SECURE Act 2.0

Last week I laid out a schedule of sorts for my posts over the next few weeks. This morning I’m flipping that around a bit to talk about the SECURE Act 2.0 that was passed by Congress and signed into law during the wee hours of last year. I’ve been spending time in recent days going through the details, so it’s all very top of mind right now.

The original SECURE (Setting Every Community Up for Retirement Enhancement) Act was signed into law near year-end back in 2019 and disrupted the field of retirement planning. For example, the original Act included about ten major provisions like taking away the ability for non-spouse IRA beneficiaries to “stretch” required minimum distributions (RMDs) over their own lifetimes. These stretch provisions had been the go-to for years. Instead, the time limit became ten years and a whole bunch of complexity was added. The Act also bumped the starting age for RMDs to 72 from 70.5.

SECURE Act 2.0 had been talked about ever since and almost became law at least once before being watered down a bit in some ways for final passage. With this legislation we’re seeing a broadening of the retirement landscape amid maybe 100 provisions and more complexity. Interestingly, many of the changes will roll out over the next several years and some aren’t available in the marketplace yet because the financial industry needs time to respond. And as often happens anyway, Congress will weigh back in to fix mistakes that are inevitable within about 400 pages of text. So, the Act’s planning implications will unfold over time.

There’s a ton of detail so I’m going to list the points and some notes that I think are most relevant instead of bludgeoning you with all the small stuff.

RMDs -

Required Minimum Distributions now begin at age 73 instead of 72. So if you’re turning 72 during 2023, you can wait until next year to start your RMDs. Here are the age ranges:

If you were born before 1951, there’s no change – you’re still required to take your RMD.

If you were born during 1951 – 1959, your starting age is 73.

And if you were born in 1960 or later, you’ll start taking RMDs at 75.

Penalties for missing your RMD will drop from 50% to 25% of the amount you were supposed to take. And most people will pay only a 10% penalty assuming they correct their mistake quickly.

If you’re charitably inclined you’ll still be able to make Qualified Charitable Distributions from your IRA once you’ve hit age 70.5 (the actual age and not a day earlier). QCDs are generally a more tax efficient way to gift, especially if you’re taking RMDs.

Waiting to take your RMD can and usually does make good sense in the near-term from a tax perspective, but it also delays and potentially compounds the tax problem down the road, especially for those who can wait until 75, by compressing a higher balance IRA into a shorter life expectancy and larger RMDs. QCDs help because the money is obviously no longer in your IRA and subject to RMDs because it’s been gifted away. Roth conversions help too by moving the money from your regular IRA to a Roth, from which RMDs aren’t required. The details around Roth conversions are beyond the scope of this post, but we should definitely discuss conversions if you’re now waiting until 73, or even 75, to start your RMDs.

Starting next year surviving spouses will be allowed to treat their late-spouse’s IRA as their own (the current rule) or they could play the role of the decedent, so to speak. This could work in different ways but, for example, an older person loses their younger spouse, inherits their IRA, and then takes smaller RMDs based on their late-spouse’s life expectancy. Doing so would save some taxes versus merging the inherited account with their own and taking RMDs on everything based on their own life expectancy.

401(k) Updates –

First, let me say that there are multiple types of retirement plans, but for brevity I’m focusing primarily on the 401(k) since it’s more prevalent.

If you’re still working past RMD age and have a Roth 401(k) at work, you won’t be required to take a minimum distribution from it. The benefit here should be obvious, but this provision starts next year.

Employers can make matching and profit-sharing contributions to a Roth, whereas previously it was only to the employee’s Traditional 401(k) balance. The catch for the employer is these dollars can’t have a vesting schedule attached, but the details of how this will actually work still have to be ironed out.

And for employees over 50 with at least $145K of wages, starting next year catch-up contributions will have to go into a Roth. In other words, the extra money an older employee gets to save wouldn’t be saved pretax. These details need to be clarified too.

Also regarding catch-up contributions, in 2025 those who turn 60, 61, 62, or 63 can add an extra catch-up amount. Maybe $12,000 versus $10,000 currently.

The Act also created a Roth SIMPLE and a Roth SEP. The industry has to respond because these account types don’t exist in the real world yet. Maybe this opens up soon or later this year, I’m not sure. But this is a big benefit since SIMPLE and SEP plans have for years been the oddball by not containing Roth provisions like a 401(k) does.

529 Plans –

If you’re not yet getting the sense that Roth accounts are favored, get this: A portion of unused 529 Plan balances can be rolled into a Roth IRA tax free. There are lots of details here, such as a limit on how much can be moved each year and a there’s lifetime max of $35,000. The 529 Plan also has to have existed for at least 15 years and contributions from the last five years aren’t eligible. The Roth IRA also has to be in the name of the 529 Plan beneficiary, which can be changed prior to moving the money.

Other interesting updates –

There are a host of provisions allowing different groups to withdraw money early from their workplace plans without penalty. Other provisions are for those suffering from domestic violence, a natural disaster, or who simply need cash in an emergency. If so, this “emergency” category will allow folks to take a relatively small distribution of up to $1,000 per year penalty-free that could be paid back to avoid taxes.

The thrust behind this last point created a new type of savings account for workplace plans that will, I suppose, sit beside a 401(k), only be invested conservatively, and would allow for pretax contributions and matching contributions from the employer. This seems an interesting attempt at keeping people from treating their long-term savings like an ATM.

For those with disabled adult children, starting next year ABLE accounts can be opened until age 46 versus the current limit of age 26.

Again, all this and more is brand new. The practical details will take time to emerge as Congress fixes errors, the IRS weighs in, and as industry responds. I’ll try to keep you posted along the way, but please let us know of questions.

Have questions? Ask me. I can help.