You may remember the SECURE Act, which was signed into law by President Donald Trump in December 2019. This Act changed many rules relating to retirement plans, especially IRAs and 401(k)s. One large change this brought is in increasing the onset of Required Minimum Distributions (RMDs) from the year you turn 70.5 to the year you turn 72.
This bill also allowed individuals working past age 70.5 to continue to contribute to IRAs as long as they are employed. Another major change it brought is for most individuals who inherit an IRA in year 2020 or later.
Most of these heirs will no longer be able to stretch out withdrawals over their lifetimes and will instead have to empty the inherited IRA within 10 years of receiving the inheritance. There are exceptions to this rule so contact us if you are curious if this applies to you.
The SECURE Act 2.0 was signed into law by President Joe Biden in December 2022 and expanded and clarified some parts of the original SECURE Act. Here is a condensed summary of many of the new rules and regulations that could affect your retirement planning.
Required Minimum Distributions (RMDs)
The SECURE Act 2.0 further raised RMD age to 73 for anyone born from 1950 to 1959 and to age 75 for anyone born on or after January 1, 1960. If you turned or will turn age 72 in 2023, you will not need to take an RMD this year and instead will wait until next year to begin.
Of course, you can always withdraw from your IRA before you are required to or withdraw more than you are required each year.
Another big change from the first SECURE Act, which you may not be familiar with, pertains to IRAs inherited on or after January 1, 2020. Most people who inherit IRAs going forward, including Roth IRAs, are required to withdraw the balance within 10 years. If you are still working over those 10 years, you could incur some unexpected taxes and planning for this is important.
The exceptions to this rule include the minor children of the former IRA owner, the former owner’s spouse, anyone not more than 10 years younger than the former owner, and anyone disabled or chronically ill (as defined by the IRS).
While the SECURE Act 2.0 did not affect these new rules, the SECURE Act created a need for more planning around IRA beneficiaries both before and after inheritance. Please contact us if you think you may be affected.
Promoting Roth Plans
The Act also contained a few items to encourage the broader use of Roth IRAs and Roth 401(k)s. It eliminated the requirement that Roth 401(k) owners take Required Minimum Distributions from these accounts starting in 2024. Distributions from Roth IRAs or Roth 401(k)s are usually not taxable and these new provisions make Roth options even more attractive for individuals.
Small business owners can now choose to create and contribute to SEP Roth IRAs and SIMPLE Roth IRAs, in addition to Traditional SEP and SIMPLE options. This provides more choice for small business owners and employees who may prefer the tax advantages of a Roth option.
For employees whose 401(k) or 403(b) plan contains a Roth option, they can now select to have any company contributions into their Roth account. In the past, these company contributions could only go into a Traditional 401(k) or 403(b) account.
529 to Roth Conversions
For those who have opened, contributed to, or owned a 529, you may know that there are penalties involved in withdrawing from these accounts without using funds on qualified educational expenses. This is one major downside to overfunding a 529 plan.
Beginning in 2024, the SECURE Act 2.0 allows beneficiaries of an overfunded 529 plan to convert some or all of the balance to a Roth IRA in the name of the beneficiary. These conversions come with an annual limit of $6,500, and a lifetime limit of $35,000, so severely overfunded 529s may still have a balance left over even after conversion.
This Act was a hefty piece of legislation which contains too many items to concisely list here. Some items which may affect your financial plan are:
- Expanded options to access retirement funds in an emergency.
- Increased 401(k) and 403(b) catch-up contributions to $10,000 for those 60-63 years of age.
- Allowed creation of ABLE accounts for individuals disabled prior to age 46 (previously was age 26).
- Certain disabled first responders can continue to exclude certain income from taxes after retirement age.
- Penalty for a missed RMD is reduced for everyone and may be further reduced if you catch it early enough.
Please contact our financial planners if you would like to discuss these provisions or find out if you are affected.