Ready for round 2? At the tail end of 2022 Congress passed legislation known as the SECURE Act 2.0 which was signed into law by President Joe Biden on December 29th, 2022. There are a number of important retirement planning changes included in this legislation.
The changes that are most pertinent to individual savers will be covered in this article. We will write another short piece on changes to Employer-based retirement plans.
Top SECURE ACT 2.0 Changes for Retirees and Pre-Retirees
- Change in the catch-up provisions for your retirement plan
- Changes in Required Minimum Distributions
- Roth IRA Opportunities
Changes to Catch-up Provisions
Starting in 2024 Catch-up provisions for all workers aged 50 and higher will be adjusted for inflation. In 2025 catch-up limit increases for 401(k) participants aged 60-63 will be the greater of $10,000 or 150% of the catch-up contribution (indexed for inflation). This extra bump in eligible savings for pre-retirees age 60-63 applies for the years in which you attain age 60, 61, 62, 63. You are no longer eligible in the year in which you turn 64.
Even before the SECURE Act 2.0 pre-retiree savers saw a nice bump in the amount they can save in a 401(k)/403(b)/457 plan for 2023. The IRS raised the catch-up limit for retirement plans to $7,500 for 2023.
Why the change? The problem pre-retirees kept running into was that the amount they were allowed to save as a catch-up provision was dictated by the IRS each year. Some years the IRS would increase the limit, some years they wouldn’t.
Here’s a chart showing the contribution limit history over the last 10 years.
Now savers will be able to see boosts in the amount they are able to save on a more regular basis.
The SECURE Act 2.0 Retirement Plan Catch-up Wrinkle
There is a wrinkle to this new provision that high earners need to be aware of, Section 604. This provision dictates that starting in 2024, if you earn $145,000 (indexed for inflation) or more, your catch up contributions have to be made as Roth contributions. Clearly, this is not ideal as typically at the end of your career many people are at their peak earnings.
However, you would get the benefit of having tax free money in retirement. Remember, all earnings and contributions to a Roth 401(k) come out tax-free in retirement. This can increase your flexibility to manage your tax picture in retirement.
IRA Catch-Up Changes
Now folks taking advantage of saving in an IRA (whether it’s a traditional, Roth, or Backdoor Roth IRA) will also see their annual catch-up contributions indexed to inflation in $100 increments. This is good news because the IRA catch-up contribution limit has been stuck at $1,000 since it was first introduced 15 years ago.
Changes to Required Minimum Distributions
RMD Ages Move Up
If you are currently taking an RMD (Required Minimum Distribution) please continue to take one. If you turned 72 in 2022, you need to take an RMD before Apr 1, 2023. However, if you turn 72 in 2023, then your RMD begin date is pushed back 1 year to age 73.
The age for taking Required Minimum Distributions will remain at 73 until 2032. Starting in 2033 the RMD age will be pushed back to age 75.
Caveat: This does not mean you shouldn’t take anything out of your IRA until age 73.
For higher net worth couples who have assets outside of an IRA or retirement plan, you may be able to live off of taxable assets until you reach age 73. However, you may wish to explore doing systematic Roth conversions so you aren’t hit with huge RMDs in your 80s.
Also, keep in mind that if a non-spouse beneficiary inherits your IRA or retirement plan, they will be subject to the new 10 year rule which means that a large IRA could be forced out over just 10 years instead of being stretched out over the beneficiary’s lifetime. If you find yourself in this fortunate position, work with your fiduciary financial advisor to help you consider the tax impact across your lifetime and your heirs.
No changes to QCD beginning age
Good news, once you turn 70.5 (and not a day before) you can continue to make Qualified Charitable Distributions from your IRA. This age target did not shift up with the higher Required Minimum Distribution age. A reminder to work closely with your Certified Financial Planner ® and CPA or tax preparer to ensure that your distributions count as Qualified Charitable Distributions if you are pursuing this strategy.
RMD penalty reduced to 25% (or 10%…)
Starting in 2023 if you miss a Required Minimum Distribution the penalty has been reduced from 50% to 25%. If you catch your mistake during the correction period, take the missed RMD and file a corrected tax return. Talk to your CPA if this is a concern of yours.
Roth Retirement Plan Changes
Roth RMDs no longer required (employer plans)
Starting in 2024, Roth Retirement Plans are now no longer subject to Required Minimum Distributions (similar to Roth IRAs). This is not a phased-in approach and it appears that all RMDs from Roth retirement plans are scheduled to end in 2024.
Employer Roth Matching and Non-elective contributions
The SECURE Act 2.0 permits employers to start making employer match and non-elective contributions as Roth contributions for employees with designated Roth 401(k)s and 403(b)s as long as the money is non-forfeitable (i.e. is not subject to a vesting schedule). Those amounts will be included in the employees income in the year they are received.
While the law made this change effective immediately, employers and plan administrators still have to design ways to update their systems to actually implement this change.
No Changes to Backdoor Roth IRAs (or Mega-Backdoor Roth)
Continue on, as you were!
529 to Roth IRA Transfers
This is a little bit of a quirky and niche opportunity that deserves its own article. Suffice to say, if you find yourself in the fortunate position of having excess funds in a 529 plan you may be able to roll those funds over to a Roth IRA opened in the name of the 529 account beneficiary. There are a lot of rules around this and since 529 plans are administered by the states, it may be a while before these 529 plans are updated to process these transfers. A few quick rules:
- The 529 must have been open for at least 15 years
- 529 contributions (and their earnings) made in the last five years are not eligible to be rolled over to a Roth IRA
- The annual limit on what can be moved from a 529 to a Roth IRA is the Roth IRA contribution limit for the year and it must include any contributions made to the Roth IRA (i.e. no double counting)
- The maximum amount that can be moved from a 529 plan to a Roth IRA during an individual’s lifetime is $35,000
Although the SECURE Act 2.0 brought many more changes than the original SECURE Act, few are as impactful as the death of the stretch. This legislation presents many planning opportunities to retirement savers but what is applicable to you?
One of the biggest takeaways with any new legislation is knowing it takes time to implement. You probably have many things on your plate and discerning the nuances to each provision may not be one of them. Hire a dependable team like Spark Financial Advisors.
You can rely on us to unpack new legislation and relevant strategies.
Stay tuned as we will address changes to specific employer based retirement plans in a separate article.
*Before making any changes to your retirement plan, please consult with your Certified Financial Planner®.