Secure Act 2.0

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SECURE ACT 2.0

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 brought key changes to many of the most popular retirement accounts and strategies. Some of these provisions that most heavily impacted individuals included the following:

  • Raising the age for required minimum distributions (RMDs) from 70.5 to 72.

  • Updates to inherited IRAs, including shortening the stretch period: Under the previous rules, non-spouse beneficiaries of inherited IRAs were able to stretch out the required minimum distributions (RMDs) over their lifetimes. The SECURE Act changed this by requiring non-spouse beneficiaries to withdraw all the funds within 10 years of the original account holder's death.

  • Removed the age limit for contributions to traditional IRA plans.

Three years later on December 23, 2022, the long awaited sequel, aptly named SECURE Act 2.0, was passed as part of the year end spending bill. Secure 2.0 builds upon the changes made by the 2019 legislation and will likely impact even more individuals than the original act did. The following is a summary of the main provisions in SECURE 2.0 that are likely to impact individual investors.

Age of Required Minimum Distributions (RMDs)

The 2019 SECURE Act changed the RMD age from 70.5 to 72 for all individuals not yet at RMD age. SECURE 2.0 now changes the RMD age to 73 starting on January 1, 2023, and further to 75 on January 1, 2033. Said another way, this changes the RMD age to 73 if you were born 1951-1959, and 75 for those born 1960 or later.

Creation of 529 Account to Roth IRA Transfers

Starting in 2024, 529 plans will be able to be rolled to Roth IRA accounts if certain requirements are met. Transfers are limited to a lifetime cap of $35,000 per beneficiary and the account must have been in existence for 15 years, and contributions and gains from those contributions within the last 5 years are ineligible to be converted. It is not yet clear if changing beneficiaries of a 529 account will reset the 15 year transfer clock, we anticipate the IRS will clarify ahead of the 2024 start date.

Roth Style Account Changes

There are several changes to Roth accounts, including the creation of two new ones, Roth SEP IRAs and Roth Simple IRAs. Other changes are as follows:

  • Effective 2024, RMDs for all plan Roth accounts have been removed.

  • Effective 2024, 401(k), 403(b), and 457(b) plan catch up contributions are required to be Roth contributions if the taxpayer is earning over $145,000. Employers will also be able to make matching plan contributions to Roth plans. Currently, all matching contributions are pre-tax.

  • Beginning in 2025, 401(k), 403(b), and 457(b) plan catch up contributions for will increase to be equal to the greater of $10,000 or 150% of the regular catch up amount – in 2023 this amount would be $11,250.

New Surviving Spouse Options for Inherited Retirement Accounts

Beginning in 2024, a surviving spouse will have the option to essentially step into the shoes of the deceased spouse and elect to treat the account as if the timeline of the original owner has not been altered. Previously, the most common option elected by the surviving spouse was to roll the decedent’s IRA into their own. Without diving too far into the implications of this new option, it appears that this will be an attractive route for individuals when the surviving spouse is older than the decedent. As with all of the items in this summary, discuss with your CPA and advisor to determine what opportunities may make sense for your individual circumstances.

Other Changes

Secure 2.0 is so expansive that we could go on for several chapters on all of the changes. Here is a quick list of the main updates not discussed above, all of which are effective starting in 2023:

  • Qualified Charitable Distributions can now be used to fund charitable trusts, but significant restrictions apply.

  • Expanded the list of qualifying emergencies for accessing retirement funds early without being subject to any penalties.

  • Reduction of RMD mistake penalties – prior to Secure 2.0 RMD under withdrawals could cost up to 50% of the shortfall amount. That amount will be lowered down to 10% in 2023 if the shortfall is corrected in a timely manner.

Items not included in Secure 2.0

There are several items notably absent from the new legislation. The first of which is any limitation of the “Back Door Roth” or “Mega Back Door Roth” strategies, which many expected to be disallowed. There was also no streamlining of retirement account rules, and if anything, withdrawal timing and calculations have become even more complex. If you are curious how any of these changes may impact you, reach out to your advisor or the CCP Advanced Planning Team, and we can assist with creating a strategic plan for your specific case.

Summary of Changes by Year

2023

  • Age of Required Minimum Distributions (RMDs) changed to 73 for those born 1951-1959 and 75 for those born 1960 or later.

  • Reduction of RMD mistake penalties to 10% of the under withdrawal if corrected in a timely manner.

  • Employers able to make matching plan contributions to Roth plans.

2024

  • Creation of 529 Account to Roth IRA Transfers with a lifetime cap of $35,000 per beneficiary

  • RMDs for all plan Roth accounts removed.

  • 401(k), 403(b), and 457(b) plan catch-up contributions required to be Roth contributions if the taxpayer earns over $145,000.

  • New Surviving Spouse Options for Inherited Retirement Accounts.

  • Expansion of the list of qualifying emergencies for accessing retirement funds early without being subject to penalties.

2025

  • 401(k), 403(b), and 457(b) plan catch-up contributions increase to be equal to the greater of $10,000 or 150% of the regular catch-up amount.