Big Changes For Retirement Planning Under Secure Act 2.0
At the tail end of December President Biden signed into law the Secure Act 2.0 as part of the $1.7 trillion Consolidated Appropriations Act of 2023. Its name represents an extension of the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act that was the Federal government’s first major retirement-focused legislation since 2006. Secure Act 2.0 builds on the government’s support and encouragement of taxpayer savings for both education and retirement, and includes significantly more changes than its earlier namesake. Here is a brief summary of the key provisions of this new law.
Let’s start with the enhancements to individual retirement accounts (IRAs). The beginning age for required minimum distributions (RMDs) from traditional IRAs is delayed from age 72 to age 73 for taxpayers born between 1951 and 1959 and to age 75 for all younger taxpayers. Starting in 2024 the catch up contributions that taxpayers age 50 and above can additionally make to their IRAs and Roth IRAs (currently $1,000) will be indexed for inflation. If you’re inclined to make charitable contributions from your IRA, the maximum Qualified Charitable Distribution (QCD) – currently limited to $100,000 – will be indexed for inflation starting in 2024. Note that there is no change to the minimum age for QCDs: you can still make them as early as age 70½. You will now also be able to make a one-time $50,000 contribution to a Charitable Remainder Trust or Charitable Gift Annuity from your IRA. With respect to investing in a Qualified Longevity Annuity Contract (QLAC) inside an IRA, Secure Act 2.0 increases the maximum amount to $200,000 (with built-in future inflation adjustments) and adds more flexibility to the allowable annuity payout structures.
One other change worth noting is the reduction of one of the most severe tax penalties in the entire internal revenue code, the 50% excise tax on the failure to withdraw an RMD when due. It is now reduced to 25%, and to just 10% if paid only one year late.
Workplace retirement plans will be allowed to expand their Roth capabilities assuming the company chooses to do so. SEP and SIMPLE plans can now be created with Roth accounts, and matching employer contributions to 401(k) and 403(b) plans, previously limited to tax-deferred accounts, can now go into the same employee-designated Roth accounts used for salary deferrals. Starting in 2024, 401(k) and 403(b) catch-up contributions for participants aged 60 through 63 will be increased to the greater of 150% of the regular catch-up amount or $10,000 (indexed for inflation). Interestingly, also in 2024 taxpayers earning more than $145,000 will be required to make catch-up contributions into the Roth portion (rather than the pre-tax portion) of their 401(k) and 403(b) plans if the plan has Roth capabilities.
Lastly the requirement that RMDs be taken from Roth 401(k) accounts starting at age 72 – an inconsistency with individual Roth accounts that do not require RMDs at all – will be eliminated in 2024.
Probably the most significant change to 529 Education Savings Plans is the ability to convert up to $35,000 of any unused education savings into retirement savings by rolling over the funds into a Roth IRA in the name of the beneficiary. While there are various restrictions (such as having to wait at least 15 years), this change will effectively reduce the taxes and penalties currently imposed on excess 529 plan withdrawals. Another positive change to education funding is the ability for employers to match education loan payments in the same manner that retirement savings are matched. This will benefit employees carrying education debt who cannot afford to save for retirement right now.
There are dozens of other changes involving post-death options for surviving spouse beneficiaries of IRAs, penalty exceptions for retirement fund withdrawals during times of need or for certain occupations, and 401(k) auto-enrollments and simplified structures for small businesses. There’s even legislation for the creation of a retirement plan lost & found registry to be managed by the DOL. Surprisingly, clarification about the most confusing change from the original Secure Act – whether annual RMDs are still required from inherited IRAs now that they must be fully withdrawn after ten years – is missing. I guess that’s what happens when you pass a bill that’s over 4,000 pages long.