April 24, 2023

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At the end of 2022 a new law was passed called the SECURE 2.0 Act of 2022 (SECURE 2.0).  Even though most provisions bring changes and enhancements to 401(k) plans, there are also some major provisions that have financial planning implications for individuals. Below are some of the key highlights for changes taking place in 2023 and 2024 for both.

Provisions effective in 2023

• The required minimum distribution (RMD) age was raised to 73. Beginning this year (2023), the age to start taking RMDs jumps from 72 to 73. Beginning in 2033, it creeps up again to 75.
• Roth contributions allowed for Simple IRAs and SEP-IRAs.  Previously all contributions to Simple IRAs and SEP-IRAs were only pre-tax. Now there is a Roth (after-tax) option.
• Roth employer contributions allowed.  Historically, all employer contributions to 401(k) plans have been pre-tax contributions, with participants not taxed on such contributions and related earnings until distribution. Under SECURE 2.0, employers may permit employees to elect that employer matching and non-elective contributions be made as Roth contributions. Roth employer contributions are taxable to the employee at the time they are made, and such contributions and their related earnings are not taxed upon distribution. Participants must be 100 percent vested in employer Roth contributions at the time they are contributed to the plan.

Provisions effective in 2024

• You are no longer required to take an RMD from Roth accounts in qualified employer plans (401ks). Prior to SECURE 2.0, RMDs were required in these situations. Thus, if you have a plan Roth account(s) and have already been taking RMDs from those account(s) you should simply be able to stop taking them beginning in 2024.
• Catch up contributions to 401(k) plans are subject to Roth tax treatment. For 2023 if you are 50 years old or older, you can make an additional pre-tax “catch-up” contribution to your 401k of up to $7500.  Starting in 2024, if you are age 50 or older, and you made more than $145,000 in wages in the previous tax year with the same employer, you would be forced to make your catch-up contributions in ROTH dollars to your 401(k) plan. 
• A surviving spouse as beneficiary can delay RMDs.  If the surviving spouse is older than the deceased spouse, RMDs from the deceased spouse’s account(s) would be delayed until the year in which the deceased spouse would have reached the required RMD age.
• Limited 529-to Roth IRA transfers allowed to beneficiaries of 529 plans.  This provision addresses 529 college savings plans which have balances remaining after college or graduate school expenditures for the beneficiary of the 529 plan are completed. If the 529 plan was maintained for at least 15 years, the remaining balance from the 529 plan can be rolled into a Roth IRA on an annual basis up to the expected annual IRA contribution limit. The total amount rolled into the Roth IRA cannot exceed $35,000 over the beneficiary’s lifetime.  For example, you set up a 529 plan for your child who has completed their post-secondary education, and there is a balance of $30,000 remaining in your child’s 529 account. Starting in 2024 you can transfer $6,500 (the expected annual IRA contribution limit) from the 529 plan to a Roth IRA.  In subsequent years you can make additional transfers equivalent to the annual IRA contribution limit for each year to a Roth IRA until the point when the 529 account is liquidated as long the total of all the transfers does not exceed $35,000.

As always, it’s important to consult a tax or investment professional regarding these provisions and how they can apply to your individual financial situation. Also, there are many other provisions in SECURE 2.0  that will be covered in future publications. 

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Important Disclosures:

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