SECURE Act 2.0—A Boost for Retirement Savers

In late 2022, before closing shop for the holidays, Congress passed the SECURE Act 2.0. President Biden signed it into law the last week of the year. Leave it to our legislative and executive branches to wait until late December to pass significant retirement legislation. This is becoming something of a trend. The Tax Cuts and Jobs Act was signed into law on December 22, 2017. The original SECURE Act was signed into law on December 20, 2019. Further compounding the amount of change and new rules a few months later was The CARES Act, a policy response to the COVID epidemic that was signed into law on March 27, 2020. You get the point. Each of these pieces of legislation brought significant changes, some temporary and others permanent, to both personal and corporate tax codes, retirement planning, education planning, as well as other areas.

The SECURE Act 2.0, signed into law on December 29, 2022, is no different. It contains over 90 provisions designed to encourage increased savings toward retirement, improve retirement plan flexibility, and make it more attractive for smaller employers to offer retirement plans. Some of these provisions are quite broad, while others affect a narrow subset of savers and businesses (the document is over 4,000 pages!). We’ll spare you all the details and instead provide a summary of a handful of key provisions that have the potential to impact your planning.

For those very close to or in retirement

Changes to the RMD starting age: If you are an IRA or 401(k) owner currently in your seventies or older, you are probably well aware of the RMD. RMD stands for Required Minimum Distribution, the minimum amount you must withdraw from your account each year as mandated by the IRS. This is important from a tax planning standpoint because withdrawals from accounts funded with pre-tax contributions, such as Traditional IRAs and 401(k)s, are taxed as ordinary income.

• The starting age for RMDs has been pushed back again (to age 73). The original SECURE Act pushed the starting age from 70 ½ to 72. As of January 1, 2023, the age at which owners of retirement accounts must begin taking RMDs is 73.
• To add to the confusion, the starting age for RMDs is scheduled to increase to 75 beginning in 2033. Said another way, the starting RMD age for those born between 1951 and 1959 will be 73. For those born in 1960 or later, the starting RMD age will be 75.

Increases in QCD annual limits: An efficient strategy for charitable giving in retirement can be to give directly to charitable organizations from your IRA. You can read more about this technique, named qualified charitable distributions (“QCDs”), in Mary Lou Daly’s article, Over Age 70 1/2? Consider a QCD for your IRA RMD.

• QCD annual limits will increase with inflation, beginning in 2024. Since the inception of the QCD in 2006, taxpayers over the age of 70 ½ have been able to contribute up to $100,000 to a qualified charity or charities directly from an IRA each year. With the QCD now indexed to inflation, those with large giving goals will be able to use their IRA to directly gift more monies to organizations they support.

For those still saving toward retirement

Higher catch-up contributions for IRA and workplace retirement plans

• IRAs: For 2023, the annual contribution limit for the IRA is $6,500. Individuals age 50 or older can contribute an additional $1,000 per year. Until now, this catch-up contribution amount has not been indexed for inflation. That changes beginning in 2024.
• 401(k)s and 403(b)s: For 2023, the age 50+ catch up contribution is $7,500. Starting in 2025, individuals between the ages of 60 and 63 will be allowed to make catch-up contributions capped at the greater of 1) $10,000 (indexed for inflation) or 2) 150% of the regular catch-up (this would equal $11,250 in 2023, or 1.50 x $7,500).

There is one caveat to higher earners: If you earned more than $145,000 from that employer in the prior calendar year, the 50+ catch-up contribution will need to be made to the Roth portion of the 401(k) or 403(b) using after-tax dollars. Those who earned $145,000 or less, indexed for inflation going forward, will be able to choose whether the catch-up contribution is made with pre-tax or after-tax dollars. This brings me to our next point.

“Rothification!”

We’ve seen this term used quite a bit when describing SECURE 2.0. Several provisions in this law boosted or expanded the availability to get more dollars into Roth. You’ve probably heard us expound on the benefits of Roth before. Benton Bragg’s article, Roth IRAs for Everyone, describes many of these benefits. See our articles Mega Backdoor Roth Contributions and Roth Conversions for additional ways to get more of your retirement savings into the Roth bucket.

• Employer contributions via Roth: Until now, employer contributions to workplace retirement plans were made on a pre-tax basis. Starting in 2023*, employers now can allow employees to elect to receive some or all of the matching or non-elective contributions as after-tax Roth contributions. In such a scenario, the matching contribution made to the Roth portion of the plan would be taxable to the employee in the year of contribution (after which the earnings would grow tax-free). *Operationally, this is a big change and we suspect it will take some time for plan administrators and payroll systems to be updated.
• Roth for SEP and SIMPLE IRAs: SECURE 2.0 authorized the creation of both SEP Roth IRAs and SIMPLE Roth IRAs. Until now, contributions to these accounts were only made on a pre-tax basis. This change is effective this year (2023), but we again anticipate it will take some time for account custodians to update policies and paperwork after getting final approval from the IRS.
• 529 Education Plan Balances Transfer to Roth IRA: Beginning in 2024, unused 529 plan balances may be moved into a Roth IRA. This one is attention-grabbing but does come with several terms that must be satisfied before using the technique.

1. 1. 529 accounts must be at least 15 years old for assets to be eligible to be moved to a Roth IRA.
   2. The Roth IRA receiving the transfer must be in the same name as the 529 account beneficiary.
   3. The transfer is subject to the beneficiary’s annual Roth IRA contribution limit. However, any regular contributions to a Traditional or Roth IRA reduce how much can be transferred to the Roth. Here is a quick example using the 2023 Roth IRA contribution limit of $6,500. Let’s say the beneficiary makes a regular contribution of $3,000 to their Roth IRA. This leaves only $3,500 that can be moved from the 529 account.
   4. There is a lifetime maximum amount of $35,000 that can be moved from the 529 to a Roth IRA for the beneficiary’s lifetime.
   5. 529 plan contributions made within the last five years are ineligible to be moved to a Roth IRA.

Ultimately, given the above restrictions and limits, this change may be most helpful in removing the uncertainty some savers have when opening a 529 plan. Until now, many parents and grandparents have worried about “over-saving” for future education costs, considering the potential taxes and fees if the 529 balance is not used for qualified education expenses in the future (perhaps that child receives a scholarship or decides to pursue a path other than college). This provision helps challenge the argument against using a 529 plan to start saving early.

One big question remains with this technique:  Does changing the beneficiary of a 529 plan restart the 15-year waiting period? If the answer is “no,” this law could make the 529 an even more efficient savings and wealth transfer vehicle. For example, think of a parent who has saved to a 529 but their child doesn’t attend college or receives a scholarship. Depending on the IRS’s interpretation, that parent would be able to make themself the beneficiary of the 529 and transfer up to $35,000 to a Roth IRA in their name over time. Once their lifetime limit is used, perhaps they could then make their spouse the beneficiary and transfer funds to his or her Roth IRA. Potentially, that is 15+ years of tax-deferred growth in a 529 moved to the tax-free wrapper of a Roth IRA. At this point, the answer is unclear and subject to written interpretation and guidance from Congress or the IRS.

This article focused on SECURE Act 2.0’s provisions that we believe apply to the broadest group. With over 90 provisions in the law, there may be other opportunities that apply to your specific planning situation. We expect that the IRS will release additional guidance in the coming weeks and months (years?) to address specific questions and scenarios that have been raised by the new law. Your planning team at Bragg will be paying attention. Thank you for trusting Bragg Financial Advisors with your planning and investing.

This information is believed to be accurate but should not be used as specific investment or tax advice. You should always consult your tax professional or other advisors before acting on the ideas presented here.