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Included with the 2023 government spending bill that was just signed into law by the president last week was the latest version of SECURE Act 2.0. The first SECURE Act was passed in late 2019 and it made some major changes. The most significant being the elimination of the “lifetime stretch IRA”. In place of the stretch was a much less tax-friendly 10-year rule which puts the maximum stretch at – you guessed it – 10 years.

SECURE 2.0 adds even more retirement account related provisions that affect savers, retirees, plan participants and plan sponsors. Here are the top items worth noting to clients.

Required Minimum Distributions age extended and penalty relief

Starting in 2023, the Required Minimum Distribution (RMD) age for certain IRA owners is now age 73 and will be further extended to age 75 in 2033. Here is the breakdown of RMD start years by year of birth:

• Born 1950 or earlier – no change

• Born 1951 through 1958 - RMDs start at age 73 (2024)

• Born 1959 or later - RMDs start at age 75 (2033)

For many clients, the additional year(s) affords more time for strategic Roth conversions or other lifetime tax planning opportunities that become much more limited after RMDs begin.

The penalty for failing to make a required distribution was a steep 50% of the shorted amount. The egregious penalty was mostly a deterrent but rarely ever enforced. SECURE 2.0 reduces the penalty to 25% or just 10% if corrected in a timely manner. The lesser penalty makes it much more likely to be imposed and/or voluntarily paid.

Roll unused 529 balances to Roth IRA

We’ve always considered 529 accounts as pseudo-Roth IRAs for college expenses as they offer similar benefits of tax-free growth when accumulations are used toward college expenses.

The SECURE Act 2.0 includes a never-before offered opportunity to roll 529 balances into a Roth IRA for the beneficiary of the 529 plan starting in 2024. There are some limits and qualifications. The 529 must have been maintained for 15 years or longer. Also, contributions made to the 529 within the past 5 years are ineligible. Rollovers are allowed annually up to the Roth IRA contribution maximum (currently $6,500) subject to a lifetime rollover maximum of $35,000.

That may not seem like a lot on the surface but provides a nice Roth IRA foundation to build investing momentum for children or grandchildren entering the work force. Assuming this begins when the beneficiary was 16 years old, that’s easily over a million tax-free dollars by their late 60s without ANY further contributions!

Qualified Charitable Distribution (QCD) limit indexed to inflation

QCDs were first introduced in 2006 and offered to those older than 70½ an alternative means of making charitable donations directly from retirement accounts. These donations satisfied the owner’s RMD obligations while being excluded altogether from taxable income – a better economic value than a typical (itemized) charitable deduction in many cases. The limit was $100k in 2006 and remains $100k in 2022. Beginning in 2024 it will be indexed to inflation.

There’s also an opportunity to make a QCD gift up to $50,000 (indexed to inflation) to a charitable trust as an expansion of the types of entities that can receive a QCD. Questions remain about this given the small amount and special requirements of the trusts.

Higher catch-up contributions

Today, participants in a 401(k) or 403(b) over the age of 50 are allowed a catch-up contribution of $7,500 in addition to the standard allowable max deferral $22,500 for 2023. These contributions are all made on a preferential pre-tax basis.

Starting 2025, plan participants who are age 60 to 63 will be allowed a “super-sized” catch-up equal to the greater of $10,000 or 150% of the catch-up amount in place at the time.

One new caveat is that for those earning more than $145,000 in the prior calendar year, all catch-up contributions must be made on an after-tax basis to a Roth account. That’s the loss of approximately $2,400 per year income tax incentive (or more) for those over that income threshold who want to max out savings.

Employer matching enhancements

Employers were previously not able to deposit matching contributions to their employee's Roth accounts. SECURE 2.0 now gives this option. Matching in this Roth form however will be fully taxable as income to the employee in the year of contribution.

Also, starting in 2024, employers can include student loan repayments as retirement plan contributions to determine the amount of employer matching funds paid to the employee.

SECURE 2.0 brings dozens of other provisions and additional complexities. It will be an evolution over the next several years as they work their way into plan documents. We will keep you abreast of major developments and work with you to help navigate your expanded options and decisions.

Disclosures