SECURE ACT 2.0 for Retirees

If you were paying much attention to financial news over the holidays, you may have seen that the “Secure Act 2.0” was attached to the omnibus spending bill passed in late December. While the changes are many, there are a few key components that are relevant to individuals nearing or in retirement:

• Changes to required minimum distributions (RMDs)
  • Increased RMD age – Beginning in 2023, the RMD age is increased to age 73. In 2033, it will increase to 75.
  • Lower penalty for missed RMDs – The penalty for not taking an RMD is reduced from 50% to 25%. A new “correction window” also applies, further reducing the potential penalty to 10%.
  • No more RMDs for qualified employer plans – Starting in 2024, RMDs are no longer required from Roth 401(k)s, Roth 403(b)s, Roth 457(b)s, or Roth TSP plans. Previously, these accounts required RMDs unless they were rolled over to a Roth IRA prior to RMD age.

• Increased access to Roth accounts
  • Roth contributions for SEP and Simple IRAs – Starting in 2023, Roth contributions are now permitted in SEP and Simple IRAs.
  • Employer matching to Roth accounts – Instead of only pre-tax matching contributions within employer retirement plans, Roth contributions are now allowed for the employer contribution portion. Certain limitations apply and the contribution is taxable income to the employee in the year it is made.
  • Rollover from 529 plans to Roth IRAs – In some instances, beginning in 2024 you will be allowed to transfer funds from 529 plans to Roth IRAs. A number of conditions apply and should be carefully followed.

• Increased catch-up contribution limits
  • Beginning January 1, 2025, catch-up contributions are increased to the greater of $10,000 or 150% of the regular catch-up contribution amount for employer retirement plan participants ages 60 – 63. Note that for wage earners above $145k, this catch-up contribution will only be allowed to Roth accounts.

One planning opportunity presented in the SECURE Act 2.0 is additional flexibility for Roth conversions, as the delayed RMD ages may create more time for retirees to transfer money from pre-tax accounts to Roth accounts at a lower tax rate before their RMDs begin. The other potential opportunity is pre-funding educational 529 accounts for children and grandchildren with the expectation of future Roth transfers to help pre-fund their retirement.

Again, there are many other changes, especially related to workplace-sponsored retirement plans, and the above list does not come close to covering all of the new legislation. For a more detailed write-up, check out Jeffrey Levine’s write-up here.