January 1, 2023

Retirement SECURE Act 2.0 – How does it affect me?

Congress, on December 23, 2022, passed a retirement bill known as SECURE Act 2.0. Here's how it may offer retirement planning opportunities for many.

Nearly three years to the day after the 2019 passing of the SECURE Act brought sweeping changes to the retirement planning landscape, Congress, on December 23, 2022, passed a retirement bill known as SECURE Act 2.0. So, how does the new bill affect you? Read below for some highlights that may offer retirement planning opportunities for many.

Required Minimum Distribution (RMD) Age

Current law dictates that those attaining age 72 have annual required minimum distribution amounts from their traditional IRAs and 401k retirement plans. Effective January 1, 2023, the age at which RMDs begin will be age 73 for those born in 1951 – 1959. In addition, those born in 1960 or later will now begin their RMDs at age 75.

SECURE Act 2.0 Phased-in Timeline for RMD Beginning Ages

Birth YearAge at Which RMDs Begin
1950 or earlier72 ( 70½ for those who turned 70½ prior to 2020
1951 – 195973
1960 or later75
  • Planning Opportunity – Changing the age at which RMDs are required definitely helps retirees defer income and growth in their tax deferred accounts, helping to save taxes and remain below the thresholds for higher Medicare B/D premiums and possibly enables an extra year of Roth conversion opportunities.

Qualified Charitable Donations (QCDs)

QCDs enable retirees who are charitably inclined to gift a distribution from their pre-tax retirement account directly to a charity with the distribution counting towards meeting their RMD. The QCD is a NON-taxable distribution saving the income tax as well as lowering adjusted gross income (AGI) to potentially save on Medicare B/D premiums.

The SECURE Act 2.0 makes NO change to the 70½ age at which account owners may utilize the QCD. Of note, eligible use is determined by the day the owner reaches age 70½, not the calendar year in which they reach 70½.

Beginning in 2024, the annual maxing QCD allowed will be indexed for inflation up from the current $100,000 annual limit. In addition, beginning in 2023, QCDs can be utilized to fund Charitable Remainder Trusts (CRTs).

  • Planning Opportunity – Welcomed news that the 70½ age for eligibility for QCDs was not changed and new opportunities for funding CRTs! CRTs enable retirement account owners to fund their CRT via QCDs tax-free and then establish an income stream from the trust for their lifetime, with the remainder going to charity.

529 Account Transfers to Roth IRAs

A common concern of funding a 529 plan for loved one is, “What if they end up not going to college and I’m stuck with these funds in the 529?” The SECURE Act 2.0 provides additional flexibility beginning in 2023.

Portions of 529 plan balances will soon be eligible for tax-free transfer to Roth IRA accounts in the name of the same beneficiary. However, there are several limitations:

  • The 529 plan must have been maintained for a minimum of 15 years;
    • The Roth IRA receiving the funds must be in the name of the beneficiary of the 529 plan;
    • Any contributions to the 529 plan within that past five years (and the resulting earnings on those contributions) are NOT eligible to be transferred to the Roth;
    • The annual transfer limit to the Roth is the IRA contribution limit for that year, less any “regular” traditional or Roth IRA contributions that are made for that year;
    • The maximum amount that can be transferred during an individual’s lifetime is $35,000;
    • Transfers into Roth are NOT subject to income limitations of normal Roth contributions.
  • Planning Opportunity – The legislative text leaves a lot to be desired for clarity, but it seems to provide several planning opportunities.

It seems the intention is that a new 15-year “seasoning” period will NOT be triggered by changing the beneficiary. Therefore, parents who have diligently saved in one 529 plan and who have multiple children could transfer the $35k limit for one child, change the beneficiary, and do the same for a second child.

Given the more favorable tax treatment and flexibility of Roth accounts versus 529 plans, a dominant planning strategy looks to be to NOT deplete all of the 529 plan funds for college expenses and reserve some for Roth transfers once the beneficiary has earned income.

401k Employer Roth Match and Catch-up Contributions

Beginning in 2023, employees may elect to have their employer 401k matches directed to 401k Roth, but the employee will have to pay the taxes on those Roth matches. It will take some time for 401k administrators to implement this new option, so look for opportunities later in 2023.

  • Planning Opportunity – With federal income tax rates historically very low and a sunset coming in 2026 pushing rates higher, this could be an optimal time for paying the tax now at lower rates to get employer matches into the tax-free Roth account. In addition, if you anticipate your income escalating in future years or decades (i.e. someone early in their career), selecting Roth employer match could be optimal due to lower income tax rates now.

Beginning in 2024, certain high-income tax payers will have mandatory “Rothification” of catch-up contributions within 401ks and qualified plans. For participants whose wages for the preceding calendar year, from the employer sponsoring the plan, exceed $145,000 (adjusted for inflation), catch-up contributions must be designated Roth.

  • Planning Opportunity – With federal income tax rates historically very low and a sunset coming in 2026 pushing rates higher, contributing catch-up funds to a Roth account may not be a bad option. When rates move higher with the sunset in 2026, it could make sense to forgo the catch-up and contribute to other retirement accounts or taxable brokerage accounts.

While these four highlights included in the SECURE Act 2.0 are assessed most likely to be relevant to our reader, they are not complete. As you can see, meeting with your wealth advisor to discuss how these specifically affect your situation would be prudent!

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