In December of 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act brought many changes to the retirement environment (death of the stretch IRA, raising RMD age to 72, etc.).
Before the end of 2022, President Biden signed an omnibus spending package which contained the SECURE Act 2.0 – another retirement reform package.
There were hundreds of items in this bill. Here are the major takeaways as it relates to retirement planning:
Retirement Planning from SECURE Act 2.0
RMD starting age pushed back
The simplest way I can explain the changes is by showing you a chart:
|Birth Year||RMD beginning Age|
|1951 – 1959||73|
If you have already started your RMDs (or were supposed to in 2022), then you are out of luck for these changes. This only applies to those who have yet to begin taking RMDs. There’s also a weird quirk in this; as a result, no one will be starting new RMDs in 2023. Generally, I think this is good for clients as we now have a bigger window to implement Roth conversion strategies before RMDs kick in that may bring in higher Medicare premiums.
RMD’s for Roth 401(k)’s no longer required
Before, even if you had funds in a Roth 401k you were required to take an RMD. This was silly because all that money is after-tax; so they eliminated this quirk and now they will be treated like Roth IRAs – No RMD requirement.
Additional employer contributions are now Roth eligible
If you’re part of a workplace retirement account, the employer contributions were always pre-tax. Now they can be after-tax Roth contributions. (For example, if your employer offered a match on money you contributed to your 401k, those “match” funds were always pre-tax. Now, they can be all Roth. This was confusing for employees when they went to rollover funds to IRAs because they had to open a Traditional IRA – for the employer’s match and a Roth IRA – for their pre-tax 401k money. And then make sure the right money got to the right account.
Wage earners over $145,000 are required to use Roth option for catch-up contributions to 401k plans (effective 2024)
Participants are eligible to defer $22,500 of their salary into a 401k. For those over age 50, you’re allowed an additional “catch-up” contribution of $7,500. With this new bill, those who make more than $145K will have to have those catch-up contribution be Roth contributions. You can avoid this by a) either having your total wages be less than $145K or b) generate earnings via self employment income (all the sole-business owners rejoice!). The latter loophole is because this constraint is specifically tied to earnings and FICA taxes. Well, self-employed individuals don’t pay FICA tax. They pay self-employment tax. It funnels to the same government agencies but they are two separate taxes.
Higher 401k catch-up contribution limit for those 60, 61, 62, and 63 (effective 2025)
The “bonus” catch-up contribution is limited to 150% of the annual catch-amount ($7,500 in 2023). So $11,250 could be contributed as a catch up if you are age 60-63. But what if you’re 64 and want to make additional contributions to your retirement? Too bad. Government at it’s finest.
529-to-Roth IRA Transfers (effective 2024)
This allows for 529 plan money that doesn’t get used for college/higher education expenses can then be transferred to the beneficiaries Roth IRA and used for retirement. The 529 plan must be opened for 15 years and the transfer is limited to the annual IRA contribution limit ($6,500 for 2023) with a maximum lifetime transfer limit of $35,000. It’s unclear whether the beneficiary of the 529 can be changed to yourself and then you make the transfers to your own Roth IRA rather than your kid’s/young person’s Roth IRA. The argument would be that since you funded the 529 plan for your kid’s college shouldn’t you be able to use the leftover funds to aid in your own retirement? We’ll see how this plays out!
New post-death option for surviving spouse beneficiaries (effective 2024)
When your spouse dies and you are the beneficiary to their IRA you have a couple current options: 1) Assume as your own or 2) Maintain as an inherited IRA. This new bill adds a 3rd: You’re now able to elect be treated as the decedent. Why would you do this? This option is effective if the spouse who dies is younger than you. The RMD gets delayed until the deceased spouse would have reached RMD age.