Key Provisions of the SECURE Act 2.0
The new law expands savings opportunities and provides a new option for unused 529 plan balances.
BY MICHAEL HOPPER, CFP®, CTFA
Executive Vice President & COO
Late last year, President Joe Biden signed the “Consolidated Appropriations Act of 2023” into law. Tucked away in the omnibus spending bill’s voluminous 1,653 pages were a group of retirement provisions colloquially known as the SECURE Act 2.0.
As my colleague Ryan Short noted last year, there was broad, bipartisan support for SECURE 2.0, and, as expected, Congress passed the bill before the end of 2022. Overall, the final version of SECURE 2.0 closely resembled many of the proposals advanced by both houses of Congress earlier in the year.
Most provisions of SECURE 2.0 lack the wide-ranging impact of the original SECURE Act; instead, much of the new law pertains to unique circumstances unlikely to apply to all Americans. Yet the new legislation still contains a number of significant provisions affecting most Americans, a few of which I highlight below.
Later Age for Required Minimum Distributions
Future retirees can keep their retirement assets growing tax-deferred for a little longer. Effective this year, the age at which individuals must begin taking Required Minimum Distributions (RMDs) from traditional IRAs and qualified plans increases from 72 to 73. Then, starting in 2033, RMDs will begin at age 75.
Overall, this change should give most Americans more control over the timing of retirement income distributions. Retirees who need income before their RMD age can still take penalty-free distributions from their IRA or qualified plan any time after age 59 ½. But for those who can afford to wait, the extra time before RMDs begin creates an extended window for making tax-efficient Roth IRA conversions. Additionally, the delay may allow some taxpayers to avoid higher Medicare Parts B and D premiums through the dreaded fee known as the Income-Related Monthly Adjusted Amount, or IRMAA.
Notably, SECURE 2.0 kept the age at which individuals can make Qualified Charitable Distributions (QCDs) from IRAs. Even though they may not be subject to RMDs, taxpayers at least age 70 ½ can still make gifts from IRAs directly to charitable organizations without including those distributions as income.
Increased Catch-up Contributions (With a Catch)
Catch-up contributions allow individuals aged 50 and older to make additional contributions to employer retirement plans such as 401(k)s and 403(b)s. As expected, SECURE 2.0 increased the limits for catch-up contributions for some plan participants. Beginning in 2025, participants ages 60-63 can contribute the greater of $10,000 or 50% more than the standard catch-up contribution amount to their plan.
However, there’s a slight wrinkle to these higher limits. Because the government would like the tax revenues from Roth contributions to fund other parts of the SECURE 2.0 legislation, any catch-up contributions made by employees with wages of $145,000 or more must be Roth (i.e., made with after-tax dollars) starting in 2024. Participants with wages below the $145,000 threshold can still make catch-up contributions with pretax dollars.
Although many 401(k) and other qualified plans provide a Roth option for employees, there is no specific requirement to do so. Thus, there may be scenarios where higher-income employees might be limited to a Roth catch-up contribution when their plans do not provide that option. The new law recognizes this possibility. If a plan does not include a Roth contribution option when any of its eligible employees have earned over $145,000, then no participants are allowed to make catch-up contributions, regardless of their wages.
Interestingly, the Roth requirement on catch-up contributions only applies to individuals with wages over $145,000. As a result, self-employed individuals may continue to make pretax catch-up contributions, even if their self-employment income is over this limit.
529 Plan Rollovers to Roth IRAs
Perhaps the most intriguing inclusion in SECURE 2.0 involves 529 college savings plans. Previously, if a beneficiary of a 529 plan could not use the funds for education expenses, there were limited options for the unused balance. Beneficiaries could either transfer the funds to another family member or withdraw the funds and pay taxes and a 10% penalty on the earnings.
The new law adds an attractive alternative, albeit with a few caveats. Effective in 2024, 529 beneficiaries can make tax- and penalty-free rollovers from 529 plans to Roth IRAs, provided they satisfy specific criteria. First, individuals can only move up to $35,000 total from a 529 plan to a Roth IRA over a lifetime. Furthermore, the delivering 529 account must have existed for at least 15 years, and the amounts transferred must have been held in the 529 account for at least five years. Also, amounts rolled over to the Roth IRA each year cannot exceed the annual Roth IRA contribution limits.
Despite the various restrictions imposed, the ability to move 529 plan assets to a Roth IRA certainly helps to make 529 college savings plans a more attractive savings option.
SECURE 2.0 is not a panacea for the many challenges confronting Americans in retirement. Despite this limitation, though, the new legislation provides Americans with additional options in retirement, and addresses a number of long-standing issues created by earlier retirement laws.