The Secure Act, passed in 2019, brought many changes to the retirement and financial planning landscape. We re-capped some of the biggest impacts of the original bill in a webinar that you can now access on-demand in the Plancorp resource library.
Here we are a few years later and The Consolidated Appropriations Act of 2023, passed in December 2022, included provisions many have referred to as SECURE Act 2.0. So, what new changes come with the Secure Act 2.0?
The change grabbing the most attention involved required minimum distributions and when they begin. In 2022, required minimum distributions began at age 72. Going forward required minimum distributions will begin at 73 for taxpayers born in 1951 through 1959. If you were born in 1960 or later, your required minimum distributions will begin at 75. If you look at these rules closely, you will note that no taxpayer must take their first required minimum distribution in 2023.
|Updated Age for Required Minimum Distributions (RMDs)
|1950 or Before
|1960 or Later
If you have been working with Plancorp, or paying attention to us, you know that we often suggest planning designed to take advantage of lower taxable income between retirement and required minimum distributions. This could take the form of an early distribution, a roth conversion or capital gain harvesting. Congress increased the opportunity to utilize these strategies by pushing back the beginning date for required minimum distributions.
What the SECURE Act 2.0 Did NOT Change
Before digging in on additional detailed changes, here are two things the Secure Act 2.0 did not change. First, the act did not eliminate backdoor Roth IRA contributions or mega backdoor Roth contributions within plans.
Second, the age at which you can donate money directly from your IRA via QCDs (qualified charitable distribution) remains at 70 1/2. Tax-free distributions have been raised at $105,000 in 2024.
Other SECURE Act 2.0 Changes
There are several changes that appear to further promote Roth contributions. Perhaps this should not be surprising as Roth contributions are made with after-tax dollars. So, it helps Congress' budget math to assume that more retirement contributions will be made with after-tax dollars as opposed to pre-tax dollars.
Originally slated to begin in 2024, but now delayed to 2026 by the IRS, taxpayers with designated Roth accounts within their employer retirement plans (401(k), 403(b), etc.) will no longer be subject to required minimum distributions on these accounts. Also, if a taxpayers' wages from a plan sponsor for the prior year exceed $145,000, any catch up contribution made by the taxpayer must be allocated to a designated Roth account within an employer plan. This will likely result in many plan changes because unless an employer offers this option to high wage earners, no employee can make a catch-up contribution.
There are other changes related to employer plans, SIMPLE IRAs and SEP IRAs that we will cover in a separate piece in the coming weeks.
One final item that is generating some buzz. Starting in 2024, you may move assets from a 529 directly to a Roth IRA (a trustee-to-trustee transfer). Contributions (and related earnings) made in the last 5 years may not be transferred. The Roth IRA receiving the transfer must be in the name of the 529 plan beneficiary and the beneficiary must have earned income in the year of the transfer. Also, the 529 plan must have been open for at least 15 years prior to the transfer. It is unclear whether a beneficiary change within the 15-year time period resets this clock. The annual transfer limit is subject to the normal IRA contributions limits less any IRA/Roth IRA contributions made by the Roth IRA account owner. Lifetime transfers are capped at $35,000 per beneficiary.
When Does the SECURE Act 2.0 Go into Effect?
The changes in the Secure Act 2.0 will roll out over the next few years, with some starting to take effect beginning January 1, 2023. If you have questions about the implications of these changes on your financial plan, Plancorp is here to help. Take our simple 2-minute financial plan analysis to identify any gaps in your plan to financial independence.
Final Thoughts on the Secure Act 2.0
There are many provisions contained in SECURE Act 2.0 that impact the retirement landscape. We have not mentioned all of them here because none rise to the magnitude of the changes imposed (the death of the "stretch IRA") by the original version passed in 2019. However, the volume of changes passed at the end of 2022 is significant. If you need assistance understanding how these changes might impact your plan, please reach out to your Wealth Manager for a conversation.