SECURE Act 2.0: What the New Legislation Means for You

Ken Weingarten |
Categories
Retirement
Required Minimum Distribution
Roth IRAs
529 Plans
Retirement Accounts

Signed into law back in December 2022, the SECURE Act 2.0 delivered various retirement-related changes and provisions that built on the original SECURE Act of 2019. Many of which provide increased flexibility for one’s personal finances. In this blog, we will cover the major provisions now in place and coming in the near future.

Changes to Required Minimum Distributions (RMDs)

  • Starting 1/1/2023, the RMD age has been increased to age 73. One item to keep in mind is if you turned age 72 in 2022 or earlier, you will still need to continue taking RMDs as usual.
  • Starting in 2033, the RMD age will be pushed further back to age 75. Below is a helpful chart to give you an idea of when you will have to start RMDs:

  • In previous years, a 50% tax penalty was in place for any RMD amount not taken. The SECURE Act 2.0 has reduced this to 25% going forward.
  • While Roth IRAs are not subject to RMDs, beginning in 2024, individuals will also no longer be subject to RMDs from Roth accounts in Employer Retirement Plan (e.g., Roth 401(k), Roth 403(b), Roth 457(b), etc.). For those who are taking RMDs from Roth accounts, you will be able to stop distributions starting 2024.

Age 50+ Catch-up Contributions

  • Starting in 2024, age 50+ catch-up contributions made to qualified retirement plans will need to be made into a Roth account if your wages in the previous year were more than $145,000 (will be adjusted for inflation in the future). Individuals with wages of $145,000 or less will still be eligible to make catch-up contributions on a pre-tax basis. It should be noted that this only applies to wages, meaning individuals with self-employment income will not be subject to the $145,000 threshold.
  • Starting in 2025, individuals who are only ages 60, 61,62, and 63 will be able to make catch-up contributions the greater of $10,000 or 150% of the catch-up contribution. With catch-up contributions also being indexed for inflation, individuals that fall into this age range may be able to contribute more. For example, if we use 2023’s catch-up contribution of $7,500, one can make an $11,250 contribution ($7,500 x 150%) instead.
  • IRA Catch-up Contributions: As of the Pension Protection Act of 2006, the annual catch-up contribution was set to a flat $1,000. Starting in 2024, the catch-up contribution limit will be automatically adjusted for inflation in increments of $100/year.

Qualified Charitable Distributions (QCDs)

QCDs are an excellent strategy for individuals age 70.5+ to carry out your charitable intentions as well as saving on taxes. The strategy allows you to directly transfer funds from an IRA to a qualified charity. The tax benefits are two-fold: first, QCDs can be counted toward satisfying RMDs (if applicable) and second, donated amounts are excluded from taxable income up to $100,000/yr. Beginning in 2024, the $100,000 annual limit will be automatically indexed for inflation.

Example: Mary (age 76) has enough income from Social Security, a pension, and other investment accounts to meet her spending needs this year. Her required minimum distribution from her IRA this year (based on the balance at the end of last year) is going to be $20,000. She does NOT need this $20,000 and would prefer not to take the money and pay income taxes. By making a qualified charitable distribution, Mary can have $20,000 sent from her IRA directly to a charity of her choice. (Or multiple charities) In this example, the charity gets the full $20,000 and Mary does not have to pay income tax on the distribution!

529 Plan to Roth IRA Transfers

One of the unexpected provisions of the SECURE Act 2.0 will allow individuals to move 529 plan funds directly to a Roth IRA starting in 2024. There are several conditions that must be satisfied in order to proceed with this strategy:

  • The Roth IRA must be in the name of the beneficiary of the 529 plan.
  • The 529 plan must be opened and maintained for 15 years or longer.
  • Contributions (and associated earnings) to the 529 plans within the last 5 years are ineligible for a Roth IRA transfer.
  • The annual transfer limit from the 529 plan to the Roth IRA is limited to the IRA contribution limit, less any contributions that have already been made. The beneficiary must also have earned income in order for the transfer to be allowed.
  • The maximum amount that can be transferred is $35,000 per beneficiary.

Parents who find that a 529 plan may be overfunded can consider this transfer strategy and help their child’s get a head start on building wealth.

Another potential planning strategy may be to take advantage of the $35,000 per beneficiary condition. For example, once a beneficiary has reached the $35,000 maximum transfer limit, one could change the beneficiary of the 529 plan and start another round of the $35,000 limit for the new beneficiary. It is, however, unclear at this time whether renaming the beneficiary would reset the 529 plan’s 15-year condition. Should future legislative guidance allow the 15-year condition to not be reset, the benefits of building Roth IRAs for various beneficiaries could be significant.

Conclusion

The provisions covered in this blog are just a few of the many adjustments made as a result of the SECURE Act 2.0. 2024 will be a major year to take advantage of financial planning opportunities. Consulting with a fee-only financial planner will help you get a head start on what to expect.

Weingarten Associates is an independent, fee-only Registered Investment Advisor in Lawrenceville, New Jersey serving Princeton, NJ as well as the Greater Mercer County/Bucks County region. We make a difference in the lives of our clients by providing them with exceptional financial planning, investment management, and tax advice.