5 Things Retirees Need to Know About SECURE 2.0

5 Things Retirees Need to Know About SECURE 2.0

May 23, 2023

On December 29, 2022, the SECURE Act 2.0 was signed into law by President Biden. This legislation is a follow up to the SECURE Act of 2019, which aimed to help improve retirement savings for Americans. If you are approaching retirement or already retired, here are the top five things you need to know about the new legislation. 

1. Changes to Required Minimum Distributions

The SECURE Act of 2019 increased the Required Minimum Distribution (RMD) age from age 70 ½ to age 72, and SECURE 2.0  will increase i even further. Individuals born between 1951-1959 will be required to start taking their RMD at age 73 and those born in 1960 or later will move to age 75.

Also, beginning in 2024, RMDs will no longer be required for participants in Roth 401(k) plans, as is the case currently with Roth IRAs. 

What this means for you

If you do not need your retirement assets to fund living expenses, this means you now have more time for your assets to grow tax deferred. The RMD delay also gives you a bit longer window to keep your taxable income down, allowing for more tax planning opportunities such as Roth conversions. Note that if you turn 72 this year, you will not have to start taking a RMD until next year in 2024. 

2. Better catch-up contributions

In an effort to encourage more retirement savings, the bill increased “catch-up” contribution limits for savers at certain ages.

  • 401(k) and 403(b) Plans: Current provisions allow employees age 50 and older to contribute an additional $7,500 annually in addition to the standard $22,500 contribution limit. Starting January 1, 2025, individuals age 60-63 will be able to make catch-up contributions up to $10,000 annually, and indexed for inflation each year after
  • Traditional and Roth IRAs: For account holders age 50 and older, the current $1,000 annual catch-up contribution limit will be indexed for inflation starting in 2024.

What this means for you

Once you reach age 64, the opportunity for additional catch-up contributions ends, so you will want to take advantage of the additional savings opportunity as much as you can from 60-63. One more important amendment is that SECURE 2.0 eliminates pre-tax catch-up contributions for individuals with compensation exceeding $145,000 (indexed annually) and requires that all catch-up contributions be designated as Roth contributions.

3. More opportunities for Roth savings

Historically, all employer contributions to 401k plans have been pre-tax contributions. Participants are not taxed on these contributions initially, but are taxed on the contributions and earnings upon distribution. Now, under SECURE 2.0, employees are permitted to elect for employer contributions to be made as Roth contributions. This means that employees will be taxed at the time the contributions are made, but are not taxed at distribution assuming certain conditions are met. In addition, employers can now amend SEP and SIMPLE IRA plans to allow participants to designate their accounts as Roth accounts. 

What this means for you

As mentioned above, you will have to pay taxes now on employer contributions designated as Roth, but the change could be worth it if you are looking to reduce your taxes in retirement. Employers will need to amend their existing plans to incorporate these changes so don’t expect to be able to take advantage of this immediately.

4. 529 plan rollovers to Roth IRAs

Beginning in 2024, 529 account holders will be able to rollover up to $35,000 over the course of their lifetime to a Roth IRA. The owner of the Roth IRA must be the beneficiary of the 529 plan. 

What this means for you

This is an exciting change as one of the biggest hesitations with funding a 529 plan is typically the concern of overfunding. However, it is important to note that this change is applicable to existing 529 plans, not new ones. The account must be established for 15 years and the rollover cannot contain funds contributed to the account within the last five years.

5. New rules for Qualified Charitable Distributions

Two changes will be made to Qualified Charitable Distributions (QCDs). First, the annual QCD limit of $100,000 will be indexed for inflation annually starting in 2024. Second, donors will be able to make a one-time annual QCD of $50,000 to establish certain split-interest entities such as charitable gift annuities and charitable remainder trusts. These opportunities are available to individuals age 70 ½ and older. 

What this means for you

QCDs are often an overlooked planning opportunity for individuals to manage gifts and reduce taxes. If you are charitably inclined, you should consult your tax and financial advisors to determine the benefits of adding QCDs to your overall financial strategy.

These are just a few of the numerous changes from the implementation of the SECURE Act 2.0. Please let us know how we can help answer your questions and coordinate with your other advisors to take advantage of the changing rules.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.