Round 2 of SECURE Act 2.0

Kirk Kreikemeier |
Categories
Planning

There were many provisions included in the SECURE Act 2.0 – some apply to individuals and others to businesses – that I briefly summarized in a previous post.  In this blog post I will emphasize some of the more popular provisions for individuals with added bullet points for more context and considerations.  Be sure to note the effective date of these provisions.

 

In 2023 - Required Minimum Distribution (RMD) age extended to 73; age 75 in 2033

  • Was age 72 prior to this (extended from 70.5 in SECURE Act 1.0)
  • If turned 72 before 1/1/2023 you are subject to the old RMD rules
  • This will allow an extra year to spread out Roth conversions if employing that strategy
  • Be aware you will be taking Social Security starting no later than age 70, so factor that as well
  • Also note the age eligible for Qualified Charitable Distributions (QCD) remains at age 70.5 so this provides an extra year for that feature to nibble down the IRA balance if charitably inclined
  • For those turning 73 in 2033 or later, your RMD age is bumped up to age 75!
  • As a reminder, you can delay the first year’s RMD until April of following year but then will have two RMD amounts in a single tax year leading to potentially higher tax bracket and Medicare IRMAA issues, so plan accordingly
  • Note this RMD delay is separate from RMD’s required for beneficiary IRAs, which the SECURE Act 2.0 was silent upon and we must wait for IRS clarity in 2023

 

In 2024 - 401k catch-up contributions must go into Roth 401k/3b if wages > $145,000

  • Recall if age 50 or older, allowed to make extra catch-up contribution of $7,500 into 401k/3b (amount for ’23); Note – also allowed $1,000 extra to IRAs (for ’23)
  • Many people are in higher tax brackets at that stage of career and may have enjoyed the extra tax deduction by contributing this amount to the deductible Traditional 401k/3b
  • Starting in ‘24, those with wages above $145,000 from that employer the previous year MUST direct the catch-up contributions to a Roth 401k/3b
  • If your 401k/3b plan doesn’t have a Roth option, you won’t be able to make any catch-up contributions!  check your plan and if no Roth option, ask HR how they intend to accommodate
  • Note the previous year wage amounts is from the same employer so those who switch jobs with high income can avoid the first year on a new job

 

In 2024 - Roth 401k/3b Emergency Fund

  • Recall withdrawing funds from 401k/3b or IRAs before age 59.5 incurs an additional 10% penalty along with any applicable tax consequences (unless for narrowly defined exceptions)
  • This lack of access to funds may prevent some from participating in 401k/3b plans and foregoing a generous company match
  • This new feature would allow a participant to contribute up to $2,500 in total to an “emergency fund” bucket, and perhaps overcome the hesitancy to participate
  • Those individuals considered highly compensated - $150,000 in 2023 – are not eligible
  • These funds must be held in cash-like instruments and I presume (details still being worked out) in the Roth portion of plan
  • Distributions from this bucket would be deemed “qualified” and avoid the 10% penalty, and assuming also in the Roth portion of plan, not subject to tax on any earnings
  • Alternatively, perhaps only the contributions amounts are eligible for qualified withdrawal

 

In 2024 - Excess savings in 529 – up to $35,000 - can be used for Roth contributions to beneficiary

  • This provision has caught much attention and thus requiring more bullet points, but important to know the details and the “yeah, but…”
  • Existing 529 basics:
    • 529 Plan allows a deduction on contributions for state taxes – not federal - in many states if using home-state plan (up to limits)
    • Earnings grows tax-free at both Federal and State level, and if withdrawn for qualified educational expenses, no taxes due upon withdrawal at both Federal and State
    • Funds not used can be kept for future use or transferred to other family members
    • If funds withdrawn for non-qualified expenses, taxes are due on the investment earnings PLUS a 10% penalty; some states also claw back original state deduction
  • This new feature will allow up to $35,000 of leftover funds in a 529 account to be used to fund Roth IRA contributions for the named 529 beneficiary
  • But the 529 account must have been open for at least 15 years in that beneficiary’s name (so you can’t just change the beneficiary name and start funding a new person’s Roth)
  • You cannot use contributions or related earnings from the previous 5 years
  • The named beneficiary still must satisfy most of the normal Roth IRA eligibility rules
    • Beneficiary must have taxable compensation
    • Subject to annual IRA limit in total ($6,500 in 2023 if under age 50); you can’t fund the full $35,000 in one year and can’t fund $6,500 from 529 and another $6,500 on own
  • The one restriction not applicable if funding from a 529 is no income limit; if funding the full amount directly, a single filer must have ‘modified adjusted gross income’ under $138,000 for ‘23
  • While appealing if overfunded a 529 (good problem to have!), ask yourself if intended to fund a child’s first 5-6 years of Roth contribution above and beyond the college bills anyway
  • If you are viewing this as a new way to help fund child’s Roth IRA, be aware you can always gift your child the contribution amount anyway (assuming annual gifting below limits)
  • It is true in this gifting scenario you missed out on the earnings tax-deferred growth and any state deduction (although not clear if some state will claw that back if used for this purpose!)

 

In 2025 - Extra catch-up contribution for those age 60 – 63

  • I mentioned the catch-up contribution provision above requiring high income individuals to begin using the Roth for these provisions starting in 2024
  • Starting in 2025, the annual catch-up contribution amount will be increased, but only for those age 60 – 63 (a very tight, strange age restriction in my view)
  • For those looking forward to the extra tax deduction, recall the other provision that will knock that benefit off for high earners (though can still add to the Roth)
  • For 401k/3b, the total catch-up contribution amount will be limited to $10,000 or 150% of regular catch-up for that year
    • For example, using the 2023 catch-up amount:  $7,500 x 1.50 = $11,250
  • For SIMPLE IRA, limited to $5,000 or 150%; using 2023 value:  $3,500 x 1.50 = $5,250
  • And for those age 64 that are continuing to work and contribute to the plan, Congress must have thought these extra four years was enough and you go back to the lower limits!

 

These five provisions I detailed further from my original post captures those receiving the most attention.  Be sure to watch for any clarifications from the IRS or your employer on implementation details.  And be sure to adjust your IRA withdrawal strategy including Roth conversions given these new RMD ages.  Reach out for help if the multi-year taxable income projection exercise seems too daunting.

 

Posted by Kirk, a fee-only financial advisor who looks at your complete financial picture through the lens of a multi-disciplined, credentialed professional. www.pvwealthmgt.com