SECURE ACT 2.0: What You NEED to Know
In 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed. 3 years later, the Act has been updated, hence SECURE Act 2.0. The following contains many of the highlights. In future content, we will dive deeper into some of these items. For now, here is a 30,000-foot view of the bill hoping to deliver greater retirement security to American workers.
Roth Changes
Elimination of RMDs for Roth money in qualified employer plans (effective 2024)
In the past, Roth assets inside a qualified retirement plan (i.e. 401(k) or 403(b)) were subject to required minimum distributions. Starting in 2024, they will not be subject to those RMDs.
Planning opportunity: this will impact retirement income planning. Roth assets can continue growing for a longer time (as has always been the case if rolled into a Roth IRA)
Small business plans now have more Roth availability
SIMPLE IRAs and SEP IRAs, which are small business retirement plans, are now eligible to utilize after-tax Roth contributions. Before January 1st, only pre-tax contributions were allowed.
Planning opportunity: this is a HUGE deal for any small business owners/employees that have wished to make Roth contributions but have been ineligible through their plan.
Employer matching can now be made as Roth
Employer matching in qualified plans has always been pre-tax. This is going to change and employer matching can now also be towards Roth. These Roth matching funds must not be subject to any vesting. This is a change that will take time to be implemented due to logistical challenges.
Planning opportunity: if you’re partial to accumulating Roth assets, this is immensely valuable. Having an employer match as Roth can help you accumulate future tax-free funds quickly.
Mandatory Roth for catch-up contributions for high-wage earners
This is a huge deal for high earners investing in 401(k), 403(b), and 457 plans. It does not impact IRAs or SIMPLE plans. If you earned over $145k in your previous calendar year and are still using the same employer retirement plan, any catch-up contributions you make will need to be of the Roth variety. Say you max out your 403(b), including catch-up because you're over 50, in 2023 that would result in $7,500 being after-tax when before you could do so pre-tax. This needs to be a consideration when planning your taxes for the year.
Planning opportunity: Do you need to adjust your withholding because you’re now making after-tax contributions that were previously always done pre-tax? Accumulating more after-tax assets can also impact your legacy planning.
Updates to Required Minimum Distributions (RMDs)
RMDs pushed back…again
Required minimum distributions have been pushed further back. The original SECURE Act moved the age from 70 ½ to 72. Now, if you reach age 72 after December 31, 2022, and age 73 before January 1, 2033, your RMD age is 73. If you turn 74 after December 31, 2032, your RMD age is now 75. Of note, if you were required to take an RMD before 2020, you must continue taking them.
Planning opportunity: Later RMDs can have many planning opportunities. Among them, more time to make Roth conversions. Also, retirement income planning should be adjusted for these new RMD ages.
The qualified charitable distributions maximum is increasing
The new RMD changes do not impact the age to make qualified charitable distributions (or QCDs). They remain available at age 70 ½. However, there are some adjustments to QCDs. The maximum annual QCD will be indexed for inflation. That’s been a long time coming, as the current maximum of $100k hasn’t changed for over 15 years. Inflation indexing starts in 2024.
Planning opportunity: if you’ve already planned on making QCDs, the new higher maximum can mean giving even more money, leaving a bigger impact.
Retirement Plan Changes
IRA catch-up contributions indexed for inflation
The IRA catch-up contribution limit for those over age 50 has been $1,000 for over 15 years. Effective in 2024, that will now adjust with inflation in increments of $100. The increments of $100 could make it a little wonky on how much the limit increases annually, but increases are a nice development.
Planning opportunity: If you are trying to maximize IRA contributions, it never hurts to have a higher limit. It's important to know the contribution limit each year and to adjust your contributions accordingly.
Employer Retirement Plan Catch-Up Changes
In 2025 and beyond, catch-up contribution limits for those ages 60, 61, 62, and 63 at year-end will see catch-up limits increased to the greater of $5k or 150% of the regular SIMPLE catch-up contribution (indexed for inflation). The language here could use some clarity before 2025 but this could amount to an additional $10k+ in catch-up contributions. But here’s the catch.. they can only be Roth contributions!
Planning opportunity: Potentially higher catch-up limits can be a great way to accumulate wealth. This can be especially powerful to anyone who got started later and wants to play catch-up (pun intended). This will be another reason to do some tax planning because the Roth nature of these contributions needs to be considered to avoid a surprise tax bill.
Linked Emergency Savings Accounts
The bill introduced the idea of a linked emergency savings account. It is meant to be a way to build an emergency fund via salary deferral. The idea is that many people may struggle to build up a savings cushion without the salary deferral option. I like the idea, but the contributions must cease once the contribution amount hits $2,500. This seems very low to me. But it’s at least a good start to an emergency fund.
These aren’t going to be standalone accounts like checking/savings but will be linked to an existing employer retirement plan. Also, it is not available for highly-compensated employees. Distributions would be allowed once per month, with no fees on at least the first 4 distributions each year. The distributions would be tax and penalty-free.
Planning opportunity: If you’ve had some trouble establishing an emergency fund, this can be a good way to have “forced savings” via payroll deferral.
Changes that Impact Longer-Term Planning
Post-Death Option for Surviving-Spouses
The original SECURE Act changed how beneficiaries can handle inherited assets. The SECURE Act 2.0 introduces a new wrinkle. If you inherit an IRA, a spouse can elect to be treated as the deceased spouse. This would mean RMDs for the surviving spouse would be delayed until the deceased spouse would have reached RMD age. If the surviving spouse dies pre-RMD age, the beneficiaries will be treated as if they were the original beneficiaries (HUGE deal). Those beneficiaries can stretch out RMDs and wouldn’t need to deplete IRA assets over 10 years, as they would before this legislation.
The details are still being worked out on this election. This will be a big topic to follow as it has huge legacy implications.
Planning opportunities: If a surviving spouse has significant assets and the deceased spouse was younger, delaying RMDs can you more time to convert pre-tax assets to Roth to potentially save money on taxes. If you don’t need the money and want to maximize your bequest to heirs, keeping that stretch option available to them on qualified assets is a big deal. Less of their inheritance will be eaten into by Uncle Sam.
Student Loan Debt Matching
No, employers won’t be paying down your student loans. However, starting in 2024, employers can "match" employee student loan payments with matching payments to a retirement account. This is a great new option. No longer will many employees have to choose between investing for their future or paying down student loans, they can do both!
Planning opportunity: If a company offers a 5% match, then you may be able to pay down your student loans up to that 5% and your employer will be putting money into your retirement plan while you're paying down loans.
529-to-Roth IRA Transfers
Beginning in 2024, some individuals can move 529 plan money directly into a Roth IRA. Now, this has many different rules that have to be met. Roth IRAs must be in the name of the beneficiary of the 529. Normally, Roth IRA contributions require earned income, so I’m hoping that the earned income requirement would be waived for anyone using this strategy (many students don't have earned income). The 529 must be maintained for 15 years (best to open as soon as your child is born!). Contributions from the past 5 years are ineligible.
How much can be moved? The annual limit will be limited to the Roth IRA limit for that year less any ‘regular’ IRA contributions made for that year. This means you can’t double dip and max out regular contributions and then max out this 529 transfer on top of it. The lifetime maximum that can be moved is $35k. There will be no income limitations like the normal modified adjusted gross income phaseout on regular Roth IRA eligibility.
Planning opportunities: Many clients have concerns about what happens if their future student gets a great scholarship. This option would allow you to kickstart his/her retirement savings via transfers over a few years. As of now, it doesn’t appear there are any rules about changing beneficiaries. This will be something to follow. Potentially, you could transfer funds to the student’s Roth IRA and then change beneficiaries and do it again with someone else (even yourself!)
There are other highlights, like the easing of restrictions on accessing funds during an emergency, a once-per-year small emergency withdrawal exception, a significant reduction of the RMD penalty, and much more. The planning opportunities are endless. We will be following closely as details are made available on these items.
Written by Nick Vail, CFP®