The SECURE Act 2.0

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The SECURE Act 2.0 has brought a myriad of changes to many aspects of retirement savings. The act increases several contribution limits, allows for previously disallowed transactions such as rolling over 529 funds into a Roth IRA, alters the rules of Required Minimum Distributions, and much more. Like any change in tax law, it also presents new planning opportunities. The changes covered are by no means comprehensive, but rather the ones we view to be most significant for individuals and families who are particularly intentional with their retirement savings. The changes are broken down into categories most relevant to pre-retirees vs. retirees and those that affect everyone to a relatively equal extent.

Changes Primarily Affecting Pre-Retirees

IRA catch-up limit for inflation

Prior to the passage of the SECURE Act 2.0, IRA contribution amounts were indexed for inflation. We saw that just recently, when the IRA contribution limit was $6,000 and increased to $6,500 in 2023. However, the catch-up contribution available to those 50+ was not indexed for inflation until now. The catch-up contribution amount will be indexed for inflation beginning 2024 in increments of $100.

Higher catch-up limit for older plan participants

Starting in 2025, those who are ages 60-63 will be able to make catch-up contributions to their employer sponsored retirement plan (401k/403b) of the greater of $10,000 or 150% of the regular catch-up contribution amount.
It is expected that guidance will be released on the wording of the provision, since 150% of the current regular catch-up contribution ($7,500) is already greater than $10,000. Regardless, this will provide those approaching retirement the opportunity to stash more dollars into tax-advantaged accounts.

Roth treatment of catch-up contributions

Next year, those who make catch-up contributions and are “high-wage” earners as considered by the IRS, will have to make said catch-up contributions on a Roth basis. A high-wage earner is currently defined as one who, in the previous year, had wages exceeding $145,000 from the employer sponsoring the plan. This amount is indexed for inflation. These catch-up contributions will be included in income and may make catch-up contributions less compelling for those looking to make pre-tax contributions.

Based on the language used in the act, there may be the possibility of making pre-tax catch-up contributions in a year in which a taxpayer switches employer. The wording references wages earned in the preceding calendar year from the employer sponsoring the plan. If the employee switches employer mid-year and is earning $250,000, they would only be receiving $125,000 in the preceding year from the employer sponsoring the plan, and thus would be eligible for pre-tax catch-up contributions. It is currently unclear if this will be allowed, but seems likely that it will be.

Roth treatment of matching or nonelective contributions

Beginning in 2024, employers will be able to make matching contributions into Roth accounts. Currently, employers get a tax deduction for making matching contributions and the match receives pre-tax treatment, which the employee does not report as income.

Starting next year, employees will be able to elect to have their match treated as Roth, but must include those dollars in income. Additionally, the match must not be subject to a vesting schedule in order to qualify for Roth treatment.

Changes Primarily Affecting Retirees

Increase in beginning age for RMDs

For individuals born in years 1951 through 1959, their Required Minimum Distribution (RMD) will be delayed by one year. Instead of having to begin taking it at age 72, it will now begin at age 73. For those born after 1959, RMDs will begin at age 75.

Surviving Spouse Bene Rules

Currently, when a spouse inherits an IRA, they have the following options:

  1. Roll the decedent’s IRA into their own
  2. Elect to treat the decedent’s IRA as their own; or
  3. Remain as a beneficiary of the IRA

Currently if the surviving spouse elects option 1 or 2, they will be required to begin RMDs upon reaching age 72. If they elect option 3, they will be subject to the 10-yr rule, which says the account must be completely distributed within 10 years of the date of death.

This new election would allow a spouse to elect an RMD schedule based on the year in which the decedent would have turned RMD age. For example:

Spouse A, age 65, and Spouse B, age 67, each have an IRA. Spouse A starts their RMD in 7 years and Spouse B in 5. If Spouse A passes and Spouse B inherits their IRA, Spouse B can elect to take the RMD from Spouse A’s IRA in 7 years, when Spouse A would have turned RMD age, instead of 5 years, when they begin taking RMDs from their own IRA.

Changes Affecting Everyone

One of the hesitancies individuals come across when determining the savings vehicle they will use to fund college for the next generation is the possibility of the beneficiary not going to college or not using all the funds that must be used for education purposes, such as 529 funds. Secure Act 2.0 includes something to combat this.

Up to $35,000 may be rolled over from a 529 plan to the Roth IRA of the 529 beneficiary. This is a lifetime amount and there are several requirements that must be met:

  • The 529 must have been maintained for at least 15 years
  • Any contributions made to the plan within the last 5 years are ineligible
  • There is an annual rollover limit equal to the max IRA contribution amount minus any IRA contributions

Although restrictive, this helps answer the worry of funds not being used for education and/or what to do if funds are not exhausted. This could also provide  great estate planning for those wanting to reduce the size of their estate while also helping the next generation pay for their education and jumpstart their retirement.

The Secure 2.0 Act has served as an update to the Secure Act passed in 2019. This article is by no means comprehensive in terms of all the changes created by the passage of the Secure Act 2.0, but does contain some of the most noteworthy. If you’d like to learn more about how these changes affect your specific situation, we are happy to discuss over the phone.

Matthew Benson, CFP®

Owner / Certified Financial Planner™

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Important Disclosure

Advisory services are offered through Sonmore Financial LLC, an Investment Advisor in the State of Arizona.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.

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