SECURE 2.0 Act

On December 29th, 2002, you were likely preparing for New Year’s Eve while the SECURE 2.0 Act was signed into law. This follows 2019’s SECURE Act. Lawmakers will tell you the goal of this legislation was to increase the country’s retirement savings. Some changes will go into effect in 2023, but most of the changes will become effective in 2024. Furthermore, not all of these “features” are mandatory changes. Check with your company’s plan to see which ones they are adopting. Here’s some highlights.

Delay RMDs

Just a short time ago, distributions from tax deferred accounts (IRAs, 401(k)s, 403(b)s, etc) were required to begin at age 70 ½ . Beginning in 2023, retirees turning 72 can now wait an extra year - until age 73 - to begin taking their required minimum distributions. In an effort not to seem short sighted, congress did some planning for the future and will allow retirees turning 74 in 2033 to wait until 75. Good news? Probably. Maybe. Let’s talk about it.

First we must remember that IRAs are tax-deferred. This means Uncle Sam effectively has a lien on your retirement savings and will want his cut every time money leaves the IRA. Planning to minimize that bite is the #1 job of retiree’s tax professionals and financial planners.

Higher RMDs in Later Years

Those choosing to put off RMDs may find that when forced to take distributions, the distributions will be higher. This could push retirees into a higher tax bracket. Delaying for the sake of delaying may not be the best option. However, planned delays and time used wisely could be extremely beneficial.

Higher Rates for Inherited IRAs

Let’s plan ahead for a minute. We recognize getting money out of our tax-deferred is generally a taxable event. There are few exceptions. We can take the money out and pay tax or our beneficiaries can take the money out and pay tax. Retirees taking large amounts out will find themselves in a tax bracket higher than normal, thus allowing Uncle Sam a larger than normal cut. On the other hand, non-spouse beneficiaries of IRAs have 10 years to take money out and pay tax. Retirees should consider timing of distributions, whether forced or not, and the potential tax impact.

More time for ROTH Conversions

Often overlooked and underappreciated is the value of a ROTH conversion. They have several key benefits:

1. Controlling the amount of tax paid.
2. Lowering future RMDs
3. Future growth of investments is tax-free

Delaying RMDs could be a great opportunity to fund ROTH conversions. RMD’s can’t be converted to a ROTH account. They must be distributed. This means when distributions start the ROTH conversion opportunity will be diminished.

Catch up Contributions

If you’re 50 or older, catch-up contribution rules let you contribute more to retirement accounts. Now, the limits on extra contributions are going to get bigger.

IRA owners could contribute an extra $1,000 in 2023 and prior. Future limits will go up with inflation in $100 increments. 401(k) contribution limits are increased to $7,500 for 2023. Starting in 2025, participants ages 60 - 63 can contribute $10,000 (or more) The one “catch” is that beginning in 2024 all catch-up contributions for those earning $145,000 or more must be made as ROTH contributions (after-tax rather than pre-tax).

529 funds can be rolled to a ROTH

Most parents are afraid of over contributing to 529 Education accounts. In 2024 those fears will be assuaged with the new ability to convert leftover 529 funds to a ROTH account. This sounds like (and is) good news, but there are several stringent requirements:

• The 529 beneficiary and the ROTH owner must be the same.
• The 529 must have been open for 15 years.
• Contributions and earnings for the last 5 years are not eligible for rollover.
• The rollover amount must not exceed ROTH contribution limits
• Rollovers are limited to $35,0000 lifetime for each beneficiary

There are surely more details to come when the IRS issues their interpretation.

Automatic participation and increasing contributions

You may wonder where your paycheck went. Then again you may not. For those paying attention, retirement plans may automatically enroll you and begin diverting your net pay to your retirement account. Each year they will increase your contributions by 1% until it reaches 15%. Opt out if you don’t want that.

Charitable giving from IRAs

If you are 70 ½ and aren’t doing qualified charitable distributions (QCDs) you probably should be. This allows IRA owners to give to charity and deduct the contributions without having to itemize. It’s magical. With SECURE 2.0 the maximum amount eligible for this strategy has and will continue to increase.

Other provisions

• In 2024 retirement plans may have a linked “Emergency Savings Account” with a balance of up to $2,500.
• It’s now easier for retirement plan participants to get savings from their plan in cases of hardship, natural disaster, and domestic abuse.
• 401(k) contributions matched by your employer can be elected to be included in income and added to your 401(k) ROTH account. Previously matching funds had to go in the 401(k) pre-tax account.
• A new “Saver’s Match” will replace the “Saver’s Tax Credit” in 2027. Details here (link:https://www.kiplinger.com/taxes/savers-credit-converted-to-savers-match).With higher AGI limits, the match will deposit a government contribution match directly into your retirement account. Implementation of this will be “fun” to watch.
• For those with trouble keeping up with their retirement money, the Department of Labor will implement a “Lost and Found” for retirement funds. Expect an “under construction” website for a few years. (Do people do that anymore?)
• RMDs will no longer be required from 401(k) ROTH accounts in 2024