What does the SECURE 2.0 act mean for your retirement?

The SECURE 2.0 Act was signed into law in late December 2022. The new law contains nearly 100 provisions affecting retirement savings and plan administration. The Act expands access to retirement savings. It also has benefits for those with existing savings.

Here is what you should know about the provisions most likely to impact your retirement plan.

Increased Age for Required Minimum Distributions (RMDs)

The age when you must begin to take RMDs from traditional retirement accounts increases to 73 in 2023. It will increase again to 75 in 2033. An easy way to look at this is if you were born before 1951 there is no impact to RMD rules. If you were born between 1951-1959, RMDs are pushed back to 73. Finally, anyone born after 1960 can expect RMDs to start at age 75.

For those at or near retirement, you’ll have an extra year (or perhaps a few) before you are required to withdraw from your accounts. That gives your accounts more time for tax-deferred growth.

For those farther from retirement, the new RMD ages can be a reason to review your retirement plans. You may want to rely on your taxable accounts longer. At minimum, you’ll have more time before needing to withdraw from your accounts.

Changes to Catch-Up Contributions

For those over age 50, current rules allow you to make additional “catch-up” contributions to your retirement plans over the normal limits. These additional amounts are possible even if you’ve been making your maximum contributions for all earlier years.

For IRAs, you can contribute an additional $1,000 if you’re over 50. This amount will be indexed for inflation starting in 2024 (in $100 increments). For employer plans like 401(k)s, the 2023 catch-up limit is $7,500. Under the new law, this limit will go to $10,000 in 2025 if you are ages 60-63 and be indexed for inflation.

These may seem like modest changes, but you will want to keep track of the numbers to make the most of your savings.

An important further change for catch-up contributions is that you will need to make them to a Roth account if you receive compensation over $145,000 in a year. For some, this could be a good requirement. When you make contributions to a Roth account, you have already paid the tax. But then you don’t pay tax when you withdraw funds later. You also are not required to withdraw funds during your lifetime. Combined, these add up to more savings over time.

If you don’t already have a Roth account, you may want to set one up so you can take advantage of the Roth catch-up contributions when the time comes. Setting up a Roth account now will also start the clock on the 5-year period, which is required before you can start to withdraw earnings or rollovers without tax.

529 Plan to Roth IRA rollover

Starting in 2024, beneficiaries of a 529 college savings plan can rollover assets from their 529 account to a Roth IRA. But there are conditions: the 529 plan must have been in existence for 15 years, contributions from the previous five years are ineligible, there is a $35,000 rollover maximum over the beneficiary’s lifetime, the beneficiary must have compensation, and the standard annual Roth IRA contribution limits apply (in 2023, $6,500 if under 50 and $7,500 if 50 or older).

This provision was enacted out of concern that people were not funding 529 plans because they were worried about paying taxes and penalties if the beneficiary didn’t use the funds for education. If that was a concern for you, don’t worry. Keep saving.

In 2024, funds left over in a 529 can be rolled over to start the beneficiary on the path for retirement savings with a Roth IRA. Also, keep in mind there are options to transfer a 529 plan to a new beneficiary if the assets exceed the $35,000 maximum for the Roth rollover.

Indexed $100,000 QCD Limit

A popular way to avoid the tax burden when you reach your RMD age (now 73) and are required to take distributions from your IRA is to donate the amount to charity through a qualified charitable distribution (QCD). With a QCD, funds go directly from the IRA to the charity and count against your RMD without any tax to you.

The maximum amount for a QCD currently is $100,000. Effective in 2024, that maximum will be indexed to inflation. Like the IRA catch-up amounts, this provision keeps us from relying on Congress to ensure the amount goes up over time.

For those with IRAs, a QCD generally should be the first source for your charitable giving. It’s a great way to support your community and save taxes. You’ll want to keep an eye on any annual adjustment so you know your maximum amount.

Performance Benchmarks for Target-Date Funds

Department of Labor regulations require retirement-plan investment options, like mutual funds, to be benchmarked to appropriate broad-based securities market indices. This new provision requires the DOL to develop appropriate benchmarks for target-date and other asset allocation funds as well.

Benchmark indexes are used as a measuring stick to gauge how your investments perform. But for those using target-date retirement funds or other funds designed to shift asset allocation as you get closer to retirement, it can be difficult to track performance. This provision is aimed to remedy this.

Bear in mind, especially if you have moved on from an employer, another solution is to consolidate your retirement assets in an IRA. With an IRA, you generally will have broader access to investments and can work with a manager to match your financial plan with appropriate investments.

No Distribution Requirements for Roth 401(k)

Currently, Roth 401(k)s have pre-death RMDs, unlike their IRA counterpart. Starting in 2024, this requirement is eliminated.

This is a positive step for folks over the RMD age – now 73 – who are still working and have a Roth 401(k). Currently, they would need to rollover their Roth 401(k) to a Roth IRA to avoid needing to make RMDs. Starting in 2024, they can keep the Roth 401(k) in place, continue to make contributions while they are working, not need to take RMDs, then rollover when they retire.

SEP and SIMPLE IRAs Receive Roth Contributions

If you’re doing your retirement savings through a SEP or SIMPLE IRA, you now have a Roth as an option. As mentioned above, this is positive development given that a Roth account uses post-tax dollars to grow tax-free, doesn’t require distributions and doesn’t incur tax when you withdraw funds once you are past retirement age.

Overall, the SECURE 2.0 Act includes a broad array of reforms and new provisions. Our advisors can help you determine how they may impact you and your plans for the future.