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Get Smart on SECURE Act 2.0

Retirement

What Happened? Congress passed a long-awaited retirement bill, dubbed “SECURE Act 2.0,” in late December as part of a broader omnibus spending bill. The original SECURE Act (“Setting Every Community Up for Retirement”) was passed in 2019 and made several major changes to retirement savings plans. This update contains significantly more changes to the original bill, and we will highlight below the most meaningful ones for our clients. The overall theme of SECURE Act 2.0 is to encourage the use of Roth accounts (after-tax retirement savings). This will bring tax dollars into near term government budgets. Perhaps most notably, the Secure Act 2.0 does NOT restrict or eliminate existing Roth strategies such as the backdoor Roth.

 Required Minimum Distribution (RMD) Age Increased to 73 in 2023 and 75 in 2033

Those who turned 72 in 2022 must still take their RMD by April 1, 2023. Those turning 72 in 2023 won’t need to take their first RMD until April 1, 2025. Additionally, starting in 2023, the penalty for a missed RMD will be reduced from 50% to 25%, and further reduced to 10% if correction is made on a timely basis.

Qualified Charitable Distributions (QCDs) Secure Act 2.0 does NOT change the age at which QCDs can be made, which is 70 ½. Currently, $100,000 per year can be taken from an IRA and donated to a qualified charity. This transfer is tax-free and can satisfy all, or a part of annual RMD. In 2024, the maximum limit will change to reflect inflation as the $100,000 limit has been in effect since 2006.

 Expanded Use of Roth Accounts Many changes were made to Roth-related accounts with an overarching theme of making more options available for contributing to Roth accounts. Roth accounts are taxed when money is put in and if guidelines are met, principal plus investment gains are not taxed when withdrawn in retirement or passed down to beneficiaries. Some of the major changes surrounding Roth accounts include:

  • No RMD for Roth Plan Accounts Beginning in 2024, Roth accounts in qualified employer plans such as 401(k), 403(b) and 457(b) plans will not be subject to RMDs. This will make them on par with Roth IRA accounts which do not require that RMDs be taken.
  • Allowance for Roth SIMPLE and SEP IRAs Previously only pre-tax funds could be deposited into SIMPLE and SEP accounts. Starting in 2023, after-tax funds can be put into a Roth version of these accounts.
  • Matching Employer Contributions to Roth Accounts Allowed Employers will now be able to make matching contributions to employees’ Roth accounts in employer plans. This match will be reported as employee income and must be immediately vested.
  • Mandatory Roth Catch-Up Contributions for High Income Taxpayers In 2024, employees who make over $145,000 and want to make catch-up contributions to employer plans, must make those catch ups in Roth contributions (after-tax dollars). Catch up contributions to IRA accounts (including SIMPLE and SEP) will not be subject to this rule. The language around this is somewhat confusing so we will look for clarity as 2024 approaches

Note: For all of these newer Roth options, it may take some time before employers, custodians and the IRS have procedures to facilitate these types of contributions.

 Certain Rollovers from 529 Accounts to Roth IRAs will be Permitted Beginning in 2024, an individual will be able to transfer money directly from a 529 plan to a Roth IRA. However, there are MANY conditions: (1) funds must be transferred into Roth account bearing the same name as the beneficiary of the 529 plan, (2) the 529 plan must have been opened at least 15 years, (3) contributions to the 529 in the previous 5 years cannot be moved, (4) the maximum that can be moved per individual lifetime is $35,000, and (5) the maximum that can be moved per year, per individual, is the annual IRA contribution limit ($6,500 in 2023) less any traditional or Roth contributions made by that individual for the year. This provision may help alleviate some worry over unused 529 account balances.

Catch Up Provision Changes IRA catch up provisions were established in 2002 at a flat $500 amount. The amount was changed to $1,000 per year in 2006, but not pegged to inflation. Starting in 2024, this amount will change with inflation in $100 increments. Stay tuned! And, also in 2024, for employer retirement plans, employees who are aged 60-63 will have an increase in contribution limit to the greater of $10,000 or 150% of the regular catch-up contribution amount for such plans (150% of 2023 catch-up contribution is $11,250).

 Assorted Other Changes:

  • Student Loan Payment Match In 2024, employers with 401(k), 403(b), SIMPLE or 457(b) plans can match contributions on employees qualified student loan payments.
  • Expansion of Start-up and Contribution Credits for New Small Business Plans These credits will help make plan adoption more cost-effective for small businesses.
  • Linked Emergency Savings Accounts In 2024, individuals will be able to set aside up to $2,500 in emergency savings accounts linked to employer retirement plans. These accounts would have the advantage over regular savings accounts in that they could receive employer matching contributions.
  • Surviving Spouse Beneficiary Changes For surviving spouse beneficiaries who are older than their deceased spouse, they are now permitted to treat themselves as decedent, thereby delaying RMDs and receiving smaller payouts because of a longer lifetime payout schedule.
  • Accessing Retirement Funds During Times of Need The new bill expands the list of exceptions for the 10% penalty on withdrawals prior to 59 ½ to include private sector firefighters, state and local correction officers, public safety workers with 25 years at the same employer, permanent reinstatement of distributions for natural disasters, persons with terminal illness, victims of domestic abuse and “emergency” withdrawal of $1,000. Also, starting in 2026, up to $2,500 per year can be taken prior to 59 ½ to pay for long-term care insurance.  
  • Expansion of ABLE Accounts Starting in 2026, individuals who become disabled prior to 46 will be able to open tax-advantaged ABLE account. Currently law allows only those disabled prior to 26 to open such accounts.
  • Other Changes In 2025, many new 401(k) and 403(b) plans will include auto-enrollment. In 2023, taxpayers can create SEP IRA plans for household employees. In 2024, small business owners will have access to “Starter 401(k)” plans.

This is a highlight of the major changes in the SECURE Act 2.0 bill. There are many details to be worked out in the coming year and we are watching this closely. As usual, please reach out to us at Sandy Cove if you have any questions regarding these changes.

Neither Sandy Cove Advisors, LLC nor its employees provide tax or legal advice.  Accordingly, please be advised that any discussion of U.S. tax matters contained within this communication is not intended or written to be used and cannot be used for the purpose of (i) avoiding U.S. tax related penalties or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.