retirement plans such as 401(k) and 403(b) plans, the catch-up contribution limit will be increased in 2025 for participants ages 60-63. The catch-up contribution limit for this age group will be increased to the greater of $10,000 or 150% of the regular catch-up amount. This will allow savers in their early 60s to put away more for retirement.
Takeaways
The SECURE Act 2.0 includes many changes to the retirement planning landscape. However, this complex legislation presents numerous opportunities and strategies to implement to improve your financial picture. If you would like to talk with a financial planner about how the SECURE Act 2.0 may provide opportunities to improve your retirement planning, please schedule a call with us here.
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