As part of the most recent omnibus spending bill, SECURE Act 2.0 brought nearly 100 changes to retirement accounts in the final days of 2022. Most of these are niche changes that will not impact a majority of the population, some will impact everyone, and all of them will be accounted for as we monitor our client’s situations. Below are a few of the most interesting or impactful changes, as well as a couple of anticipated changes that did not come to pass.
The Required Minimum Distribution (RMD) starting age is being increased
People with pre-tax retirement accounts (IRAs, 401(k)s, 403(b)s, etc.) are required to distribute a minimum amount from the accounts each year, beginning at an age determined by Congress. Starting in 1986 when these rules were created, that age was 70 and a half. The SECURE Act of 2019 then raised the age to 72. Now, SECURE Act 2.0 is raising the age again (and again - see chart below). Starting this year, the new required minimum distribution (RMD) age is 73. In 2033, the RMD age will move up to 75. These are beneficial changes that increase the number of years we are able to plan distributions and rollovers from pre-tax accounts in a way that optimizes tax efficiency. These rules do not change your ability to take distributions from the accounts, so there are no downsides to worry about.
Catch-up contributions made to 401k, 403b, and 457b retirement plans by high wage earners have a new restriction
Starting in 2024, high wage employees will be required to make any additional catch-up contributions to 401k, 403b, or 457b plans as Roth contributions, not pre-tax. High wage employees are being defined here as eligible retirement plan participants with “wages (as defined in section 3121(a)) for the preceding calendar year from the employer sponsoring the plan exceed $145,000” (SECURE Act 2.0, Section 603). Additionally, catch-up contributions are only allowed for people age 50 and above.
Employees who meet the criteria above will no longer be allowed to make pre-tax catch-up contributions, though they will continue to be able to make regular (non catch-up) contributions as pre-tax. If their employer’s plan does not allow Roth contributions, the employees will not be able to make catch-up contributions at all! Self-employed people are unaffected by the new rules as they do not earn wages.
Overall, the loss of choice for tax treatment of catch-up contributions is a negative change for high wage employees. The rule specifically impacts taxpayers who are near or at the height of their earning potential where pre-tax contributions are most effective. Still, assuming the goal is saving for retirement, Roth contributions to employer retirement plans are usually preferable to brokerage savings. If you may be affected by this new rule, make sure your employer will provide a Roth account for your catch-up contributions!
529 to Roth IRA rollovers
Also starting in 2024, we will be allowed to move funds from a 529 plan into a Roth IRA held by the 529 plan beneficiary. This opportunity comes with many restrictions:
- The 529 plan must exist for at least 15 years before Roth IRA transfers are allowed.
- Only the Roth IRA owned by the 529 plan beneficiary is allowed to receive the transfer.
- Contributions (and earnings on those contributions) to the 529 plan made within 5 years of the desired transfer date are not eligible to be transferred, though older contributions are eligible.
- Roth IRAs have an annual limit to total contributions they can receive from any source. Transfers from 529 plans will count towards that limit.
- A beneficiary may only receive a lifetime maximum of $35,000 of these transfers into their Roth IRA.
This new opportunity caught our attention as a way to use older 529 assets that may otherwise be left over (likely the intended purpose of this rule) as well as a way to preemptively save for a child’s retirement. New parents and grandparents will be able to save for their children’s education costs with less fear of over saving and under spending 529 funds.
There were no changes made to:
Qualified Charitable Distributions (QCDs) starting age
Many of our clients heard us talking about QCDs in 2022 as a great way to make charitable donations from their IRAs. At one point in time, the age individuals are allowed to make QCDs (age 70 and a half) matched the starting age for required minimum distributions. As the starting age for RMDs has increased, the starting age for QCDs has remained the same. This is a good thing – we want as much time as possible to make these tax efficient charitable donations. I just wish they would move the starting age down to a nice, round 70.
Backdoor Roth IRA or Mega-Backdoor Roth contributions
These contribution strategies rely on what seems to be a tax loophole (even though it is sanctioned by the IRS) that allows otherwise ineligible contributions to find their way into Roth accounts. Experts have guessed the backdoor Roth contribution strategy would be eliminated in both SECURE Acts (2019 and 2022), but so far it has remained untouched. We will continue to use these strategies where relevant with our clients for as long as they are allowed.