How SECURE Act 2.0 Impacts Your Financial Plan
Recent legislation, SECURE Act 2.0, makes important rule changes related to Roth IRAs, Qualified Charitable Distributions (QCDs), and more.
In this article, we provide a concise overview of the most significant changes in this law, and how they may impact your financial plan.
What is SECURE Act 2.0?
SECURE (Setting Every Community Up for Retirement Enhancement) Act 2.0 was signed into law on December 29, 2022.
This legislation aims to bolster retirement security. It is a follow-up to SECURE Act 1.0, which was passed in December 2019—a law that made substantial changes to the rules for retirement accounts.
Some provisions of the new law have already gone into effect, while others will be phased in over the next several years.
SECURE Act 2.0 Summary
While there are likely no changes in SECURE Act 2.0 as impactful as the elimination of the “stretch” (a strategy for extending inherited IRA distributions over an individual’s full life expectancy) in SECURE Act 1.0, the newest iteration of this law does contain nearly 100 changes. It is worth taking the time to understand how they could affect your financial plan.
Here are some of the most significant developments. We explain in more detail below.
- The back-door Roth IRA contribution is still alive.
- The RMD (required minimum distribution) starting age has been pushed back again. This shift gives additional time for proactive planning like Roth IRA conversions.
*Based on expected technical correctionBirth Year Impact of SECURE Act 2.0 <1951 N/A 1951-1959* RMD age pushed back to 73 1960+ RMD age pushed back to 75 - There is no additional clarification on the 10-year rule for inherited IRAs created by 1.0.
- There is no impact to the minimum age at which QCDs can be made (still 70 ½).
SECURE Act 2.0 Backdoor Roth is Still Alive
A “backdoor” Roth IRA contribution provides high-wage earners the opportunity to circumvent IRS income limits. Current law stipulates that individuals making more than $153,000 annually (as of 2023) cannot make direct Roth IRA contributions. However, there is a loophole which allows nondeductible traditional IRA contributions to be converted to a Roth IRA, even for individuals above this income threshold. The key takeaway here is that SECURE Act 2.0 did not eliminate this loophole.
SECURE Act 2.0 and Roth Accounts
The most important change related to Roth accounts is that there will be no more required minimum distributions (RMDs) for Designated Roth Accounts (DRAs) as of 2024. A DRA is a separate account in a 401(k) or 403(b) plan which receives Roth contributions. After this change goes into effect, rollover decisions for these accounts will more closely resemble those for traditional 401(k)s and IRAs.
Effective in 2023, SECURE Act 2.0 will allow both SEP and SIMPLE IRAs to offer a Roth option (previously, they were restricted to only pre-tax contributions).
Also effective as of 2023, employer contributions will be eligible for Roth. This change applies only to matching and nonelective contributions, not profit sharing, and all contributions must be “nonforfeitable.” It is possible that this stipulation may limit the availability of Roth for balances that are not fully vested.
Finally, high-wage earners will be required to use a Roth option for catch-up contributions as of 2024. If wages are over $145,000 per employer, you will no longer be able to make pre-tax catch-up contributions. Self-employed individuals are most likely not subject to this requirement.
SECURE Act 2.0 529 Plan Changes
2.0 legislation introduces a new set of rules which allow 529 plan to Roth IRA transfers. First, the 529 plan must have been maintained for at least 15 years, and the Roth IRA must be in the name of the 529 plan beneficiary (the expectation is that a change in beneficiary will not reset the 15-year clock). The beneficiary must have compensation in order to benefit from a 529 to Roth transfer.
Contributions to a 529 plan made within the last 5 years are ineligible to transfer. All transfers are subject to the IRA annual contribution limits (Roth IRA income limits do not apply). The maximum lifetime transfer per beneficiary is $35,000. At this time, the potential for claw back of 529 plan state tax benefits is unclear.
SECURE Act 2.0 and Qualified Charitable Distributions
Starting in 2024, the maximum qualified charitable distribution (QCD) amount will be indexed for inflation. For years, QCDs have been capped at a flat $100,000/year per individual.
Effective 2023, the Act also creates a one-time ability to fund up to $50,000 to a CRUT, CRAT, or CGA.
Other Changes in SECURE Act 2.0
- SECURE Act 2.0 introduces a new option for surviving-spouse beneficiaries, effective in 2024. A surviving spouse can elect to be treated as decedent for RMD (required minimum distribution) purposes.
- The legislation updates catch-up contribution limits for 401(k)s and other similar plans. Effective 2025, for participants turning 60, 61, 62, or 63 during the year, the catch-up limit is the greater of $10,000 or 150% of the catch-up dollar limit (that would equal $11,250 in 2023).
- The penalty on distribution of earnings from excess contributions is also eliminated, effective immediately. While earnings will not be subject to the previous 10% penalty, they will still be taxable.
- The Act also reduces the penalty for failure to take a timely RMD. The RMD penalty will be reduced to 25%, effective in 2023. This penalty is further reduced to 10% if errors are fixed during the correction window (potentially a multi-year period).
- New 401(k) retro-deferral rules for sole proprietors will be effective for plan years beginning after the date of enactment. Sole proprietors who establish a new plan are able to make retroactive salary deferrals for the prior year.
- Starting in 2024, employers can match payment for plan participants’ student loans.
If you are confused or concerned about changes in this legislation and how they affect your financial plan, schedule a free consultation with a Wealthstream financial advisor.