How does the newly passed SECURE Act 2.0 affect your retirement?

The recently signed bill by President Joe Biden was a $1.7 trillion omnibus spending bill which includes Secure 2.0 Act retirement savings legislation. This landmark legislation includes many changes to retirement savings. Here’s a rundown of some key points that we think may have direct impact on your retirement saving strategies.

Required Minimum Distribution (RMD)-related changes:

The SECURE Act 2.0 includes several modifications related to RMDs, namely the following.

• RMD ages are pushed back under the SECURE Act 2.0. Currently taxpayers are required to start taking required minimum distribution (RMD) at age 72. The new bill increases the age to 73 in 2023, and in 2033, the age will increase to 75.

  • The implication on the financial planning side may mean we now have a longer window to do Roth conversions before an RMD pushes one’s tax bracket to higher tier.

  • Also, we’d like to note that those who turn age 72 in 2022 are still required to have taken RMDs in 2022.

  • This change does not affect the Qualified Charitable Distribution starting at age 70 ½.

• RMD penalties are reduced. The penalty for missing RMDs is reduced from 50% of the withdrawal amount to 25%. There is one saving grace: if you take RMDs by end of the next year, the penalty will be reduced to 10%.

• Surviving spouse RMD options are expanded. Under current law, a surviving spouse who inherits retirement accounts from a deceased spouse has a few options, but the most commonly selected one is to roll over a decedent’s IRA into their own IRA and start RMDs when he/she reaches RMD age. The new bill gives another option that a surviving spouse can elect to be treated as the deceased spouse. What this means is:

  • The RMDs for a surviving spouse will be delayed until the original deceased spouse would have reached the age when they are required to take RMD’s.

  • The RMD will be calculated using the Uniform Lifetime Table that is used by account owners, rather than the single Lifetime Table that applies to beneficiaries.

  • If the surviving spouse dies before RMDs begin, the surviving spouses’ beneficiaries will be treated as though they were the original beneficiaries of the account. This allows them to stretch distribution over their life expectancy instead of the 10-year rule that would otherwise apply.

The primary utilization of this new change mainly applies to those who inherit retirement accounts from a younger spouse. By electing to treat themselves as the decedent, they will be able to delay RMDs longer. Once the RMDs start, the amount will be smaller.

• Qualified Charitable Distributions (QCDs) are subject to certain changes.  

  • The annual maximum QCD of $100,000 will be increased by inflation starting 2024.

  • Starting in 2023, taxpayers can use a one-time QCD (max $50,000) to fund a Charitable Remainder unitrust (CRUT), Charitable Remainder Annuity Trust (CRAT), or Charitable Gift Annuity (CGA).

Roth-related changes

The SECURE Act 2.0 includes many changes related to Roth IRAs. Here are the major ones.

• No more RMDs for employer plan Roth accounts such as Roth 401k, Roth 403B, and Roth 457 accounts.

• Creation of Simple Roth IRAs and SEP Roth IRAs. Previously, simple and SEP IRAs were only funded with pre-tax dollars.

• Allows employer to deposit matching and/or non-elective contributions to an employee’s Roth accounts (i.e. Roth 401K).

One very important development is that 529 rollovers can be made to Roth IRAs, with limitations:

• The provisions are not going to be in effect until 2024

• The receiving Roth IRA must be in the same name as the beneficiary of the 529 plan

• The 529 plan must have been maintained for at least 15 years or longer

• Any contributions to the 529 plan within the last 5 years (and its earnings) are ineligible to be moved to Roth IRA

• The annual limit for how much can be moved from a 529 plan to a Roth IRA is the IRA contribution limit of the year (i.e.: $6,500)

• The maximum amount that can be moved from a 529 plan to Roth IRA during the beneficiary’s lifetime is $35,000

Retirement Account Contributions

The SECURE Act 2.0 also includes developments related to retirement account contributions.

• IRA catch-up contributions will be indexed for inflation. The catch-up contribution limit will automatically adjust for inflation starting 2024.

• There will be increased plan catch-up contributions for those in early 60s. Starting in 2025, those who are between age 60-63 will have their retirement plan catch up contribution limit increased to the greater of $10,000 or 150% of regular catch-up contribution.

• It will create linked Emergency savings Accounts: employees who are NOT highly compensated may contribute to a new type of “Emergency Savings Account” that are linked to their employer retirement plans such as 401(k) & 403(b) accounts.

• Solo 401(k) account opening and contribution deadlines for sole proprietors are extended. It used to be that a solo 401(k) account had to be opened by year end; the new bill extended the due date for both account opening and funding to the individual tax filing date.

Retirement Account Distributions

In general, IRS imposed a 10% penalty for distributions from retirement accounts taken prior to reaching age 59 ½ with a few exceptions. The SECURE Act 2.0 expanded on the list of exceptions.

To name a few:

• Certain professionals over age 50, such as private sector firefighters, state and local corrections officers, public safety workers

• Those who live in permanent reinstatements of certain qualified disaster areas

• Victims of domestic abuse

There are also new emergency withdrawal exceptions for taxpayers who experience “unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses.”

• There is a new exception for qualified long-term care distributions with an annual limit of 10% of vested balance or $2,500.

• It also expands plan loans to participants in disaster areas. For those who live in a Federally declared disaster area, they can take a larger loan from a qualified plan up to 100% of the vested balance, or $100,000.

The SECURE Act 2.0 brings many more changes to retirement plans, so many that we are not able to summarize them all in this blog. Some of these changes affect employees, while others may affect small business owners. We recommend that you contact us to discuss the implications of these new changes so that we can explore the financial planning opportunities with you should you so wish.

Contributor

Ellen Li is a partner at Financial Alternatives and a lead advisor for many of the firm’s clients and has a special focus on financial planning. Ellen has an MSBA degree in Financial and Tax Planning from San Diego State University and she holds the CERTIFIED FINANCIAL PLANNER™ designation. She is a member of the Financial Planning Association (FPA).

Sources:

Kitces, Michael. (28 December, 2022). SECURE Act 2.0: Later RMDs, 529-to-Roth Rollovers, And Other Tax Planning Opportunities. https://www.kitces.com/blog/secure-act-2-omnibus-2022-hr-2954-rmd-75-529-roth-rollover-increase-qcd-student-loan-match/

United States Senate Committee on Finance. SECURE 2.0 Act of 2022. https://www.finance.senate.gov/imo/media/doc/Secure%202.0_Section%20by%20Section%20Summary%2012-19-22%20FINAL.pdf