SECURE 2.0 — What Does It Mean For You?

The SECURE Act…Setting Every Community Up For Retirement Enhancement (SECURE) was initially enacted in 2019.  In late December 2022, Congress enacted the Consolidated Appropriations Act, a spending Bill that included significant changes to retirement planning, contributions, and distributions.  Known as the Secure Act 2.0 of 2022, it includes a number of retirement, tax, and other provisions that may affect your retirement planning.  Here’s how!

Required Minimum Distributions (RMD)

The first SECURE Act generally raised the age at which you must begin to take RMDs — and pay taxes on them — from traditional IRAs and other qualified plans, from 70½ to 72. Beginning January 1, 2023, the age at which one needs to take their RMD has increased to age 73, and will be increased to age 75 in 2033, thereby allowing people to delay taking RMDs and paying tax on them.  The law also relaxes the penalties for failing to take full RMDs, reducing the 50% excise (or penalty) tax to 25%.  If the failure is corrected in a timely manner, the penalty can be reduced further to 10%.

Catch-up Contributions

Beginning January 1, 2025, individuals who are ages 60 to 63 can make catch-up contributions to 401(k) plans and SIMPLE plans up to the greater of $10,000 or 50% more than the regular catch-up amount. The increased amounts are indexed for inflation after 2025. (The 2023 annual dollar limit on catch-up contributions is $7,500 for 401(k)s and $3,500 for SIMPLEs, up from $6,500 and $3,000, respectively, for 2022.)

The law also changes the taxation of catch-up contributions, though, which could reduce the upfront tax savings for those who max out their annual contributions. Effective for taxable years beginning after December 31, 2023, catch-up contributions will be treated as post-tax Roth contributions. Previously, you could choose whether to make catch-up contributions on a pre- or post-tax basis. An exception is provided for employees whose compensation is $145,000 or less (indexed for inflation).

Qualified Charitable Distributions (QCDs)

QCDs have gained in popularity as a way to satisfy RMD requirements while also fulfilling philanthropic goals. With a QCD, you can distribute up to $100,000 per year directly to a 501(c)(3) charity after age 70½. You can’t claim a charitable deduction, but the distribution is removed from taxable income.

Under the new law, you also can make a one-time QCD distribution of up to $50,000 through a charitable gift annuity or charitable remainder trust (as opposed to directly to the charity). This is effective for distributions made in taxable years ending after December 29, 2022. The law also indexes for inflation the annual IRA charitable distribution limit of $100,000.

Tax-Free Rollovers From 529 Plans To Roth IRAs

The new law permits a beneficiary of a 529 college savings account to make direct rollovers from a 529 account in his or her name to a Roth IRA without tax or penalty. This provides an option for 529 accounts that have a balance remaining after the beneficiary’s education is complete. The 529 account must have been open for more than 15 years and other rules apply. The provision is effective for distributions beginning in 2024.