SECURE ACT 2.0 – What You Should Know
The Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 was passed by Congress on December 23, 2022, as part of the Consolidated Appropriations Act of 2023. It presents several significant changes to individual retirement accounts and employer-sponsored plans. Following is a highlight of a few important provisions:
- Required Minimum Distribution (RMD) Changes
- Effective 2023, the required distribution age at which IRA owners must begin taking distributions has been increased from 72 to 73. Note that it is only applicable to individuals turning 73 in 2023 and later. Additionally, this age is increased to 75 for participants turning 74 in 2033 or later. Participants of an employer-sponsored plan (401(k) etc.), if currently employed, are not subject to the RMD rules (with some exceptions). The penalty for not taking the required amount has been reduced from 50% to 25%, and only 10% if corrective action is taken in a timely manner.
- Contribution Limits for IRA and Roth IRA
- For 2023, the contribution limits for IRAs and Roth IRAs have been increased to $6,500 and for individuals aged 50 or over, the limit is now $7,500. Unlike previous years, the contribution limits are now also indexed for inflation starting 2024.
- Salary deferral limits for those participating in a 401(k), 457 or 403(b) plan are now $22,500 and for those aged 50 or over, the catch-up contribution is an additional $7,500.
- There is a new catch-up contribution limit for plan participants aged 60 to 63 (effective 2025). For 401(k), 403(b) and 457(b) plans, the adjusted dollar limit is the greater of $10,000, or an amount equal to 150% of the regular catchup contribution limit in effect for 2024.
- Conversion of 529 Plans to Roth IRAs
- SECURE 2.0 Act allows up to $35,000 (lifetime per beneficiary) to be converted from a 529 plan to a Roth IRA. While this may sound like a good solution for over-funded 529 accounts, there are several restrictions and caveats such as annual conversion amount limited to the annual Roth IRA contribution limit and a minimum of 15-year holding period for the 529 before conversion.
- Increase in QLAC amounts
- A Qualified Longevity Annuity Contract (QLAC) is an annuity funded by funds from a qualified plan or an IRA. Doing so allows for deferral of RMDs as the payments from a QLAC don’t begin until age 85 albeit at a higher amount. Doing so protects the IRA owner against longevity risk and depletion of assets in the later stages of their life. The previous limit was the lesser of 25% of the value of the account or $145,000. SECURE 2.0 Act increases the lifetime amount that can be added to a QLAC to $200,000 (indexed for inflation).
These are just some of the key highlights that will be in effect from the SECURE 2.0 Act in 2023 or later. In most cases, they create opportunities for tax savings or enhanced retirement funding. Clarification and additional information from the IRS will be needed for proper implementation of the provisions. We will consider each one of these changes and their impact on your financial plan, investment strategy and long-term goals. In the meantime, if you have any questions, please feel free to give us a call.