The SECURE 2.0 Act is now law. The legislation provides a slate of changes that could help strengthen the retirement system—and Americans’ financial readiness for retirement.
The law builds on earlier legislation that increased the age at which retirees must take required minimum distributions (RMDs) and allowed workplace saving plans to offer annuities, capping years of discussions aimed at bolstering retirement savings through employer plans and IRAs.
While SECURE 2.0 contains dozens of provisions, the highlights we feel most pertinent include the following:
- New rules for required minimum distributions (RMDs): The start of RMDs is delayed to age 73, gradually increasing to age 75 by 2033. This benefits seniors who don’t need immediate access to retirement funds, allowing them to keep money in tax-advantaged accounts for longer.
- Reduced penalties: The penalty for failing to take RMDs is reduced from a 50% excise tax to 25%. Those who take the necessary RMD and pay the excise tax within a specified correction window face a reduced penalty of 10%.
- Waived RMDs for Roth 401(k) accounts: Roth 401(k) accounts will no longer be subject to RMD rules during the account holder’s lifetime, aligning them with Roth IRA distribution rules. (effective 2024)
- Broader qualified charitable distributions (QCD) rules: People aged 70½ or older can donate up to $100,000 directly from an IRA to a qualified charity using a QCD. The annual cap of $100,000 will be indexed to inflation.
- Supersized catch-up contributions and expanded Roth options: Defined contribution participants aged 60-63 can make catch-up contributions of up to $10,000 ($5,000 for SIMPLE plans), 50% more than the standard catch-up amount. Catch-up contributions for employees earning over $145,000 must be made in an after-tax Roth account. Roth options are expanded for SIMPLE and SEP IRAs and employers can match contributions in 401k and 403b accounts with Roth dollars.
- 529 to Roth IRA conversions for beneficiaries: Starting in 2024, up to $35,000 of unused 529 plan assets can be transferred to a Roth IRA for the same beneficiary, provided certain conditions are met. This allows for intergenerational wealth transfer and potential growth.
It’s important to note that while SECURE 2.0 offers these opportunities, it may also create complex tax situations for high-net-worth individuals. Some savers may face higher tax brackets, Medicare surcharges, increased taxes on Social Security payments, and tax burdens on heirs. It is important that you have a financial advisor who understands and can help assist you with these planning ideas. Please reach out if you would like to learn more about how you can become the next intelligent investor.