Signed into law in December 2022, the SECURE Act 2.0 aims to close gaps across the retirement system and help Americans better save for their future financial needs. In an ever-evolving financial and retirement planning landscape, many of the act’s key provisions attempt to solve for obstacles that have historically made it difficult to balance current financial needs with retirement planning.
Key changes in SECURE 2.0
There are three main provisions of the SECURE Act 2.0 that sophisticated taxpayers need to understand:
- Changes to Required Minimum Distributions (RMDs)
- Mandatory Roth treatment of catch-up contributions for certain individuals and ability for employers to allow Roth treatment of matching contributions
- Rollover treatment of a 529 college savings plan
Changes to RMDs
There are three RMD changes of which you should be aware:
- Under the previous law, participants are generally required to begin taking RMDs from their retirement plan at age 72. The SECURE Act 2.0 increases the age to 73 in 2023 and 75 in 2033 depending on your year of birth.
- Previously, if an individual failed to take their RMD, they faced a 50% excise tax penalty. Under the new law, the penalty for failing to take an RMD is reduced to 25%—and it can be further reduced to 10% if the failure is corrected within a certain time frame.
- In addition to the RMD changes, the law changed the rules for Qualified Charitable Distributions (QCDs). The $100,000 annual income exclusion for IRA QCDs will now be indexed. A one-time QCD of $50,000 (also indexed) will also be allowed through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts.
“Rothification” of catch-up contributions
- After 2023, all catch-up contributions by participants of 401(k), 403(b) and governmental 457(b) plans who earn over $145,000 (indexed) annually must be made on a Roth (after-tax) basis.
- Employer contributions can also be treated as Roth contributions. Under the new law, employers may permit participants to designate matching or non-elective vested contributions as Roth.
529 accounts can be rolled over to a Roth IRA
- Effective in 2024, certain assets in a 529 college savings account can be rolled over tax-free into a Roth IRA for the 529 beneficiary where the account has been maintained for more than 15 years. Rollovers are subject to Roth IRA annual contribution limits as to the beneficiary, but not subject to the income limits. Rollovers are limited to a lifetime limit of $35,000 and apply only to contributions to the account (and earnings) before the five-year period ending on the rollover date.