By: Justin Louis
Looking ahead to a new year often reminds us of how our lives evolve and of the opportunities we have to refine our plans for the future. While thinking through our goals for 2023, we are also thinking through the changes coming our way with the passage of the Secure Act 2.0. This legislation aims to expand and improve on the original Secure Act signed into law in December 2019, which made some significant changes, particularly related to the handling of inherited retirement accounts. As passed, the Secure Act 2.0 expands access to, and increases flexibility for, retirement plans. We know sifting through all of the amendments tucked into a 4,000-page bill can be challenging so here we highlight a few changes that stood out to us.
Required Minimum Distributions
One of the broadest changes is related to the Required Minimum Distribution (RMD). Currently, owners of retirement accounts must take distributions from tax-deferred accounts starting at age 72. The Secure Act 2.0 delays the age of distribution through several phases, ultimately moving it back to age 75 for those born after 1959. While many welcome this change as a reprieve from additional taxable income, it may also push retirees into higher tax brackets when they do begin distributions. That said, delaying the RMD age potentially adds additional low-income years between retirement and forced distributions, extending the window of opportunity for Roth conversions. We would encourage a study of your income projections if you are currently in, or approaching, this life phase.
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At a high level there are numerous changes that expand Roth opportunities under the new rules. Over time congress has leaned into the “rothification” of retirement accounts and this law is no exception. For example, employer contributions are now eligible for Roth treatment, an advantage previously reserved only for employee contributions. Additionally, RMD requirements are removed for the Roth portions of employer retirement plans like 401(k)s which better matches the way Roth IRAs currently work.
Another change that is garnering a lot of attention is the ability to perform 529 to Roth IRA rollovers starting in 2024. As we assist clients with college savings plans, we’re often asked about how best to handle overfunded 529 accounts. Though overfunding is a tax efficient way to seed savings for the educational need of the next generation, not everyone can or wants to set aside savings for something that may feel like so far in distant future. Fortunately, the trend has been towards increased flexibility for 529 accounts and the Secure Act 2.0 introduces a limited ability to transfer assets from a 529 to a Roth IRA once the account has been open for a minimum of 15 years, limited to annual Roth IRA contribution limits as well as a lifetime limit of $35,000. The contribution must be made to the beneficiary of the 529 account.
Increased “Catch-Up” Retirement Contributions
IRA owners over the age of 50 can contribute an extra $1,000 as a catch-up contribution. This amount has been fixed since 2006 but will be indexed for inflation starting in 2024 to allow for regular increases over time. For participants in employer sponsored plans such as 401(k)s, there will be additional catch-up periods added in 2025 for those age 60, 61, 62, and 63, limited to $10,000 indexed for inflation.
Qualified Charitable Distributions to see increased limits
Introduced in 2006, Qualified Charitable Distributions (QCDs) are one of the best ways for IRA owners over 70.5 to make charitable gifts. The limit for QCDs has been fixed at $100,000 since its introduction. Beginning in 2024, the QCD limit will be adjusted for inflation.
As previously mentioned, these are only a few highlights of the Secure Act 2.0. Some other changes provide retirement fund accessibility for emergencies, new relief for when retirement plan mistakes are made, the ability to amend plans to allow employer matches for employee student debt payments, auto-enrollment requirements for new 401(k) and 403(b) plans, and a “Saver’s Match” that replaces the “Saver’s Credit” in 2027.
With every legislative change, we’re reminded that the process of financial planning is just that – a process. Your plan is built with the flexibility to adapt as goals, life situations, and laws evolve over time. Because your family’s situation is unique, we welcome a more in-depth conversation focusing on how these changes apply specifically to you.
Justin Louis is a Consultant at Carolinas Investment Consulting.
Carolinas Investment Consulting is not affiliated with any of the websites linked in this commentary. Nothing contained herein constitutes financial, legal, tax, or other advice. The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Carolinas Investment Consulting. The information published herein is provided for informational purposes only, and does not constitute an offer, solicitation or recommendation to sell or an offer to buy securities, investment products or investment advisory services. All information, views, opinions and estimates are subject to change or correction without notice. The appropriateness of an investment or strategy will depend on an investor’s circumstances and objectives. These opinions may not fit to your financial status, risk and return preferences. Past performance is not indicative of future returns.