SECURE Act 2.0

US Capitol Building

You may have heard that President Biden recently signed the SECURE Act 2.0 into law.

For those keeping score at home, “SECURE” stands for Setting Every Community Up for Retirement Enhancement.

The good news is that there’s a lot in there that should be quite helpful to many of you.

The bad news is that it makes the rules around retirement and tax planning even more complex than they already are. Even keeping track of the timelines is tricky, as the starting dates for the various provisions are all over the map.

I’ve narrowed the bulk of my commentary down to the seven new provisions or areas that I think may provide the most benefit to people reading this blog. And then included many more in rapid fire style bullet points.

Ready to be bored? Let’s dig in!   

1. RMDs being pushed back

First, what’s this RMD of which you speak?

RMD stands for Required Minimum Distribution, and it represents the minimum annual amount someone is required to withdraw from their retirement accounts. RMDs apply to most types of tax-deferred accounts, such as Traditional IRAs, Rollover IRAs, 401(k)s, and 403(b)s.

Basically, the government wants to GET PAID BABY, so it requires people to take these withdrawals and therefore have to pay the associated income tax on the withdrawals.

For years, the starting age for RMDs was the year the investor turned age 70 ½, then it was pushed back to age 72 a few years ago.

Now, the beginning age is changing to:

  • For those born in 1950 and before: Age 72

  • For those born between 1951-1959: Age 73

  • For those born in 1960 or later: Age 75

Overall, I’d say this is very welcome news.

If you’re retired and are living off the money in your tax-deferred accounts, this really doesn’t change anything for you.

But if you don’t need the money in those accounts (because you’re able to live on money in other accounts or sources of income), this gives you more flexibility. It also provides more time for good tax planning moves leading up to your RMD age, for example using Roth conversions to smooth out and lower your lifetime tax bill.

2. Roth accounts: Congress is loving ‘em

There are quite a few changes related to Roth IRAs and Roth 401(k)s/403(b)s. It seems that Congress is embracing Roths and making the tax code more and more accommodating toward them.

Background:

  • With Roth retirement accounts, you make an after-tax contribution to the account, which means that amount is included in your income during the year of contribution and you pay income tax accordingly. The money then grows tax-free over time, and then your withdrawals from the account are also usually tax-free.

  • Pre-tax or Traditional retirement accounts, on the other hand, receive the opposite treatment. You get a tax deduction when you make the contribution, get tax-free growth, but then have to pay income taxes on the withdrawals.

With that said, here are some of the new changes:

Roth RMDs

  • Effective in 2024, RMDs are no longer required for Roth employer retirement plans, such as the Roth 401(k), Roth 403(b), Roth 457(b), and Roth TSP.

  • Roth IRAs are NOT subject to RMDs, so this levels the playing field a bit by making Roth 401(k)s/403(b)s subject to similar rules.

  • This is good news overall, as the longer funds can remain in Roth accounts, the better, since all growth is tax-free.

Creation of SIMPLE Roth IRAs and SEP Roth IRAs

  • Until now, SIMPLE IRAs and SEP-IRAs could only include pre-tax, tax-deferred funds.

  • Employers can now offer Roth versions of both of these accounts.

Employers can contribute to Roth accounts

  • Until now, any employer retirement contributions (such as the “matching” contribution your employer may make) had to be made in a pre-tax manner, meaning they go into the pre-tax or Traditional side of your retirement plan.

  • Now, employers may elect to make those contributions to a Roth account instead. Doing so would mean that the contribution would be included in your income for that year, meaning you’d pay income taxes on it (though no FICA/payroll taxes). But, as explained above, the money will thereafter be tax-free forever.

Roth catch-up contributions

  • If you’re age 50+, you’re able to make a “catch-up” contribution to your 401(k)/403(b)/457(b), which is an additional amount ($7,500 in 2023) above the normal contribution maximum.

  • Until now, you’ve had the option as to whether you wanted that catch-up contribution to go to your pre-tax account or your Roth account.

  • Starting in 2024, if your wages were above $145,000 (adjusted for inflation) in the previous calendar year from that same employer, any catch-up contributions will be required to be put into the Roth account.

  • Three odd quirks about this:

    • This provision applies to wages, so it appears that self-employed individuals who don’t technically receive wages would still have the option to make pre-tax catch-up contributions.

    • Since the $145K test applies to the same employer, someone who switches employers would also have the choice of pre-tax.

    • If the employer has employees who meet this $145K test, but the employer doesn’t offer a Roth catch-up contribution option in the first place, NO employees may make catch-up contributions AT ALL, whether they make more or less than $145,000.

No changes to “Backdoor Roth” strategies

  • Also worth noting: Congress made no attempt to close the very powerful “Backdoor Roth IRA” and “Mega Backdoor Roth” strategies (loopholes?) that many are fond of.

3. Transfers of 529 money to Roth IRA

If you’ve contributed to a 529 college savings account for a child, have you ever wondered what happens if the child doesn’t need the money for college?

There are currently many different avenues of what to do with the “extra” money, and now Congress has added another.

Starting in 2024, there will be a limited ability for the owner of a 529 college savings account to move some of the account’s money into a Roth IRA owned by the 529 account’s beneficiary.  

There are some conditions that need to be met though:

  • The transfer has to be to a Roth IRA of the 529 account’s beneficiary, not the 529 account’s owner.

  • The transfer must be a direct transfer (you can’t withdraw it from the 529 account and then contribute it to the Roth IRA later).

  • The 529 account must have been open for 15 years or longer.

  • Any contributions to the 529 account within the previous 5 years (and the earnings on those contributions) are ineligible to be moved.

  • The maximum amount that can be moved to a Roth IRA per year is the IRA contribution limit for that year, minus any other IRA contributions that the beneficiary makes for that year.

    • For example, if the IRA contribution maximum for a certain year is $6,500 (like it is in 2023), and the 529 beneficiary has already made a $2,000 contribution during the year, then the maximum amount that can be transferred from the 529 account to the Roth IRA for that year is $4,500.

  • The maximum amount that can be moved to a Roth IRA during the beneficiary’s lifetime is $35,000.

  • It seems likely that a transfer can be made only if, and to the extent, the beneficiary has compensation during that year. That means they’ve received wages or other earned income from a job or self-employment.

    • This condition also applies to regular Roth IRA contributions. This is why, for example, parents can’t contribute to a Roth IRA for their minor children unless the child has compensation from a job. It’s also why retirees who don’t work anymore can’t make Roth IRA contributions.

    • It is nice though that the income limitations don’t apply to these transfers like they do to regular Roth IRA contributions.

Other planning ideas:

  • It may make sense to open a 529 account sooner rather than later, even if you don’t plan on contributing to it right away. Maybe just put $50 into it. You could even name yourself as the initial beneficiary (with the intention of changing it later). The reason is because doing so will get the 15-year clock started, which may come in handy down the road.

  • It’s currently possible for the owner of a 529 account to change the 529’s beneficiary to a family member of the current beneficiary. It’s unclear from the text of the new law as to whether a change of beneficiary will start the clock over for the purposes of the 15-year test mentioned above. Congress seems to have implied that the 15-year clock would not reset, but we’ll need definitive guidance on that. If it doesn’t reset, that opens up the ability to change the beneficiary several times and end up transferring much more than $35,000 in total out of the 529.

  • A higher net worth family may want to consider making a large contribution to a young child’s 529 account, with the intention of converting some every year (15 years later) once the child is receiving compensation of some sort.

4. Surviving-spouse beneficiaries of retirement accounts

When a person with a retirement account passes away and has named their spouse as the beneficiary, that spousal beneficiary has a few options as to how to treat the account, such as being able to roll the decedent’s IRA into their own IRA or choosing to treat the decedent’s IRA as their own.

SECURE Act 2.0 adds another option for surviving spouses.

Starting in 2024, a surviving spouse will be able to elect to be treated as the deceased spouse.

This may sound weird (probably because it is), but it could provide some meaningful benefits in certain situations:

  • It could be especially helpful if the deceased spouse was younger than the surviving spouse, as the RMDs from the account would start not when the (older) surviving spouse turns the RMD beginning age, but rather when the (younger) deceased spouse would have turned that age.

  • Plus, the RMD calculations would be more friendly, as they would be based on the IRS table that applies to account owners rather than the one that applies to beneficiaries, and would be based on the younger age rather than the surviving spouse’s actual age.

  • Finally, if the surviving spouse passes away before RMDs begin, the surviving spouse’s beneficiaries will be treated as if they were the original beneficiaries of the account (which may allow for more generous RMD rules).

In English please?

If an older surviving spouse makes this election, it would mean the account would (1) have later/lower RMDs, which would (2) allow the account to grow tax-deferred for longer, which eventually will mean (3) more money for you and your heirs.

5. IRA catch-up contributions

If you’re 50 years old or older, you are eligible to make a catch-up contribution to your IRA, which is an extra amount over and above the regular IRA contribution maximum.

The IRA catch-up contribution maximum has been stuck at $1,000 since 2006.

Starting in 2024, the IRA catch-up contribution maximum will be indexed to inflation. That means as inflation naturally rises over time, the catch-up contribution maximum will also rise.

This change aligns it with all other types of annual retirement contribution limits, which are all already indexed to inflation.

6. Higher catch-up contribution limits for people age 60-63

If you’re 50 years old or older and work for an employer with a retirement plan such as a 401(k) or 403(b), you are eligible to make a catch-up contribution to your retirement plan. The maximum amount is set to $7,500 for 2023.

Starting in 2025, people who turn 60, 61, 62, or 63 during the year will be able to make increased contributions for that year.

The catch-up limit for these folks will be increased to the greater of $10,000 or 150% of the regular catch-up contribution limit (indexed for inflation) for employer retirement plans.

The same thing will apply for SIMPLE IRAs as well, except that the limit will be increased to the greater of $5,000 or 150% of the regular SIMPLE IRA catch-up contribution amount.

Why does this apply only to those age 60-63? Why not give some love to someone who is 64 or older too?

No clue.

7. Relief for retirement account mistakes

We talked about RMDs in a different section above. So, what happens if you forget to take an RMD, or don’t withdraw enough? Well, the government slaps you with a tax penalty of 50%(!) of what you should have taken out.

For example, if your RMD is $10,000 but you forget about it and don’t take the withdrawal. You would be greeted with a $5,000 penalty, on top of any ordinary income taxes you’ll owe on the withdrawal.

Ouch.

Starting in 2023, SECURE Act 2.0 reduces that egregious penalty to 25%.

Plus, if you correct your RMD mistake within a certain “Correction Window” (which is by the earliest of a few different timeframes), the penalty will be reduced to 10%.

And, if you or the IRS don’t catch the RMD mistake for a long period of time, there’s now a statute of limitations of three years, meaning the penalty generally won’t be assessed if the mistake happened 3 or more years ago.

Rapid fire other stuff

There’s a ton of other stuff in SECURE Act 2.0, much of which won’t be impactful for most people. But here are a few more that may move the needle for you:

  • A new type of account called an Emergency Savings Account, that needs to be linked to an employer retirement plan (such as a 401(k)), will be available in 2024. There are limitations on who can own one of these accounts, plus only $2,500 can be contributed (total, not per year).

  • Starting in 2024, the maximum annual Qualified Charitable Distribution (QCD) amount will be indexed to inflation (currently set to $100,000).

  • In 2023, there’s a one-time opportunity to use a QCD to fund a Charitable Remainder Unitrust, Charitable Remainder Annuity Trust, or Charitable Gift Annuity, up to $50,000.

  • There are more exceptions to the 10% early withdrawal penalty applied to retirement account withdrawals for people under age 59 ½, ranging from expanded exceptions for public safety workers, to people with a terminal illness, to victims of domestic abuse, to $1,000 “emergency withdrawals” for just about anyone, to withdrawals for long-term care premiums, and more.

  • Starting in 2024, employers will be able to amend their retirement plans to allow employer matching contributions into the retirement account for amounts paid by an employee toward their student debt.

  • Starting in 2026, ABLE (529A) accounts can be established for people who become disabled prior to age 46. Under current law, these accounts are only available to people who become disabled prior to age 26.

  • Sole proprietors can now contribute to a Solo 401(k) for a plan year up until the individual tax filing deadline, not including extensions (previously the deadline was year-end).

  • Qualified Longevity Annuity Contracts (QLACs) can now be purchased up to a maximum of $200,000 within a retirement account (previously limited to the lesser of $145,000 for 2022 or 25% of the account’s balance).

  • The contribution limit and catch-up contribution limit for SIMPLE IRAs for most employers with 50 or fewer employees will go up by 10% in 2024.

  • Starting in 2024, a new Starter 401(k) plan will be available for employers to offer with a contribution max of whatever the IRA contribution max is at the time.

  • Starting in 2027, the Saver’s Credit, which is a tax credit to incentivize lower income individuals to make retirement contributions, will be replaced by the Saver’s Match. Basically that means instead of a tax credit, the government will put the money straight into the individual’s retirement account.

  • Starting in 2023, for small businesses with 50 or fewer employees, the retirement plan start-up credit will become more generous, in that 100% of retirement plan start-up costs will be covered by the credit (up from 50%), along with the credit partially covering employer contributions for the first 4 years. 

Summary

We made it to the end! And yes, you’re a bit of a nerd for having made it to the end. :-)

As you can see, there’s a lot to unpack, and there’s quite a bit more in the bill beyond what I’ve covered here.

My guess is that the full implications of many of these changes won’t be figured out for a while, and that more and more planning ideas will surface as time goes on.

Chances are there’s something in the bill that can benefit you sooner or later. Now it’s just a matter of making sure you take advantage of the opportunities!

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