The SECURE Act 2.0 was part of the Consolidated Appropriations Act of 2023 and intends to further enhance retirement savings opportunities for Americans. It’s important to understand the key provisions and how they may impact your situation. We are going to cover a few key changes and discuss what they mean for individuals:
1) Increase Age of RMDs from 72 to 73:
With the passing of the SECURE Act 2.0, the required minimum distribution (RMD) age was increased to 73 beginning in 2023for individuals who turn 72 after 2022. In 2033, the RMD age will move to 75. So, for people born in 1960 or later, your RMD age will be 75 given current laws.
What does this mean for you?
Many people have deferred large amounts of money on a pre-tax basis over the years, meaning they will have to pay the applicable taxes when the money is withdrawn. Delaying RMDs can enhance this issue if not planned for properly.
You may want to consider shifting some of your pre-tax dollars to a tax-free position for later in your retirement or to pass on to your heirs more effectively. Some individuals make this tax move by moving funds to a Roth, called a Roth conversion. You will pay taxes now but move funds to a tax-free position for later distributions.
Roth conversion considerations are covered in the “Roth Conversions” article. I’d recommend checking that out.
Another consideration to keep in mind is that the age increase for RMDs did not affect the age at which you may begin taking Qualified Charitable Distributions (QCDs). A QCD is a nontaxable distribution from an individual retirement account (IRA) to an eligible charity. It can count towards your RMD for the year and neither you nor the charity will have to pay income taxes.
The requirement age for Qualified Charitable Distributions (QCDs) is still 70 1/2 and individuals can contribute up to $100,000 as a QCD. Starting in 2024, the $100,000 limit will be indexed for inflation.
So why is this an important consideration?
With a QCD, you don’t have to itemize to receive the deduction. It comes off your 1040 and reduces your Adjusted Gross Income (AGI). This means that QCDs can also have a positive impact on Social Security taxes, Medicare Part B premiums and the 3.8% net investment income surtax for some taxpayers because they are based on your AGI.
Please note that you can't take QCDs from 401(k)s - only IRAs.
2) Changes to 529 Plans:
The SECURE Act 2.0 also includes impacts to 529plans. A lifetime limit of up to $10,000 from a 529 plan may now be used to repay a beneficiary’s student loans and an additional $10,000 from the same plan may be used for a sibling’s student loans. Participants in qualifying apprenticeship programs can use 529 plan savings to pay for costs including fees, books, supplies and required equipment.
Beginning in 2024, beneficiaries of 529 plans that have been in place for 15 years or more can transfer assets from a 529 plan to a Roth IRA. The transfer is subject to the beneficiary’s annual contribution limit and up to a lifetime maximum of $35,000.
This provision may alleviate a parent’s potential concern that they are overfunding a 529 plan. For example, if a child qualifies for scholarships or school expenses are less than anticipated, leftover 529 amounts could be transferred to the beneficiary’s Roth IRA.
Additional requirements and guidelines for beneficiaries are expected.
3) Changes to catch-up contributions:
Effective in 2025, catch-up contributions for 401(k), 403(b), and governmental 457(b) plan participants aged 50 or older must be made to a Roth account. However, the requirement applies only if the employee’s prior-year wages from the employer sponsoring the plan exceed $145,000 in the previous taxable year.
Effective in 2024, the catch-up contribution limit for IRAs will increase annually for inflation in $100 increments.
Effective in 2025, the new law expands catch-up contribution limits for employees who are ages 60 – 63. The catch-up amount will increase to the greater of $10,000 or 150% of the normal catch-up limit for 401(k), 403(b) and 457(b) plans. The catch-up limit for SIMPLE IRAs and SIMPLE 401(k) plans will increase to the greater of $5,000 or 150% of the normal catch-up limit. These amounts will be adjusted for inflation beginning in 2026.
Remember: Starting in 2025, if your income from your employer was over $145k in the prior year, this additional catch-up contribution would also have to go into Roth.
Other SECURE Act 2.0 Changes:
There are many other provisions of the SECURE Act 2.0 that may impact your situation. You will likely see these changes come into effect during annual open enrollment periods. I always recommend reviewing your employee benefits during that enrollment window every year to make sure you're taking advantage of all the benefits available to you.
Together, we can work to keep you on-track towards your financial goals.
Request a consultation with me to learn more.
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