On December 29th of 2022, the Secure 2.0 Act was signed into law. This is a follow-up to the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 to address topics that were not previously discussed or resolved. As its longer name implies, there are several enhancements that benefit the retirement saver. Here is an overview of some important changes to be aware of and their respective effective dates.
Required Minimum Distribution (RMD) – In 2019, the Secure Act bumped the RMD starting age from 70 ½ to 72. With Secure 2.0 Act, the new beginning age for RMDs is 73. This will be increased until year 2033 with a beginning age cap of age 75. If you’re turning 72 this year, you are delaying your first RMD until next year. More revisions are needed on this so we will keep you updated as they are provided.
Roth Employer Match Contributions – Until now, employers who offered a match to employees’ retirement savings were added in as pre-tax contributions. This was even if the employee elected to make Roth contributions to their retirement plan. Employers will now be able to allow employees to receive employer match as Roth. The employer still receives a tax deduction; however, the employee is electing to show the employer match as income by converting it to Roth within the plan year.
Roth Contributions for SEP and SIMPLE – If you’re part of a SIMPLE or SEP plan with your employer, you can now make Roth contributions. This may take time to for the recordkeepers and plan custodians to implement but the option will become available in 2023.
Qualified Charitable Distributions – Beginning at age 70 ½, IRA owners can begin sending distributions of up to $100,000 to charities of their choice without showing the amount as income for themselves or the charity. QCDs are a great, tax-efficient way to achieve your charitable giving. Beginning in 2024, the $100,000 limit will be inflation adjusted. In addition, you’ll be able to do a one-time distribution of up to $50,000 into a split-interest entity.
IRA Catch-up Contribution – At age 50, retirement savers are provided the option to save $1,000 more than the IRA annual limit. For instance, in 2023, those under age 50 can save $6,500 per year in a Traditional or Roth IRA. If you’re over 50, you’re able to take advantage of a catch-up contribution of $1,000 more to save $7,500. Beginning in 2024, that additional $1,000 will index with inflation.
Retirement Savings Lost and Found – While it seems odd that you could forget about your retirement account, the Department of Labor has been tasked to build a site to help with just that! The Retirement Savings Lost and Found will be available for retirement plan participants to look up balances from past employers.
College Savings to Retirement Savings – A 529 account allows for tax-deferred growth and tax-free distributions for qualified education expenses. Because of this, the account becomes a topic of conversation in education planning sessions. It’s often followed with the question, “What if my child doesn’t need the full amount of the account to fund college?” There are options to using the account even if the child gets full ride or if you saved too much – both great problems to have. With Secure Act 2.0, you’ll now be able to rollover up to $35,000 of the account to a Roth IRA for the beneficiary in $6,500 per year increments if the account has been opened for 15 years.
Retirement Plan Catch-up Contribution - The catch-up contribution for a 401(k) or 403(b) will be increased for ages 60-63 beginning in 2025. During that time, the retirement participant can increase their catch-up contribution from $7,500 to $10,000. If the participant has previous-year wages over $145,000, the catch-up contribution must be a Roth contribution.
J. Brooke Cassady
Baird does not offer tax or legal advice. Please consult your tax or legal professional for specific information. Robert W. Baird & Co. Incorporated. JG2023-0112