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Just as movie fans anticipate the sequel to a blockbuster movie, so has the retirement world looked forward to the long-awaited sequel to 2019’s tax legislation, the SECURE Act. Like many sequels, SECURE Act 2.0 provides its own memorable moments and includes some cameos from the original, but also attempts to carve out a unique place in the world of dense tax law.

The main plot is one of the mild-mannered retirement saver attempting to benefit from new opportunities and avoid familiar pitfalls, in a twisted tale filled with lots of numbers. At over 400 pages it is rated “C” for Complexity.

If you hate spoiler alerts then read the full text of the Consolidated Appropriates Act, 2023, of which the SECURE Act 2.0 bill became a part by clicking here.

However, most would prefer to check out the highlights in something more akin to a movie trailer format. Read on for key features of the SECURE Act 2.0 to see which may apply to you or your loved ones.

Starring: the starting age for Required Minimum Distributions (RMD)

Audience: individuals in their early 70’s

The 2019 SECURE Act changed the start age of required distributions from IRAs and retirement plans from 70.5 to age 72. Likewise, SECURE Act 2.0 makes yet another change by pushing the start age to the year in which an individual turns age 73. This applies to those born between 1951-1959. For those born in 1960 or later, the start age is now 75.

Interestingly, this change will not be fully felt until 2024. The reason: individuals that reach age 73 in 2023 would have reached age 72 in 2022, and thus were required to begin required distributions in 2022. The first individuals that will be impacted are those that celebrate a 73rd birthday in the 2024 calendar year.

Co-Starring: A myriad of Roth retirement plan changes

Audience: those with earned income, especially high-income earners

Effective for this year (2023) are newly created Roth SEP-IRAs and Roth SIMPLE accounts.

Also, retirement savers now have increased access to having dollars placed in the Roth portion of an employer retirement plan. Employees can elect to have their employer deposit matching contributions to the employee’s Roth account. However, beginning in 2024, employees that received $145,000 or more in wages from their employer in 2023 will be required to receive all matching employer contributions for 2024 in their Roth account. Because these matching Roth contributions will be subject to income tax in the year of receipt, high-income earners should be especially cognizant of the potential tax ramifications.

Breakout Performance: 529 plan to Roth IRA transfers

Audience: those with 529 plans, whether with young or older children

A headline grabber, this feature has garnered much attention due to the planning possibilities some quickly envision. However, the known (and unknown) rules around this 529 plan feature (which will begin in 2024) may dampen the fervor.

Key details that are clear are the 529 plan must be in existence for 15 years before a transfer can be made from the 529 plan to a Roth IRA owned by the beneficiary of the 529 plan. Any dollars deposited to a 529 plan in the preceding five years are ineligible for transfer (as are the earnings on those contributions).

Importantly, the beneficiary must have earned income in the year of transfer of at least the amount of the 529 plan transfer (the same requirement for a “normal” Roth IRA contribution). The annual transfer limit is equal to the annual Roth IRA contribution limit, and a beneficiary is limited to $35,000 of lifetime transfers.

What is not certain, but is expected to be clarified in the future by the IRS or Congress, is if the 15-year window “restarts” if the 529 plan beneficiary is changed. This, in turn, could impact a possible strategy in which a 529 plan owner changes the 529 plan beneficiary to transfer 529 plan dollars to multiple beneficiaries’ Roth IRAs over time.

Teasers: Catch-up contributions to IRAs and retirement plans

Audience: those age 50+, or that will be 60+ in 2025

Since 2006, individuals aged 50 and above have been able to make a “catch-up” contribution by adding $1,000 to an IRA or Roth IRA on top of the standard annual contribution limit. That $1,000 amount has been frozen in time but will [finally] be increased beginning in 2024. Starting next year, the $1,000 will be indexed annually with inflation in $100 increments.

Those working and contributing to an employer retirement plan (such as a 401k or 403b) will see an increase in their catch-up contribution maximum beginning in 2025. Specifically limited to individuals aged 60, 61, 62, and 63, this will allow a catch-up contribution of at least $10,000 (but as high as 150% of the standard catch-up amount). Currently, this catch-up contribution is $7,500 and will remain so in 2023 and 2024.

The full cast of SECURE Act 2.0 is lengthy, and addressing each change (many of which have limited application, but are potentially important for those they do impact) is impossible. From the relaxation of the 10% early retirement plan withdrawal rules, to more friendly rules surrounding 72(t) distributions, and opportunities for those with student loans to have employers help repay the debt… the list goes on like the final credits of a movie.

Just like successful movies need a director and producer, so too does a successful financial plan. If you are unsure that your life’s financial script will have a happy ending please reach out to Bridgeworth by clicking here to learn more about how we serve our clients.


Sources:

  1. https://www.congress.gov/bill/117th-congress/house-bill/2617/text
  2. https://www.kitces.com/blog/secure-act-2-omnibus-2022-hr-2954-rmd-75-529-roth-rollover-increase-qcd-studentloan-match/

Bridgeworth is now a part of Savant Wealth Management as of 11/30/2023. Savant Wealth Management (“Savant”) is an SEC registered investment adviser headquartered in Rockford, Illinois.