At the end of 2022, the Consolidated Appropriations Act was passed, which included a retirement bill known as SECURE Act 2.0. This law was built upon the original SECURE Act legislation passed in 2019.
The SECURE Act 2.0 expands and changes the rules on saving for retirement, withdrawals from retirement plans, increases the savings thresholds and tax benefits for Roth IRAs, 401(k) plans and more.
Ultimately, most people just want to know what parts of the Secure 2.0 Act apply to them. Here’s a summary of key provisions to pay attention to.
High Wage Earners & Catch-Up Contributions
Catch-up contributions allow folks 50 and older to save even more in workplace retirement plans.. For 2023, the catch-up contribution was raised to $7,500. This is in addition to the regular annual contribution limit of $22,500, meaning those 50 and above eligible to save $30,000 in total for 2023.
Effective in 2024, people with wages (like w2 income) above $145k (which will be indexed for inflation) are only eligible for Roth catch-up contributions. Regular contributions may still be made with pretax dollars. The new rules apply to 401(k), 403(b) and 457(b) plans, not to catch-up contributions for IRAs. The IRA catch-up contribution limit will finally adjust automatically for inflation from its stagnant $1k cap in 2024 as well.
Planning opportunities: You may be able to avoid mandatory Roth 401(k) catch-up contributions with income above $145k if you are self employed. Also, if you change jobs in the middle of the year, you may still be able to do pretax catch-up contributions even if you’re a high wage earner.
If you’re an employee with an employer-sponsored retirement plan, you’ve only been able to receive matching contributions on a pre-tax basis. Employers may now offer the option to match and make non-elective contributions via Roth 401(k) accounts. Heads up: You’ll also pay taxes on these employer contributions.
Beginning in 2024, employer retirement plan based Roth accounts like Roth 401(k) and Roth 403(b) will no longer require RMDs, similar to individual Roth IRAs. SEP and SIMPLE IRAs will now allow Roth contributions.
Good news: One component that was not restricted or eliminated was existing Roth strategies, like backdoor conversions or mega-back-door Roth contributions.
Additional Flexibility for 529 College Savings Accounts
Beginning in 2024, it’s possible to move money from a 529 plan directly into a Roth IRA, and the transfers are not subject to income limitations. This comes as great news for savers who had concerns about potentially overfunding their child’s 529 plan. There are, however, certain conditions that must be met:
- The Roth IRA receiving the money must be in the same name of the beneficiary of the 529 plan;
- The 529 plan must have been maintained for at least 15 years;
- The annual limit is the IRA contribution limit for the year, reduced by any regular IRA or Roth IRA contributions made that year;
- Lifetime transfer limit of $35k
Planning opportunity: If a parent contributed to a 529 account for their child, maintained ownership, and the child no longer needed the 529 money, it appears the parent may be able to change the beneficiary to themselves and then transfer the money to their own Roth IRA, subject to the conditions above. Note: Before doing so, please seek expert guidance. Some legislation interpretation still needs to be confirmed or rejected.
Changes to Qualified Charitable Distributions (QCDs)
QCDs have been one of the best ways for people who are charitably inclined to give money directly from an IRA in a tax-efficient manner. The annual limit of $100k will now be indexed for inflation starting in 2024.
It’s also now possible to use a QCD to fund certain types of charitable trusts. However, the maximum amount that can be moved is $50k. Given the time, expense and complexity that comes along with these types of trusts, this modest dollar limit may preclude most people from doing so.
Changes to Required Minimum Distributions (RMDs)
RMDs are when you must take withdrawals from your retirement accounts, regardless if you want or need the money. The original SECURE Act raised the age for RMDs from 70.5 to 72. SECURE 2.0 pushes this out further:
- Age 73 for folks born between 1951–1959
- Age 75 for folks born in 1960 or later
- Turned 72 in 2022 or earlier? You must still keep taking RMDs.
The bill also decreases the penalty for missed RMDs from 50% to 25% of the shortfall, and providing the mistake is corrected in a timely manner, the penalty is now only 10%.
Have a younger spouse? If they predecease you, you can now elect to be treated “as your deceased spouse,” which allows you to take RMDs based on their age rather than your own.
Planning opportunities: Pushing out the extra income created by RMDs age could mean additional years before the dreaded spike inMedicare Part B/D premiums and perhaps a few more years of Roth conversions. Please work closely with your advisor to see if this applies to you.
Other Changes Worth Noting
At over 400 pages, the legislation is long and cumbersome. While it’s impossible to include every component, we’ve focused on the items that are most likely to impact our clients. A few other items worth noting:
- In 2028, some S Corp owners who sell shares to an Employee Stock Ownership Program (ESOP) may be eligible to defer up to 10% of their gain by taking advantage of a like-kind exchange;
- SECURE 2.0 expanded the list of 10% penalty exceptions for accessing retirement funds during times of need;
- Beginning in 2024, employers can “match” an employee’s student loan payments by contributing an equal amount to a retirement account on their behalf.
We’re Here to Help
As we digest these latest changes and wait for important clarification on items that still remain ambiguous, we are already thinking proactively about which of our clients might be able to benefit.
If you are wondering how these changes pertain to your situation and would like some professional guidance, please reach out, we’re here to help.
Uplevel Wealth is a fee-only, fiduciary wealth management firm serving clients in Portland, OR and virtually throughout the U.S.