In the final days of 2022, a 4,000+ page document called the Consolidated Appropriations Act of 2023 was passed. It included a long-awaited retirement bill known as SECURE Act 2.0, which built upon the initial SECURE Act Bill passed in 2019. While the magnitude of the changes wasn’t the same, the number of changes were significant. Below is an executive summary of the important items with two of the biggest being pushing back the IRA Required Minimum Distribution (RMD) age AGAIN and making Roth or tax-free accounts more available. The last section is dedicated to what was NOT included in the bill, which will be a huge relief for many high-wage earners.
New Distribution Rules
RMD age will rise to 73 in 2023.
One of the major changes of the original SECURE Act was moving the Required Minimum Distribution (RMD) from IRAs from age 70.5 to 72. Now it gets moved back again. If you had to take an RMD last year, you will need to take one this year. However, if you were planning to take your first RMD this year because you are turning 72, you can actually wait another year to withdrawal. The graphic below shows a simplified timeline for distributions. Starting in 2033, the beginning RMDs won’t start until age 75.
Reduced RMD penalty.
The bill decreases the penalty for missed RMDs from 50% to 25%, and if the mistake is corrected in a timely manner, the penalty is further reduced to 10%.
Access to funds.
Retirement plan participants can now use retirement funds in an emergency without penalty or fees. For example, starting in 2024, an employee can get up to $1,000 from a retirement account for personal or family emergencies. Other emergency provisions exist for terminal illnesses and survivors of domestic abuse. I almost didn’t include this section because (1) it’s a small amount, and (2) one of the reasons you work with me is to ensure you don’t need to access these retirement funds for a reason other than retirement!
New Accumulation Rules
Three key parts:
- Starting January 1, 2025, investors aged 60 through 63 can make catch-up contributions to their employer retirement plan to the greater of $10,000 or 150% of the future (or normal) catch up amount. The numbers here are interesting as the current catch up amount is $7,500, and 150% of $7,500 is $11,250, which is already more than $10,000. They should have just written in 150% of the current catch up amount. This just goes to show that Washington truly likes creating complexity for no good reason.
- One more BIG caveat with catch up contributions is related to high-wage earners (individuals earning more than $145,000 annually). This states that any catch-up contribution must go to the Roth portion of the 401(k). This means that you will be taxed on the extra contribution today, yet all growth grows tax free.
- Catch up contributions to IRAs (which has only been increased once dating back to 2006) will now be indexed for inflation in $100 increments.
Beginning in 2025, the Act requires employers to enroll employees into workplace plans automatically. I think this is a great feature as it strongly encourages default savings though employees can choose to opt-out.
Student Loan Matching.
In 2024, companies can match employee student loan payments with retirement contributions. The rule change offers workers an extra incentive to save for retirement while paying off student loans.
Revised Roth Rules
529 to Roth Conversion.
Starting in 2024, individuals can roll a 529 education savings plan into a Roth IRA. Therefore, if your child gets a scholarship, goes to a less expensive school, or doesn't go to school, the money can get repositioned into a retirement account. However, there are some stipulations:
- The Roth IRA receiving the funds must be in the name of the beneficiary of the 529 plan.
- The 529 plan must have been maintained for 15 years or longer.
- Any contributions to the 529 plan within the last 5 years (plus the earnings on these contributions) are ineligible to be moved to a Roth IRA.
- The annual limit for how much can be moved from a 529 plan to a Roth IRA is the IRA contribution limit for the year, less any traditional IRA or Roth IRA contributions already made in that year (i.e. no doubling up of IRA contributions).
- The maximum amount that can be moved from a 529 plan to a Roth IRA during an individual’s lifetime is $35,000.
It is still not known if a change to the 529 beneficiary will trigger a new 15-year holding period. Initial indications from Congress seem to point to a change in beneficiary will NOT affect the 15 year requirement. This would encourage folks to open and fund a 529 plan early (even with a $1) to start the clock. Then you can switch the beneficiary to yourself and make annual transfers (if a change doesn’t reset the clock). Or you can use it for the beneficiary to jumpstart their retirement. Lastly, as of today, to make a direct Roth IRA contribution, folks have to have a Modified Adjusted Gross Income (MAGI) of less than $228,000 to make a full contribution if married. There is no income restriction on 529 to Roth transfers.
SIMPLE and SEP Roth IRAs.
From 2023 onward, employers can make Roth contributions to SIMPLE IRA and SEP IRA retirement plans. Though this is already enacted, it will take time for plan administrators and custodians to update paperwork and procedures to accommodate the change.
Roth 401(k)s and Roth 403(b)s.
The new legislation aligns the rules for Roth 401(k)s and Roth 403(b)s with Roth IRA rules. From 2024, the legislation no longer requires minimum distributions from Roth Accounts in employer retirement plans.
Support for Small Businesses Retirement Plans.
In 2023, the new law will increase the credit to help with the administrative costs of setting up a retirement plan. The credit increases to 100% from 50% for businesses with less than 50 employees. By boosting the credit, lawmakers hope to remove one of the most significant barriers for small businesses offering a workplace plan.
New Post-Death Option for Surviving Spouse Beneficiary.
If a spouse is a beneficiary of a retirement account, they can now elect to be treated as the deceased spouse for distribution purposes. At first glance, it appears that the primary use case will be for surviving spouses who inherit a retirement account from a younger spouse. By electing to treat themselves as the decedent, they will be able to delay RMDs longer, and once RMDs do start, they will be smaller than if the spouse had made a spousal rollover or remained beneficiary of the account.
Qualified Charitable Donations (QCD) Indexed for Inflation.
Starting this year, QCD donations will now adjust for inflation. As a reminder, Qualified Charitable Donations are from someone’s IRA and can be considered a part of their RMD, as long as they are 70.5 or older. This continues to be the best way to give to charity for those of age, as you do not pick up the distribution as income and does not impact Social Security taxation or Medicare IRMAA surcharges.
What’s Not in SECURE Act 2.0?
Almost as important as what is in the bill is what is NOT in the bill. Each of the following items were discussed at length over the previous three years but again, these were not in it:
- Limiting the use of the backdoor Roth or Mega backdoor Roth contributions.
- Placing new limits on who can make Roth conversions.
- Forcing IRA distributions if your account balance becomes too large, such as above $10M.
As always, if you have any questions with the above please reach out. I will be discussing these with client during upcoming meetings.