Overall, this is a tough question to answer. SECURE 2.0 doesn’t cause any real major changes, but collectively, all the small changes have a significant impact. Put a different way, SECURE 2.0 probably won’t derail or save your retirement, but you certainly need to update your financial plan.
Many important dates have shifted, Roth options have gotten better, and there are several small but useful provisions which affect only a few people. We won’t cover all the provisions in this article, but we’ll touch on some of the SECURE 2.0 highlights and changes.
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There have been several beneficial changes for people saving for retirement. Some changes affect how much you can contribute to your retirement accounts. Others change the ways which you can save for retirement.
Currently, individuals the age of 50 and over can make catch-up contributions to their retirement accounts. However, for IRAs, the limits are somewhat low for many folks in the final stages of saving. The current (as of 2023) catch-up contribution limit is $1,000 and is not adjusted for inflation.
Section 108 of SECURE Act 2.0 changes this and will start raising (indexing) IRA catch-up contribution limits each year for inflation. These new catch-up contribution limits don’t start until 2024, so mark your calendar. This is a helpful change if you’ve been wanting to start putting more into your IRA.
In addition to indexing IRA contributions, there are improvements to catch-up contribution limits for other retirement accounts coming as well – a bit later. And only for people aged 61 to 63. Starting in 2025, catch-up contribution limits for employer sponsored plans (401ks) will increase to the greater of $10,000 or 50% more than the normal catch-up contribution in 2025.
This is a bit confusing because we don’t know if there will be any adjustments to catch-up contributions between now and then. Currently, catch up contributions for qualified accounts like a 401k are limited to an additional $7,500 per year. If there aren’t any changes, the catch-up contributions for a 401k could be as high as $11,250 and then indexed for inflated thereafter.
Overall, these increased limits should be helpful to folks doing their final preparations for retirement. These increased limits don’t apply immediately, but we can start planning now. We’ll be setting our reminders for sure!
SECURE 2.0 now allows for a Starter 401(k). The Starter 401k is similar to a SIMPLE IRA, but has lower contribution limits and less rules attached to it.
The plan “generally” requires all employees to be enrolled and have a default contribution rate of 3% to 15%. The annual deferral (contribution) limit would be the same as the IRA limit ($6,500 for 2023). This change starts after 12/31/2023.
One of the biggest winners from SECURE 2.0 are Roth accounts. In addition to the indexed catch-up contributions for Roth IRAs mentioned earlier, other key benefits have been added. Some of these changes take effect immediately, but some we won’t see for some time. You should still start planning now.
Starting in 2023, SECURE 2.0 adds the ability to contribute to a SIMPLE or SEP IRA as a Roth contribution. This could be a huge benefit to small business owners. Most notably, the ability to contribute to a “Roth SEP” could significantly improve the ability for some to increase their Roth contributions.
The ability to contribute to a SEP as an employee or as the employer is possible. Keep in mind, Roth contributions are after tax and can’t be deducted by the employee. This isn’t any different than other Roth options previously available.
The same goes for a SIMPLE IRA. The higher limit for a SIMPLE versus a Roth IRA makes it a great way for some small businesses to expand Roth offerings.
Another exciting possibility is the ability for employers to contribute matching contributions into Roth accounts. Previously, all employer matching contributions had to be in a pre-tax or “traditional” account. Roth matching contributions should still be deductible by employers.
Although the change takes place immediately, this is an option – not a mandate. Just because employers can contribute to a Roth instead of traditional doesn’t mean they will. It can take time (and money) to get changes to employer retirement plans implemented.
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Out of all the Roth IRA enhancements, the ability to convert a 529 account to a Roth IRA may have the most extra rules around it. We feel this will be a very useful tool for college savings and could also be (marginally) helpful in estate planning as well.
The basic idea is you’ll be able to contribute to a 529 account and then convert it to a Roth IRA later. This would enable repurposing unused 529 funds into a Roth IRA for the named beneficiary. This helps prevent money going unused or losing tax benefits if the 529 beneficiary doesn’t go to college.
There is a lifetime limit of $35,000 for rolling 529s into a Roth IRA. Also, these rollovers are subject to the Roth IRA annual contribution limits. The 529 also needs to be open for at least 15 years prior to the rollover.
This change is good for families wanting to save for college but are afraid the money will go unused or be penalized upon withdrawal. Also, this could be a creative way for parents and grandparents to help set their heirs up for their own retirement success down the road.
We could see a lot of utility with this provision, but we’ll have to see how this functions when it comes time to do it. Financial institutions still need to establish how they’ll track and transfer all these 529s. This provision takes effect for transfers after 12/31/2023.
If you have retirement accounts such as a 401k or traditional IRA, required minimum distributions (RMDs) could be a concern. Fortunately, new provisions in SECURE 2.0 make RMDs a little less concerning.
One of the immediate changes is the increase of the RMD age to 73 (previously age 72). This means anyone turning age 73 on January 1, 2023 or later won’t have to take their first RMD until April 1st of 2024. You can potentially save on taxes and avoid other issues common with RMDs by delaying an extra year.
There’s a part two for the age increase though. Starting January 1, 2033, the age for RMDs increases to 75. Things could still change in ten years. Point in case, RMDs age limits have changed twice in the last four years already.
Another provision to lessen the sting of RMDs is the decrease of the penalty to 25% or 10% if corrected in a “timely manner.” This is the penalty for any amounts not taken as a required distribution. This is a huge change from the previous excise tax rate of 50%. Still, 25% isn’t anything to brush off either.
The elimination of RMDs for all Roth accounts isn’t going to drastically change the way we save for retirement. However, this does eliminate a lot of unnecessary moving of money and paperwork. Being able to leave money in your Roth 401k or other Roth designated account eliminates the need to transfer to a Roth IRA to avoid RMDs.
Granted, you might still want to transfer your Roth accounts to your Roth IRA to simplify things or increase your investment options. You just don’t have to move funds solely to avoid taking RMDs.
One small catch, this provision doesn’t take effect until January 1, 2024. If your account is subject to RMDs for December 31, 2023 and earlier, you still have to take the RMD.
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With over 92 separate sections within SECURE 2.0, there is a lot of change. However, this new law is being rolled out over time and piece by piece. This “softens” the impact now, but definitely adds complexity to trying to keep track of all the changes.
Overall, most people nearing retirement aren’t going to significantly alter their overall retirement plans. There will certainly be many smaller tweaks and adjustments needed with the new rules. There were also a lot of other provisions we didn’t cover here. We highlighted some of the key changes and benefits.
All these changes are a lot to keep track of on your own. NextGen Wealth checks for changes relating to our clients. We’re tracking all the dates for SECURE 2.0 implementation and we’re helping to make sure everything runs smoothly with any changes in law.
This is why we work with people on a long-term basis. We’re never going to make you go it alone. We’re here to guide you throughout your retirement journey.
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This article was written by Clint Haynes, CFP®. Clint is a Certified Financial Planner® and Founder of NextGen Wealth. You can learn more about Clint by reading his full bio here.
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