Updated for 2024: Secure Act 2.0 – Revisiting the Impactful Changes Now and in the Future
by: Ashley Madden, CFP®, CPA, CEPA
The original SECURE Act (the “Setting Every Community Up for Retirement Enhancement” Act) was signed into law in December 2019. This Act initiated some of the largest changes to retirement plans since the Pension Protection Act of 2006. One of the most significant changes from that Act was the change in the Required Minimum Distribution “Required Beginning Date” from 70 ½ to age 72. A separate provision in the original SECURE Act eliminated the option for beneficiaries of IRA accounts to “stretch” those IRA distributions over their lifetime. The change was made to limit the distributions from Beneficiary IRA accounts created after December 31, 2019, to ten years. Since the Act was first created, 2023 finally brought some much-needed clarification on when and how distributions must occur before the end of the ten years. This will be covered below. However, any potential penalties on these distributions were eliminated if not taken in 2020 and 2021, per IRS Notice 2022-53.
Following up to the original SECURE Act, a $1.7 trillion federal spending package called “Securing a Strong Retirement Act of 2022”, commonly called SECURE Act 2.0, was passed by Congress on December 23rd, 2022. While there are many new changes in this Act, I will cover the ones that are most relevant to high-net-worth individuals who are either actively saving for retirement or already retired.
Increase in the age for RMDs: Starting in 2023, Required Minimum Distributions (RMDs) are now taken at age 73 (changed from age 72, per the original SECURE Act). Then, for individuals turning 75 in 2033 and beyond, this will be the new age for RMDs. This is an important planning consideration for those who turned 73 in 2023 or the many more who are trying to plan for the RMDs they face in the future. These decisions are further complicated by the uncertainty of where tax rates will land in 2026 and beyond. Will rates rise to the pre-SECURE Act levels, as planned? Or will there be permanent changes or at least a continuation of current tax rates beyond 2026? Only time will tell. For many high-net-worth individuals, RMDs mean taking IRA distributions subject to ordinary income tax that the individual may not need for cash flow. These IRA distributions, especially for those with significant IRA assets, can push other income into higher tax brackets, including investment and Social Security income. Since Medicare Part B premiums are based on Modified Adjusted Gross Income, taking RMDs can even increase Medicare Part B premiums. So, this change potentially prolongs taking additional taxable income that can have a financial impact beyond the tax on the actual RMDs. Notably, those starting their RMDs under these new rules have until April of the following year to take the first-year RMD. However, one must evaluate their tax picture as this would mean taking two RMDs into one year, potentially creating an even higher marginal tax rate in the year the RMDs are both taken.
Clarification to the ten-year rule for Beneficiary IRA Distributions – the rules differ for taking RMDs from Beneficiary IRAs depending on such factors as whether the original IRA owner had already been taking RMDs and if the beneficiary is “Designated” or “Non-Designated”. The rules a beneficiary may need to follow and the options available will depend on the facts and circumstances of their unique situation. However, we did receive much needed clarification in June of 2023 under IRS Notice 2023-54 that non-spousal designated beneficiaries that follow the “ten-year rule” were exempt from RMDs in 2023 but follow RMD rules starting in 2024 and the Beneficiary IRA account must be fully withdrawn within the ten-year period.
Reduction in the penalty for not taking RMDs: For many years, the penalty for not taking Required Minimum Distributions has been a whopping 50% of the RMD not taken. Starting in 2023, the penalty has been reduced to 25% and, if taken within two years (with some limitations), the penalty is reduced to 10%. As a reminder, if a RMD is taken retroactively, an individual who has been remiss in taking their RMD for a particular year can request penalty abatement using Form 5329 and attaching a letter of explanation to the IRS.
Higher contribution limits for older individuals in retirement plans: According to a recent Bankrate survey, 55 percent of Americans said their retirement savings are falling short, with nearly 35 percent indicating that they’re “significantly behind” and another 20 percent reporting that they’re “somewhat behind” on their financial goals. As part of the SECURE ACT 2.0, starting in 2025, the catch-up contribution limit for retirement plan contributions (such as those made to 401(k)s and 403(b) plans) is increasing for those ages 60-63. These individuals will be able to contribute the greater of $10,000 or 150% of the regular catch-up amount for 2024 (indexed for inflation, starting in 2026). So, for individuals, especially high-income earners who can max out their retirement contributions, they will be able to save even more. Notably, for individuals who have access to a Roth option within their retirement plan, they could make these contributions with after tax dollars, which may be considered tax free income when withdrawn.
Limitations on catch-up contributions for high-income earners: Starting in 2024, for income earners of $145,000 and over (indexed for inflation), all catch-up contributions to qualified retirement plans (such as 401(k) plans) were scheduled to be allocated to a Roth account. However in August 2023, the IRS issued Notice 2023-62 which provides a two-year administrative transition period to implement these new provisions.
RMDs eliminated from Roth 401(k) plans: Starting in 2024, Roth 401(k) plans have the same rules as Roth IRAs. There will be no RMDs required from Roth 401(k) plans. This will allow individuals who have the option to keep Roth accounts with an employer plan a more even playing field for evaluating their options to convert to Roth IRA versus staying in the employer plan.
Changes to SIMPLE plans: SIMPLE retirement plans may be “simpler” than their 401(k) cousins, but with simplicity comes limitations. The new Act makes several changes to SIMPLE plans. These changes include higher employer contributions and allowing Roth contributions for employees (starting in 2023). Notably, SEP-IRA plans, often used by high-income self-employed individuals, will also be eligible for Roth contributions. Starting in 2024, employers can replace their SIMPLE-IRA plan with a SIMPLE-401(k) plan or another 401(k) plan if they require mandatory employer contributions.
Potentially higher IRA Catch-up Contributions: As a reminder, for 2024, IRA and Roth-IRA contributions are limited to a total of $7,000 (or 100% of earned income, if less). For those ages 50 and older, they can make a $1,000 catch-up contribution. While IRA contributions have increased over the years, indexed to inflation, the catch-up contribution has remained $1,000 since 2015. Starting in 2024, the $1,000 limit will now be annually adjusted for inflation in $100 increments.
Roth conversions for 529 plans: 529 plans (for education) have been advantageous for families saving for retirement by allowing tax-free growth potential on plan assets. Starting in 2024, tax-free and penalty-free rollovers will be allowed from 529 plans to Roth IRA accounts in the name of the 529 plan beneficiary. Limitations include a limit of $35,000 allowed for the rollover, rollovers only allowed for a named beneficiary who has been in place for 15 years, and rollovers can only be for plan contributions and earnings that have been in place for at least five years.
We have covered only a few SECURE 2.0 Act rules in this article. As demonstrated here, the rules are complex and will be rolled out over the next few years. Everyone’s planning situation is unique, and now, the need for professional financial advice from an experienced advisor is more important than ever.
If you have any questions or comments regarding this article, email Ashley.
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