Yes, it is true, Congress found some common ground and accomplished something that is (mostly) beneficial to taxpayers. Just before ringing in the new year, President Biden signed a new bill into law, known as SECURE 2.0. SECURE 2.0 brings significant changes to retirement accounts, many of which will affect our clients and their finances. Before looking at the new rules under SECURE 2.0, we should quickly review the first SECURE Act, which passed in December 2019.

One notable change under the original SECURE Act was pushing back the required minimum distribution (“RMD”) age from age 70 ½ to age 72 (a more detailed post on RMDs to come later this quarter). The SECURE Act also drastically changed the rules regarding how beneficiaries can withdrawal from inherited IRA accounts. In short, the old rules allowed for a non-spouse beneficiary to distribute the inherited IRA over his or her lifetime, known as the “stretch” provision. Often, this produced significant tax savings and provided flexibility to many younger beneficiaries as they could withdraw the taxable income from the IRA over many years or even decades. However, the SECURE Act eliminated the stretch provision so that these types of beneficiaries now have 10 years to withdraw the entire IRA (same rules apply for inherited ROTH IRAs). The new rule creates significantly less flexibility for beneficiaries and a higher tax burden as the accounts must be withdrawn in much less time. SECURE 2.0 continued to build upon the overhaul of the retirement rules, but this time, the changes are mostly a positive for taxpayers.

The new law contains several new updates to the retirement rules. Some of the main changes under SECURE 2.0 likely to have the biggest impact on our clients are:

• Starting in 2023, RMD age now begins at age 73 and will further increase to age 75 in 2033.
• Catch-up contributions (over age 50) to retirement accounts will increase starting in 2024/2025.
• A portion of unused 529 plans will now be eligible to be rolled over into a Roth IRA account.

Once an individual reaches the RMD age, the IRS has a formula to determine a minimum amount that individual must distribute from his or her IRA each year. Failure to take the distribution results in a severe tax penalty (SECURE 2.0 reduces this penalty, but it is still a hefty 25% of the RMD). Unfortunately, the change from age 72 to age 73 is minor and did not go as far as some had hoped. Nonetheless, if you are age 72 or younger (or turning 72 this year), this gives us one additional year to do tax planning so we will take it! For those clients that already depend on IRA withdrawals for living expenses, this change is irrelevant. However, for those clients that have other sources of income, having the flexibility of choosing where to withdraw funds is a valuable tax tool. Each year, we review our client’s taxes and look at ways we can reduce future RMDs (when it makes sense to do so) and increase financial flexibility. This slight change in the RMD age certainly gives us a little more flexibility with tax planning. Again, there will be a more detailed post about RMDs soon.

The catch-up provisions are also significant for many of our clients that are still working. The old rules (which will still apply in 2023 and 2024) allowed for an individual over age 50 to contribute an additional $7,500 to his or her employer-sponsored plan (401(k)s, 403(b)s, etc.). Starting in 2025, individuals that are ages 60-63 will have the catch-up provisions increase to $10,000 annually, which will be indexed for inflation (sorry for using the “I” word!). One wrinkle to this increase, is that an individual earning wages over $145,000 in the prior year will need to make the catch-up contribution into a ROTH account (no current deduction). It should be noted that the Act implies that this wage limitation does not apply to self-employed workers. Additionally, the current catch-up amount for IRA accounts will increase starting in 2024, as the $1,000 catch-up will be indexed for inflation. These changes are a great tool for those of you approaching retirement and will allow you to increase your retirement savings.

Finally, under the current rules unused 529 plans, which are education savings plans, can be rolled over to a wide range of family members or withdrawn with a 10% penalty and any gains included in income. Some parents (and grandparents) have been hesitant to contribute to 529s due to the penalty on the unused funds. Under SECURE 2.0, a 529 account that is at least 15-years old can be rolled over to a Roth account for the beneficiary of the 529. The rollover is subject to the annual Roth contribution limits and there is a lifetime limit of $35,000 on the account. Despite the limitations, this is a welcome change that will make the 529 even more flexible and attractive for many people.

There remain lingering questions on how these and other changes will be implemented, however, the overall updates to the retirement rules under SECURE 2.0 are positive. As these changes are implemented, we will work with clients to make any beneficial adjustments to their financial plans because of the new law. Listed below are some of the other changes in the new law not mentioned here in detail, however, we are happy to discuss in depth any of these changes and how they may impact you.

• Businesses with more than 10 employees must provide automatic enrollment in 401(k) and 403(b) plans (3% of pay with annual increase of 1%).
• SIMPLE and SEP IRAs can be treated as Roth contributions.
• Employers can designate matching contributions to retirement plans as Roth contributions (previously the employer match had to be pre-tax).
• Employers can make matching contributions to retirement accounts for employees making payments towards student loans.
• Increased access to emergency savings and penalty-free withdrawals for employees.
• Improved coverage for making elective deferrals for part-time workers.
• Modified credits for small business contributions to pensions.
• Savers Match (replaces the Saver’s Credit) offers up to $2,000 tax credit for eligible individuals that make a qualified retirement contribution.

Researched and composed by JD Matchett-Robles