SECURE Act 2.0

Posted on Monday, August 28, 2023

The SECURE Act 2.0 legislation seeks to bolster future American retirement savings. With a bill of this magnitude, there can be uncertainties.  Despite any lingering details that might need determined, the Act represents a progressive stride toward enhancing the American retirement landscape.  The following are several provisions which you may wish to consider when planning your financial retirement activities.

Required Minimum Distribution (RMD) Age Modification

The RMD guidelines mandate account holders to withdraw a specific amount from their retirement accounts beginning at a predetermined age. The SECURE Act 1.0 shifted the RMD age from 70.5 to 72 for all individuals. The SECURE Act 2.0 introduces another alteration based upon an individual’s birth year. In 2023, the RMD age increases to 73. Starting in 2033, the RMD age increases to 75.

RMDs and Roth Contributions

The SECURE Act 2.0 introduces three provisions centered around Roth contributions. First, both Simple IRAs and Simplified Employee Pension (SEP) IRAs will be permitted to accept Roth contributions starting in 2024. Formerly, these plans exclusively allowed pre-tax contributions.

A second provision pertains to RMDs for Roth accumulations in employer-sponsored retirement plans, such as 401(k)s, 403(b)s, and 457(b)s. Previously, RMDs were based on total account value, encompassing Roth contributions. However, this practice eliminated the potential for tax-free growth within the account. SECURE Act 2.0 rectifies this by allowing RMDs only for pre-tax contributions, enabling continued tax-free growth for Roth funds.

A third Roth-related provision revolves around 529 plans and their conversion potential to Roth IRAs. While this provision appears appealing, it is accompanied by specific conditions. The annual amount that can be converted to a Roth IRA is capped by the yearly IRA contribution limit (e.g., $6,500 for 2023), with a lifetime cap of $35,000.

Catch-Up Contributions

Catch-up contributions empower individuals aged 50 and above to save more in retirement accounts. The current cap for IRA catch-up contributions is $1,000 ($7,500 for employer-sponsored plans). Beginning in 2024, the annual catch-up amount will be indexed for inflation, making it more aligned with the Consumer Price Index (CPI). SECURE Act 2.0 also designates any catch-up contributions from individuals earning $145,000 or more in wages as Roth contributions rather than pre-tax contributions. From 2025 onward, there will be a second tier of catch-up contribution rules added for individuals aged 60 to 63.  Those individuals can take advantage of a higher catch-up limit of $10,000.

Qualified Charitable Distributions (QCDs)

QCDs allow individuals aged 70.5 and above to make tax-free charitable contributions directly from an IRA, up to $100,000. Starting in 2024, this amount will be adjusted annually for inflation.

A new, unique opportunity enables the use of a QCD to fund entities such as Charitable Remainder UniTrusts (CRUTs), Charitable Remainder Annuity Trusts (CRATs), or Charitable Gift Annuities (CGAs).  Please note the funding limit is $50,000 which is lower than allowed if the funds go directly to the charity. Given the complexity, consulting a tax professional before implementing this provision is recommended.

Annuity-Focused Provisions

Effective 2023, income annuities held within qualified plans and IRAs will offer additional benefits without violating RMD rules. These benefits encompass guaranteed annual income payment increases, lump sum payment options, acceleration of imminent payments, dividend-like payments to annuity owners, and Return-Of-Premium (ROP) death benefits. The legislation also urges the IRS to amend its regulations, allowing insurance dedicated Exchange Traded Funds (ETFs) as investment options.

Other Various Provisions

Qualified Long-Term Care Distributions: Beginning in 2026, up to $2,500 per year can be withdrawn penalty-free from retirement accounts to cover long-term care insurance.

Excise Tax Reduction for RMD Shortfalls: The penalty for failing to meet RMDs in a required year is reduced from 50% to 25% and can further drop to 10% if promptly rectified.

Student Loan Payments for Retirement Savings: Starting in 2024, employers can consider student loan payments as retirement plan contributions, allowing matching contributions for employees making student loan payments.

401(k) Auto-Enrollment: Beginning in 2025, new employer-sponsored retirement plans will mandate automatic enrollment, promoting increased savings.

If you have further questions about how SECURE Act 2.0 and its implications might impact your financial retirement plans, please reach out to your DWD CPA.

Contributed By: Jessica Ogle, CPA | Partner | DWD CPAs & Advisors

Posted in Tax Topics For Individuals

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.