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SECURE ACT 2.0, Continued

SECURE ACT 2.0, Continued

February 21, 2023

SECURE ACT 2.0, Continued

 As the landscape around American retirement continues to change, we want to do our part by offering guidance and clarity to how these changes will affect you.  Back in December, Bryan Beatty wrote in our EBW Newsletter about the new-coming legislation dubbed SECURE Act 2.0.  The massive $1.7 trillion Consolidated Appropriations Act of 2023 signed into law on December 29th, 2022, is over 4,000 pages long and poses many significant changes to how you can expect to save for your future, your children’s or grandchildren’s education, the taxes you pay, and how employers help their employees save for retirement.

 As so often happens, the final version of the bill is slightly different than the original version that was released to the public.  The signed version of the bill contains over a hundred provisions for retirement plans and the tax code that each bring their own nuance to a person’s retirement picture, and depending on each person’s situation these changes may impact you somewhat, a lot, or not at all.  Now that the dust has started to settle, we want to highlight some of the major changes that we believe will impact our clients the most so that you know what to expect over the next several years as many of these changes begin to be implemented.

  Increased Catch-Up Contributions and Mandatory Roth Savings (2024):

 In our opinion, the changes in the bill that are going to have the most noticeable effects revolve around saving into your employer’s 401k.  You may be familiar with the annual limit of how much you are allowed to save into a 401k as an employee – for 2023 it is $22,500.  If you are over 50 you are a granted a ‘Catch-Up Contribution’ of $7,500 to allow you to save more.  Most employer plans allow you to choose to make these savings as ‘Pre-Tax’ – meaning you don’t pay taxes on what you put it, but instead pay taxes when you eventually take it out OR you save as Roth – meaning you pay the tax now, but the eventual withdrawals come out tax-free.  Starting in 2024, some individuals will lose control over this choice.  For individuals who have made over $145,000 in wages in the previous year, you will be obligated to complete any Catch-Up savings as Roth, and would not get a tax deduction for the amount of Catch-Up contribution you make and instead would pay taxes on it up front.

It's also worth noting that the Act specifically addresses those employer plans that do not have the option to save as Roth.  If a 401k or other plan doesn’t have a Roth option, the entire catch-up provision is lost for that plan, for everyone involved.  This would unnecessarily limit the allowable savings in that plan.  This really should not be considered a viable option for an employer, so you should see the addition of Roth option in your employer savings plan if it does not have it already.

Roth Employer Contributions (2023):

Sticking with the topic of Roth savings – Employers now have the option of making matching or profit-share contributions to the employer plan for your benefit as Roth.  Historically, all Employer contributions have been required to be Pre-Tax.  Unlike the paragraph above, this is just an option, not an obligation.  Technically this provision is already in place, but it will take some time for the plan administrators, and the IRS, to catch-up and determine how this will be implemented.  Look for the willing employers to start making Roth 401k contributions for their employees once more guidance has been put out about how exactly this should be handled from the perspective of payroll, taxation, and employee vesting.  We see this as a huge benefit as it relates to financial planning because, in general, a long-term plan looks better with more Roth as opposed to Pre-Tax savings.

Age 60-63 Super Catch-Up (2025):

Another meaningful provision in the bill is that, starting in 2025, those who are age 60-63 will have access to an even larger Catch-Up contribution.  Currently those that are over 50 are allowed to save an addition $7,500/yr into their Employer plans.  SECURE 2.0 expands on that to say that those ages 60-63 can save 150% of the normal Catch-Up.  This will not go into effect until 2025, but hypothetically a person age 61 could save up to the normal 401k max of $22,500 plus the super Catch-Up of an additional $11,250, for a total savings of $33,750.  This was designed with the understanding that many Americans don’t start emphasizing their retirement savings until later in life, and by then more savings needs to be done – hence the name ‘Catch-Up’.  If you’re following along, you should note that if you are in the group making more than $145,000/yr, the entire Catch-Up amount including the age 60-63 addition would need to be contributed as Roth.

 Changes to RMD Rules – Again (2023):

Once again the rules around Required Minimum Distributions from IRA accounts have changed.  In 2020 they moved the age for mandatory withdrawals from 70 ½ to 72.  In 2022 they updated the life expectancy factors used to calculate the RMD amounts.  Now in 2023, they have pushed the age of mandatory withdrawal out to 73 (meaning the calendar year you turn age 73), and there are further changes written into the law over the next decade.  By 2033, the age will be increased to 75.

 Believe it or not, Congress made a mistake in writing this 4,155 page bill.  There is a technical mistake in the language, but at some point between now and 2033 the age is going to increase to 74, before finalizing at 75 in 2033.  We will need to wait for an amendment or IRS guidance to know when exactly that is, but at some point it will happen.

 Another change related to RMDs is centered on the penalty that’s applied for those that fail to take the withdrawal.  Typically you’re required to take out at least the minimum withdrawal from an IRA by the December 31st – there is an exception that allows you to wait until April 1st of the following year, but only for the very first RMD.  Historically the penalty for failing to do this has been 50% of the minimum distribution amount, but SECURE 2.0 reduces this to 25%.  It also writes in a provision that allows a further reduction of the penalty to only 10% if it is ‘corrected in a timely manner’.  Again, we await IRS guidance to learn the definition of ‘timely’ and ‘corrected’, but one could assume this means that you at least need to fix it before the IRS discovers it themselves.

 The last RMD provision we want to cover is related to 401ks or other employer sponsored plans.  The tax code states that Roth dollars inside of a Roth IRA are not subject to the Required Minimum Distribution – this is a good thing.  However, until now the tax code has made no such provision for Roth dollars inside of an employer sponsored plan like a 401k.  Roth funds in those accounts had the same mandatory distribution rules as the Pre-Tax funds.  SECURE 2.0 changes this and allows for continued tax-free growth of that balance with no mandatory withdrawals, at least during the life of the original saver.

 529 to Roth IRA Transfers (2024):

One of the more interesting provisions is the allowance of rolling excess funds in a 529 plan into a Roth IRA for the benefit of the same beneficiary.  There is a list of caveats, but this is still a new answer to the question ‘what if we don’t need these funds for college?’  The law allows you to make a Roth contribution on behalf of a beneficiary using funds from a 529 with no tax or penalty.  The caveats:

  • The account must have been open for at least 15 years (unsure whether that means under the same beneficiary – again, we wait for guidance)
  • The amount rolled over must be coming from contributions and their associated earnings that are at least 5 years old
  • You are limited to the same restrictions as a normal Roth IRA contribution – the annual limit ($6,500 in 2023) and earned income of at least the contribution amount (earned by the beneficiary) are still required. Interestingly, the upper income limits are specifically excluded and do not have to be followed for this ($153,000 in 2023 for a single person).  So if your 20 year-old has become a TikTok star, is earning $1MM per year, and has no need for their 529 money, then you can still take advantage of this new provision and make a Roth provision on their behalf
  • You are limited to a maximum of $35,000 in Roth funding per beneficiary in their lifetime from 529 transfers

 Employer Matching on Student Loan Repayments (2024):

Starting in 2024, SECURE 2.0 allows for employers to treat their employee’s student-loan payments as if they are contributions to their employer savings plans for the sake of the employer matching.  This means that a young person who is saddled with student debt could still be able to receive the 401k match from their employer, whereas they might otherwise not be able to save from their paycheck themselves due to having to make their student loan payments.  It will take some time for employers and plan administrators to develop a process for implementing and verifying this, but regardless it can be seen as a positive, especially for those just getting started in their careers.

 SECURE 2.0 contains a significant amount of changes, and the topics covered really only touch on the high notes.  If you have any questions about anything covered here, or about anything else contained in the bill, please contact your advisor.

 Please note that EBW Advisors are not tax professionals.  If you have specific questions related to your tax situation or the preparation of tax returns, please contact a tax professional.