Secure Act 2.0 – Everything You Need To Know
On December 23rd, the massive $1.7 trillion spending bill was passed, and it included a retirement bill known as SECURE Act 2.0. At first glance, SECURE Act 2.0 appears to have an equal or greater impact on current and future retirees compared to the first SECURE Act bill passed in 2019. Let’s dive into the highlights.
Required Minimum Distributions (RMDs) starting dates are pushed back
RMDs are the required distributions that the IRS requires you to take from tax-deferred retirement accounts like 401(k)s and IRAs. They require distributions so that they are taxed and they can collect revenue that has been deferred for many years.
From 1986 until 2019 the RMD starting age was 70 ½. The passage of the original SECURE Act in 2019 pushed the starting age back to 72. SECURE Act 2.0 pushes the RMD age back to age 73 and then in 2033 to age 75.
In the case of an individual who attains age 72 after December 31, 2022, and age 73 before January 1, 2033, the applicable age is 73. In the case of an individual who attains age 74 after December 31, 2032, the applicable age is 75.
No pre-tax catch-up contributions for high-income workers
Employees under the age of 50 are generally allowed to contribute $22,500 per year for 2023 to their 401(k) or workplace plan. If you are over the age of 50, you are eligible to make an additional “catch-up” contribution of $7,500. However, it appears this bill will not allow those catch-up contributions to be pre-tax if the employees’ wages were over $145,000 the previous year. This will go into effect starting in 2024. If the plan allows it, the employee will be eligible to make catch-up contributions, but they will have to be after-tax Roth contributions.
Example – Jane, age 55, made $275,000 from her job in 2023. Because her income is over the $145,000 limit, she will not be able to make a pre-tax $7,500 contribution to her 401(k) in 2024. Instead, she contributes $22,500 pre-tax and $7,500 in her Roth 401(k) for the catch-up.
529 to Roth IRA transfers allowed after 15 years
Beginning in 2024, owners of a 529 will be able to make limited transfers tax-free to the beneficiary’s Roth IRA. There are many rules around who and how much is eligible.
The Roth IRA owner must be the same as the 529 beneficiary.
The 529 must have been open for at least 15 years.
No contributions within the last 5 years are eligible to be transferred.
The transfer amount is limited to the annual Roth IRA contribution limit ($6,500 for 2023)
The maximum amount that can be transferred is $35,000 over their lifetime.
I think this is a great addition to the tax code as it allows parents to fund 529s with less fear of their child not using the money. If they don’t use it, eventually they will be able to move it to a Roth IRA and get started on their retirement savings!
These were three of the biggest changes I saw reviewing the bill. There are dozens of other changes that have a big impact on the small number of people they apply to, including –
1 – Missed RMD penalty reduced from 50% to 25%
2 – New Roth and solo 401(k) options for self-employed individuals
3 – Larger QCDs from IRAs in future years
4 – Expanded list of exemptions for accessing retirement funds early without a 10% penalty
5 – Further increases to catch-up contributions starting in 2025 for those 60 and older
6 – More flexibility for older surviving spouses regarding RMDs
For a full list of the changes and details, check out this article by Jeffrey Levine.
Happy Planning,
Alex