Secure Act 2.0
On December 23rd, 2022 the U.S House of Representatives passed an omnibus spending bill that includes the much-anticipated SECURE Act 2.0. The original SECURE Act passed in December 2019 and brought a wide range of changes, most notably extending the RMD age to 72, and ending the ‘stretch’ IRA. The original SECURE Act is what brought our now dreaded “10-YR Rule” for inherited IRA accounts.
Although SECURE Act 2.0 doesn’t have the widespread changes that the original SECURE Act brought, there are a few updates that will have an impact for investors. The following is a brief outline of the major provisions of SECURE Act 2.0.
Required Minimum Distributions (RMDs) Pushed Back
The original SECURE Act extended Required Minimum Distributions (RMDs) for retirees from the age of 70.5 to age 72 for those turning 70.5 or older in 2020 or later. SECURE Act 2.0 further pushes back the age at which RMDs must begin. For people who turn 72 in 2023 or later, RMDs will be pushed back by 1 Year compared to current rules. For those who turn 74 after December 31, 2032, the new RMD age will be 75.
This change is generally going to be neutral to positive for retirees. If you are already taking distributions to fund retirement, it will not have an impact on you. If, on the other hand you are doing ROTH conversions in low income years, or RMDs will have a significant tax implication for you, this will at least buy a little time.
Changes to ROTH Accounts
SECURE Act 2.0 has several significant changes for various types of ROTH Accounts. Some welcome news is that the changes do not include eliminating Back-Door Roth or Mega Roth planning strategies. You can read our Mega ROTH article here. In general, many of these changes are set up to provide additional options for savers to get more money in to Roth Accounts.
Creation of SIMPLE Roth IRAs and SEP Roth IRAs
SIMPLE and SEP IRA accounts have been an easy way for small business owners to establish retirement plans for themselves and their employees. This change will now allow business owners to set up and elect to contribute to Roth Accounts for their SEP and SIMPLE plans. While this is a great way for employers to contribute a large amount into ROTH accounts, it would eliminate the tax deduction that currently comes with SEP contributions, as all amounts contributed would be included as income to the taxpayer. It will be important to consult with you tax advisor to compare the pros and cons if a SEP or SIMPLE Roth IRA is right for your business.
Elimination of Roth Employer Plan RMDs
Starting in 2024, RMDs from Roth accounts in qualified employer plans (Roth 401k, Roth 403B, Roth 457) will no longer be required. Currently, regular Roth IRA’s are not subject to RMD’s, however employer plans are subject to regular RMD rules. While the distributions from Roth accounts are always tax free, this was previously an unnecessary rule that required retirees to take money out of their Employer Roth accounts in retirement. This rule is a welcome change and makes Employer Roth plans even more advantageous for investors.
Employer Plan Contributions Eligible for Roth Treatment
Employers will now be allowed to deposit matching and/or nonelective contributions to employees’ Roth Plan accounts. The amount contributed will be included in the employee’s income in the year of the contribution. Until now, all employer contributions to 401k and 403B plans had to go into a Regular 401k plan, even if the employee was making Roth contributions. This allows employees to save more money into their Roth plans, allowing them to grow tax free, and not be subject to RMDs at any point.
Catch-Up Contributions must be in Roth for High Earners
Current law allows catch-up contributions for savers over 50 to their IRAs, Roth IRAs, 401ks, 403bs and 457 plans. Starting in 2024, for those employees making over $145,000 in wages in the previous year, their catch-up contributions can only be designated Roth Contributions. Important to note, if an employee plan does not allow a Roth option in their plan, then no catch contributions would be allowed for employees.
Increased Catch Up Contributions for Participants in their Early 60’s
Effective in 2025, catch up contributions for employees who are 60, 61, 62 and 63 will have their plan catch up contribution increased to the greater of $10,000 or 150% of the regular catch up contribution amount.
529 to Roth Transfers
Perhaps the most widely covered aspect of Secure Act 2.0 has been the 529 to Roth transfer. Starting in 2024, you are eligible to move funds from a 529 account into a Roth IRA account. Until now, any funds that were not used for college in a 529 account were effectively “stuck” there and could only be taken out with penalties and taxes. See our piece on College Savings Here. This new provision gives new options for those funds, however the conditions that must be met are very strict
- The maximum that can be moved in an individual lifetime is $35,000
- The Roth IRA and beneficiary of the 529 must be the same
- The 529 plan must have been maintained for 15 years or more
- Any contributions made in the past 5 years are ineligible to move to a Roth IRA
- The annual amount that can be moved into a Roth IRA is the same as the annual Roth Contribution limit for the year ($6,500 in 2023)
So, while it may sound like a great idea, the restrictions make facilitating any transfer very cumbersome.
There are many other updates to the SECURE ACT in SECURE ACT 2.0 but these are the ones that will largest impact to most people. While these new changes are intended to “simplify” the rules, they often make things more complicated. With that said, these changes can introduce new planning opportunities. Please reach out to us to see if these changes impact you, and how we may be able to take advantage of SECURE Act 2.0.
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