Included as part of the omnibus spending bill that congress passed in December was a much anticipated (by nerds like me, at least!) retirement bill known as Secure Act 2.0.
This bill contains within it a ton of changes related to retirement accounts and retirement planning. This piece will only focus on a handful of the changes that I believe are most relevant.
Tax laws are constantly changing—it’s critical to remain aware of the changes so that you can take advantage of opportunities and avoid pitfalls caused by the changes.
Let’s dive into the most important changes.
The age for taking RMDs was pushed back…again
What are RMDs? RMD stands for Required Minimum Distribution and it’s when the IRS forces you to take money out of your retirement account when you reach a certain age. Why would they do this? In order to collect the tax revenue for the taxes that you (likely) have to pay on those distributions.
For years the triggering age for taking RMDs was 70 ½. However, unless you’re a new parent or in pre-school, you measure your age in full years, not months, and certainly not half-years! So, this 70 ½ age was very confusing. Thankfully, in 2019 when Secure Act 1.0 was passed, the RMD age was upped to 72. Now, it’s being increased once more.
Beginning this year in 2023, RMDs will now begin the year you turn 73. It will stay that way for about 10 years, then in 2033, the RMD age will be pushed back again to age 75. Here’s how this could impact you depending on your birth year:
|Birth Year||Age when RMDs begin|
|1950 and earlier||72 (or 70.5 for those who turned 70.5 before 2020)|
|1951 - 1959||73|
|1960 and later||75|
What can or should you be doing with this information?
Well, if you’ve already started taking RMDs or you already take more in distributions each year than what your RMD requires, then these changes don’t really affect you.
But if you haven’t started taking RMDs yet, this could be an opportunity. Getting an extra year before being forced to withdraw money is welcome news. That’s one more year that you can potentially avoid higher Medicare Part B/D premiums. Or it’s one more year where it might make sense for you consider filling up lower tax brackets with a Roth conversion.
Many “Roth” related changes
Included in the bill are a number of changes to Roth accounts—both Roth IRAs and Roth portions of retirement accounts.
Interestingly, all of them are “good” changes. None of the changes restrict or eliminate any existing Roth strategies. For example, many believed this bill would eliminate the longstanding Backdoor Roth IRA strategy. That did not happen.
Here are a few of the changes that did happen:
- Elimination of RMDs in Roth retirement accounts. This puts Roth 401(k) or Roth 403(b) accounts on equal footing with Roth IRAs in this regard—there is no RMD requirement. This starts in 2024.
- Creation of Simple Roth IRAs and SEP Roth IRAs. You can now designate new SEP or SIMPLE IRA accounts as Roth rather than Traditional pre-tax, meaning you’ll pay taxes on contributions now so that you don’t have to pay them later. This starts in 2023.
- Employer contributions are eligible for Roth treatment. Previously, employer “matching” contributions or employer profit-sharing contributions could only be deposited into the pre-tax portion of your retirement account. Now, you can ask your employer to put their contributions into the Roth portion of your account instead. This starts in 2024.
- High wage earners are required to use Roth option for catch-up contributions. Workers over the age of 50 are allowed to make “catch-up” contributions to their employer plan. In 2023, workers can do a max of $22,500 of “normal” contributions to plan like a 401(k). Workers over 50 can do an additional $7,500 of “catch-up” contributions. Now, for workers over 50 whose wages exceed $145,000 any catch-up contributions must be Roth and cannot be Traditional pre-tax. This starts in 2024.
Increased catch-up contributions for ages 60-63
As mentioned above, right now, workers over 50 can make additional “catch-up” contributions to their 401(k)/403(b) plan on top of the normal maximum.
Beginning in 2025, this provision allows workers between the ages of 60-63 to increase the amount of “catch-up” contributions they can do. The new “catch-up” amount is the greater of $10,000 or 150% of the regular “catch-up” amount, indexed for inflation.
This is a helpful way to allow those who can afford it some additional savings before retirement. Why they stopped the age at 63 years old, who knows, but it is what it is!
Taking this together with Roth change #4 above, workers ages 60-63 whose wages exceed $145,000 will be allowed to do more in “catch-up” contributions, but they’ll now be required to direct all of those contributions to the Roth portion of their account.
529 to Roth IRA Transfers
While this change isn’t exactly applicable for retirees and pre-retirees specifically, it’s an extremely intriguing change that I wanted to share.
Beginning in 2024, individuals can transfer money between a 529 plan and a Roth IRA, as long as certain criteria are met:
- The Roth IRA owner must be the same as the beneficiary of the plan
- The 529 plan must have been maintained for at least 15 years
- Any contributions made to the 529 plan in the last 5 years cannot be moved to a Roth IRA
- The annual limit for how much can be transferred is the annual IRA/Roth contribution limit, reduced by any IRA/Roth contributions made by that individual
- The maximum lifetime amount that can be moved from a 529 plan to a Roth IRA is $35,000
This change is intriguing to me because it has the potential to address the very common question that parents saving for college have: “What happens to the 529 plan if my kid doesn’t need the money in there?”
With this change, that parent could simply change the beneficiary of the 529 plan from their child to themselves and then transfer the funds to their own Roth IRA, abiding by the other criteria above.
Changes by Year
I’ve hit you with a handful of changes above, but not all of them take effect right away. Below is a helpful chart to show when each change begins in the coming years.
|2023||- RMDs pushed back to age 73|
- Roth SEP and SIMPLE IRAs allowed
|2024||- Elimination of RMDs in Roth retirement accounts|
- Employer contributions can be Roth
- High-wage catch-up contributions must be Roth
- 529 plan to Roth IRA transfers allowed
|2025||Increased catch-up contributions for ages 60-63|