A new law could change the way you save for retirement and use your retirement funds. The SECURE 2.0 Act of 2022 was designed to encourage more participation in retirement savings plans, at the business and individual levels. Some provisions took effect Jan. 1, 2023, and others will phase in over the next couple of years.
The original SECURE Act, passed in 2019, had about a dozen changes, including one with massive implications: the end of the IRA stretch, used in estate planning. The 2.0 version doesn’t have a big hitter like that provision, but it does have nearly 100 changes that offer more flexibility to people at various income and asset levels.
Let’s look at seven changes that will likely change investment or withdrawal decisions for many people.
1. You can wait longer to take distributions
The age of required minimum distributions (RMDs) for traditional retirement accounts has increased to 73. If you turn 73 in 2023, you must take your first RMD from a retirement account by April 1, 2024, with annual RMDs thereafter. The age will increase to 75 in 2033.
Delaying distributions gives more flexibility and time for investment growth, but the resulting larger required distributions later can increase tax liability. Any delay in distributions requires proactive planning to manage future tax liability.
2. Your Roth employer retirement plans will be more flexible
Changes regarding designated Roth accounts — such as Roth 401(k) or Roth 403(b) — offered through employers are meant to increase participation in these plans.
A big change is an elimination of RMD for designated Roth accounts, starting in 2024. This also means that if you have already been required to take distributions from designated Roth accounts, you will be able to stop those withdrawals in 2024 if you so choose.
With RMDs being the most common reason for rollovers from a designated Roth account to a Roth IRA, the rollover decision changes. A Roth IRA still holds advantages over other Roth accounts, but the decision now is similar to the decision to rollover money from a traditional 401(k) plan to a traditional IRA.
Another Roth change allows employers to match contributions to designated Roth accounts and to add Roth options to SIMPLE and SEP retirement plans. As employers make this benefit available, it will increase employees’ flexibility in contributing before- and after-tax dollars to their accounts. For employers that choose to make contributions to the Roth 401(k) side of the plan, it must be nonforfeitable. For 401(k)s that have a vesting schedule, it remains to be seen how this will play out. One possibly is that employers will only match contributions to the Roth 401(k) after the employee becomes fully vested.
3. You can transfer 529 funds into a Roth IRA
If you saved more money in a 529 college savings plan than your child ended up spending on college, what do you do with it? Previously, you had to pay a penalty and income tax on any gains from the account. Starting in 2024, the money can be moved directly to a Roth IRA in the current 529 beneficiary’s name. A few caveats:
- The 529 account must have existed for at least 15 years prior to the rollover. If you use one account for multiple children, a change in beneficiary is not expected to “reset the clock.”
- Any contribution within the last 5 years is not eligible.
- There is a lifetime transfer cap or $35,000 per beneficiary.
- The beneficiary must have some income at the time of the transfer.
- The transfer is subject to annual Roth IRA contribution limits, so the transfer and any other contributions combined must stay within the limit. Interestingly though, Roth IRA income limits do NOT apply for the 529 to Roth IRA transfer.
This change not only gives more flexibility to 529s, but its provisions also offer a carrot for starting a 529 plan when children are young.
4. You can choose how to handle survivor benefits
Today, surviving spouses have several options when inheriting a retirement account from their deceased spouse, such as rolling the decedent’s IRA into their own, electing to treat the decedent’s IRA as their own, and remaining a beneficiary of the decedent’s IRA, but with special treatment.
Beginning in 2024, surviving spouses can elect to be treated as their deceased spouse for RMD purposes. By electing to be treated as the deceased spouse, RMDs would be delayed until the deceased spouse would have reached RMD age. In addition, once RMDs begin, the surviving spouse uses the “Uniform Lifetime Table” that is used by account owners, rather than the “Single Lifetime Table” used by beneficiaries.
There are nearly a dozen decision paths based on each spouse’s age and the surviving spouse’s needs to determine when to take distributions.
5. You can increase your catch-up contributions
Catch-up contributions, which let people 50+ exceed standard contribution limits, will change over the next three years:
- 2023: The annual catch-up contribution limit for a workplace plan increases from $6,500 to $7,500.
- 2024: Annual catch-up contribution limits for IRAs (currently $1,000) will be adjusted for inflation in increments of $100. It was previously the only retirement account contribution that was not automatically indexed for inflation. It’s worth noting that people who make more than $145,000 in wages from an employer will not be able to make pre-tax catch-up contributions starting in 2024. Rather, the catch-up contribution must be post-tax (Roth). This does not apply for self-employed individuals, only for those who have an employer, and the wage figure will be adjusted annually for inflation.
- 2025: People aged 60 to 63 will have an annual catch-up contribution limit of $10,000 for workplace plans and $5,000 for SIMPLE IRAs in most cases.
In addition to increasing retirement account balances, increased catch-up contributions may lower tax liability for people aged 50 to 63.
6. You will have more access to retirement funds in times of need
Several provisions for emergency use of retirement funds are effective immediately. Money can be borrowed from retirement accounts with no tax penalty for people who:
- Live in a federally declared disaster area
- Are public safety workers over 50 years old
- Have a terminal illness
- Are victims of domestic abuse
- Have unforeseeable financial needs due to personal or family emergencies
- Need long-term care
All of these situations have their own loan limits and repayment schedules. Some have additional rules, such as a limit to how often they are used. In general, they encourage people to save for retirement without worrying about shortchanging their emergency savings accounts.
7. You will face fewer penalties for mistakes
If you accidently contribute more than the allowable amount to a retirement account, you will no longer pay a penalty as long as you withdraw the money and any earnings attributed to it by Oct. 15 of the following year.
If you didn’t take a RMD on time, the penalty is now 25% (or 10% if fixed during a specified correction window). This is down from 50%.
Both of these lowered penalties are effective now.
Adjust your plans accordingly
As you can see, some of the changes in SECURE 2.0 Act have long-term implications for tax planning and investment management. Whether you are in the saving or withdrawal phase of retirement, we recommend speaking with your wealth manager and tax professional about how to shift your plans this year and into the future. You may be able to take advantage of added flexibility and decrease your tax liability.
Mallory is a Wealth Manager and Shareholder. She listens deeply and helps simplify complex financial situations to help clients move into an easier, clearer future. She aims to give financial advice that is compassionate, wise, and easy to understand.