SECURE Act 2.0, an update to the Setting Every Community Up for Retirement Enhancement Act of 2019, was recently passed by the Senate. This new bill contains a variety of provisions that could positively affect the retirement savings for millions of Americans.
Big changes to RMDs
One of the most significant aspects of SECURE Act 2.0 affecting retirees is the age changes for Required Minimum Distributions (RMDs) for original account owners.
For many years, account owners had to start drawing from IRAs and employer retirement plans at age 70 ½.
The SECURE Act increased the starting age to 72, and SECURE 2.0 pushes it to 73. If you turn 72 in 2023, the required distribution rules will not be enforced this year.
Further, the starting age will increase to age 75 in 2033. There are no distribution requirements for the original owner of Roth IRAs. Prior to passing SECURE 2.0, the rules did apply to Roth balances inside employer retirement plans.
Beginning in 2024, the Roth balances in 401(k), 403(b), and governmental 457(b) plans will no longer be subject to RMDs.
Frequently asked question: I turn 72 this year (2023). Should I still draw out the amount I thought I was going to have to take from my IRA this year?
If you need the money, the answer is to draw only what you need from your IRA.
If you don’t need to draw much from your IRA, and you are in a reasonable tax bracket this year, you should consider converting some of your IRA to a Roth IRA.
This will decrease the amount of your future required distributions and grow tax-free inside the Roth IRA. You can take qualified charitable distributions from your IRA starting at age 70 ½, even if you aren’t required to take a distribution.
Higher catch-up contributions
Some of you might already be familiar with catch-up contributions in employer retirement plans.
For example, if you turn age 50 or older during 2023 you can contribute an additional $7,500 into your retirement plan. Starting Jan. 1, 2025, individuals ages 60-63 years old will be able to make catch-up contributions up to $10,000 annually to a workplace plan, and that amount will be indexed to inflation. (The catch-up amount for people 50 and older in 2023 is currently $7,500.)
Please note, if you earn more than W-2 wages in excess of $145,000 in the prior calendar year, all catch-up contributions at age 50 or older will need to be made to a Roth account in after-tax dollars.
Individuals earning $145,000 or less in W-2 wages, adjusted for inflation going forward, will be exempt from the Roth requirement. Self-employment income from a partnership or sole proprietorship is not subject to this rule.
IRAs currently have a $1,000 catch-up contribution limit for people aged 50 and over. Starting in 2024, that limit will be indexed to inflation, meaning it could increase every year, based on federally determined cost-of-living increases.
Roth treatment for employer contributions
Beginning in 2024, you can also elect to have some employer contributions to your 401(k) or 403(b) account treated as Roth, rather than pre-tax. The employer’s plan must allow Roth contributions and the employer contributions must be nonforfeitable. This would make most employer matching and nonelective contributions eligible for Roth treatment. Such amounts will be included in the employee’s income in the year of contribution.
Frequently asked question: Should I elect to have the employer contributions I receive as Roth?
The answer to this question is similar to whether to make your own contributions as Roth or pre-tax. Generally, you make Roth contributions if you expect your current tax rate to be lower than what it will be during retirement. This is often the case for those who are younger and early on in their careers. This could also be the case for someone who stands to inherit a large estate.
Remember, you pay the tax on that contribution now and it will grow tax-free and not be subject to mandatory distributions in the future. If your income is lower now, electing Roth treatment for employer contributions could accumulate into a lot of tax-free income during your retirement years.
Inheriting an IRA? Pay attention
Prior to 2020, a non-spouse beneficiary of a retirement account could elect to take distributions in the form of a lump sum, or empty the account within five years, or stretch the distributions over their life expectancy in the form of annual RMDs.
This came to be known as a “stretch” benefit since retirement accounts could be passed down and, the income from them, stretched over multiple generations.
SECURE 1.0 ended the stretch in most instances and now non-spouse beneficiaries are required to empty these accounts within 10 years of the decedent’s death. To make things complicated, final guidance has not been issued on whether there is an annual RMD required when a non-spouse beneficiary inherits a pre-tax retirement account and the decedent already started RMDs before passing away. Early indications suggest this will be the requirement, and the final regulation is due by the end of 2023. Please note, only the 10-year rule applies to Roth IRAs, and you still get tax-free distribution treatment on inherited Roth accounts.
Frequently asked question: I have just inherited an IRA from my mother. Should I draw more than the RMD each year or take more out during year 10?
The answer to this depends upon whether the account is a Traditional or Roth IRA, as well as what cash flow and taxes look like.
For a Roth IRA, I recommend delaying all of your distributions until year 10, unless you need money or can use the inherited Roth account to fund your own Roth IRA or make Roth contributions in your 401(k). This will enable you to maintain tax-free growth for as long as possible.
If this is a Traditional IRA, I recommend using distributions to balance your income out over the next 10 years. If you are going to retire in a couple years, it would probably benefit you to take larger distributions after you retire rather than evenly over the 10 years.
Qualified charitable distributions
The annual qualified charitable distributions (QCD) limit has been $100,000 per taxpayer since its inception in 2006.
Beginning in 2024, this limit will be indexed to inflation. Available this year, people who are age 70 and a half and older may elect as part of their QCD limit a one-time gift up to $50,000, adjusted annually for inflation, to a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity.
This is an expansion of the type of charity, or charities, that can receive a QCD. This amount counts toward the annual RMD, if applicable. Please note, for gifts to count, they must come directly from your IRA by the end of the calendar year.
529 education plans
An interesting opportunity available in 2024 is the ability to roll funds from a 529 plan to a Roth IRA. The 529 account must be maintained for at least 15 years prior to the rollover and the beneficiary for the 529 account must be the same as the owner of the Roth IRA.
The rollover is treated as a contribution toward the annual Roth IRA contribution limit of the Roth account owner, as well as an aggregate lifetime limit of $35,000. Any 529 contributions made within the last five years (and the earnings on those contributions) are ineligible to be moved to a Roth IRA.
While the SECURE Act 2.0 provides increased opportunities to save for retirement, everyone’s financial situation is different. As always, consult a financial advisor or tax professional to understand how SECURE Act 2.0 changes apply to you.
Blaine Carr is a senior wealth advisor with Peterson Hastings, an investment advisory firm located in Kennewick and Walla Walla.