As I mentioned in my fourth quarter newsletter, SECURE Act 2.0 passed and was signed in to law by the Biden administration in December 2022. It ushered in some pretty major changes that all investors, savers, and retirees and future retirees need to be aware of. Although more than 90 changes related to investing, saving, and retirement planning were made, I’ll highlight just a few of the key changes in this post. Many will likely undergo fine tuning. Please note, the regulations may further be revised. This is a consensus understanding at the moment.
To start, one of the biggest changes is to required minimum distributions (RMDs). The age to take RMDs increases to age 73 in 2023 and then to age 75 in 2033 for qualified plans. Also, the penalty for failure to take an RMD will decrease from 50% to 25% and ultimately to 10% if corrected in a timely manner starting in 2023. Timely manner is being defined as taking the RMD by the end of the second year following the year it was due. While this is great news for account owners, it can have some unintended consequences. One of which is that your account size may grow substantially thus pushing up the amount of your RMD. This could affect other areas of taxation. For heirs, if the account has grown substantially and it is in an IRA, they will generally have only ten years to deplete the account. This could add a tremendous amount of taxable income for heirs during the ten years. Too complicate this 10-year timeline even more, how you take the distributions and empty the account depends on whether the original owner died before or after their required beginning date for taking RMDs, and whether the heir is an eligible designated beneficiary or non-eligible designated beneficiary. Got that? Congress seems to have taken something that was previously straightforward and overly complicated it.
One positive development, Roth accounts in employer plans will be exempt from RMDs starting in 2024. You may recall this was previously a quirky difference between a Roth IRA and a Roth 401(k). Now, the retirement plan Roth account is treated more like a Roth IRA.
Catchup contributions on retirement plans and IRAs are increasing, but come with age restrictions and new rules. For example, starting in 2025, those age 60 through 63, can contribute the greater of either $10,000, or 150% of the catchup contribution limit in effect, to their workplace retirement plan (subject to indexing). However, if you earn more than $145,000 in the previous year, you have to make the additional $10,000 contribution to the Roth account side of your plan. No, I don't know why. Nor does anyone know why those aged 64 and older, and still working, can't make the higher catchup contribution. You can be sure some of these nutty rules will get worked out at some point.
Employers can now offer matching for student loan payments. Starting in 2024, employers can "match" payments employees make on student loans with matching payments to workplace retirement plans. The match is not necessarily dollar-for-dollar. This is to incentivize employees to make their student loan payments and give them a chance to save for retirement. So far, this aspect of student loan relief has not been challenged in court. My understanding at this time, is that this matching doesn’t increase the overall maximum contribution limits. Stay tuned!
There’s a big, exciting change for 529 plans! If you have a 529 plan that is at least 15 years old, you will have the ability to rollover up to $35,000 (aggregate lifetime limit) from the 529 plan, to a Roth IRA, subject to annual Roth IRA limits (minus any contributions made to an IRA or Roth IRA) starting in 2024. This is huge for those planning for retirement and saving for their children's education. If your 529 plan grows and the account has leftover, unused funds for education, you now have a new retirement option for up to $35,000 of the account. This is a win for parents and students who have accounts that have grown significantly. There are a few caveats to this rollover. The beneficiary must have compensation in the year of rollover, contributions (and earnings on such) within the last 5 years cannot be rolled over, Roth IRA income limits do not apply.
A new eligibility age for ABLE Accounts (Achieving a Better Life Experience Act of 2014). Previously, to be eligible for an ABLE Account, one had to be disabled before age 26. That has been corrected and raised to age 46. This age expansion may greatly benefit up to six million Americans. The previous low age limit prevented many military members and first responders from accessing these accounts.
Something for 401(k)/403(b) plans, the SECURE 2.0 requires auto-enrollment and contribution increases for 401(k) and 403(b) retirement plans. New defined contribution plans automatically enroll employees when they become eligible to participate in their employer’s retirement plan. Newly enrolled participants would start with a 3% pre-tax contribution that gradually increases by 1% each year, up to at least 10%, but not more than 15% of the employee's earnings. Existing retirement plans do not have to meet these requirements. There may be additional exemptions for businesses with ten, or fewer, employees, those in business less than three years, church plans, and government plans.
Finally, with regard to 401(k) qualified workplace plans, employers are now able to make matching contributions to the Roth side of the plan. Under previous regulations, if an employee directed their contributions to the Roth side of the plan, the employer match contribution had to go into a pre-tax subaccount. The Roth matches are not excluded from the employee’s annual gross income (so taxable).
There’s a lot more to SECURE Act 2.0 than the above summaries. Keep in mind that many of these changes are accompanied by new rules and requirements. I would also keep in mind that some items may be tweaked and revised as the new regulations work their way into the marketplace.
A lot of this can be confounding. As an independent Certified Financial Planner™, I can help you navigate these changes. Contact me and let’s get started! #talktometuesday #education #Hireaplanner #stressfree #SECUREAct2.0 #IRS #401k #403b #Roth #IRA #RothIRA