By Investment Associate Bobby Adusumilli, CFA.
In 2019, the SECURE Act was signed into law with the goal of helping people to save and invest for retirement.[1] In efforts to further improve retirement plan saving and investing, the SECURE 2.0 Act was signed into law in December 2022.[2][3] We want to highlight how this act may impact your finances.
Option For Roth Matching & Non-Elective Employer Contributions To Retirement Plans
Beginning in 2023, employer retirement plans (such as 401(k)s and 403(b)s) will be able to offer the option for employees to receive matching and non-elective employer contributions as Roth contributions, which are immediately vested. The Roth employer contributions would be added to the employee’s taxable income for that year.
It is important to recognize that this is optional for your employer, and this feature may not be available yet on your employer's retirement platform.
Increasing The Beginning Age For Required Minimum Distributions (RMDs)
Currently, owners of retirement accounts including Traditional 401(k), 403(b), 457(b), and IRA accounts are required to begin taking RMDs from these accounts starting at age 72. Based on birth year for people who have not already begun taking RMDs, the SECURE 2.0 Act changes the beginning age for RMDs to the following:
Required Roth Catch-Up Contributions For High Wage Earners For Employer Retirement Plans
Effective in 2024, for employees age 50+ who made at least $145,000 in wages (will be adjusted for inflation going forward) in the previous year from an employer, any catch-up contribution to that employer’s retirement plan must be a Roth contribution. If an employer retirement plan doesn’t offer a Roth catch-up contribution option, then catch-up contributions are not allowed for anyone for these employer retirement plans. Roth catch-up contributions do not apply for self-employed individuals, nor do they apply to IRAs such as SIMPLE IRAs.
Higher Catch-Up Limits For Employer Retirement Plans For Participants Age 60-63
Currently for employer retirement plans, participants age 50+ may make catch-up contributions of $7,500 to a 401(k) or 403(b), or $3,500 for SIMPLE IRAs. Starting in 2025, individuals age 60-63 will have the ability to make larger catch-up contributions. For a 401(k) and 403(b), the annual catch-up contribution limit for people age 60-63 will increase to the greater of $10,000 or 150% of the regular catch-up amount for 2024. For a SIMPLE IRA, the annual catch-up contribution limit for people age 60-63 will increase to the greater of $5,000 or 150% of the regular catch-up amount for 2025. These catch-up contribution limits will be indexed for inflation beginning in 2026.
Ability To Offer Roth Option For SIMPLE IRA & SEP IRA Plans Beginning In 2023
Limited Ability To Transfer A 529 Balance To A Roth IRA
Starting in 2024, a 529 plan beneficiary whose account has existed for at least 15 years may be able to use their balance to make Roth IRA contributions cumulatively up to $35,000 throughout their lifetime, subject to conditions.
Annually, the total amount you contribute to a Roth IRA - both via money earned as well as through a 529 account - cannot exceed the Roth IRA contribution limits.
You must have earned at least corresponding income within the year to contribute 529 account money to your Roth IRA.
Any contributions and associated earnings made to the 529 account within the previous five years are ineligible to be transferred to a Roth IRA.
This aspect of the SECURE 2.0 Act is complicated, and we expect further rule clarifications in the future.
Employer Matches For Student Loan Payments
Effective in 2024, employers will be able to to offer employer matches for eligible federal student loan payments made by participants. The student loan payments will be treated as salary deferrals for vesting and matching purposes.
It should be noted that this is an option for employers, but not an obligation.
For IRAs, The Catch-Up Limit As Well As Qualified Charitable Distributions (QCDs) From Traditional IRAs Will Be Indexed To Inflation Starting In 2024
As always, if you would like to discuss how the SECURE 2.0 Act may impact you and your family, please reach out to us.
Important Disclosure Information & Sources:
[1] “H.R.1994 - Setting Every Community Up for Retirement Enhancement Act of 2019". United States Congress, 2019, congress.gov.
[2] “SECURE 2.0 Act of 2022". United States Senate Committee on Finance, 19-Dec-2022, finance.senate.gov.
[3] “SECURE Act 2.0: Later RMDs, 529-to-Roth Rollovers, And Other Tax Planning Opportunities“. Jeffrey Levine, 28-Dec-2022, kitces.com..
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