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Secure 2.0 Planning Considerations

After a bitterly and closely contested mid-term election last November, the lame duck Congress wrapped up unfinished business before party control in the House changed in January 2023. The result was a 4,000-page $1.7 trillion omnibus bill passed by the House and Senate and ultimately signed by President Biden on December 29, 2022.

The Omnibus bill garnered media attention as largely a spending bill to fund the government into 2023 and to provide aid to Ukraine. However, unnoticed by many was that numerous policy changes, including wide-ranging updates to retirement plan provisions, were added to this bill at the last minute to avoid starting from the beginning in the next Congressional session.

These retirement plan provisions, dubbed “Secure Act 2.0,” are a follow up to the “original” Secure Act signed in 2019 that itself made sweeping changes to retirement provisions, including the elimination of the “Stretch IRA.”

Secure Act 2.0

Congress is attempting to prevent the looming crisis caused by many Americans having inadequate retirement savings. Part of this “savings gap” is driven by the complexity and cost for small businesses to offer retirement plans for their employees. Many Secure Act 2.0 provisions are directed towards employers and provide solutions streamlining administration and incentivizing workers to participate.

Although not as wide ranging as the original Secure Act, several provisions are critical for individual taxpayers to understand and incorporate into their current financial plans. Key changes from Secure Act 2.0 and the related planning considerations are highlighted below.

1. (Another) Change to Required Minimum Distribution Age

IRAs and employer sponsored retirement accounts have historically required taxpayers to begin taking distributions in the year they turn 70 1/2, referred to as a required minimum distribution (RMD). The age for RMDs was first extended to age 72 with the passage of Secure Act 1.0 in 2019.

Secure Act 2.0 made additional changes to the age at which RMDs must begin. For taxpayers born between 1951 and 1959, the RMD age increases to the year a taxpayer turns 73. This includes taxpayers turning age 72 in 2023 whom anticipated taking an RMD this year. For those born after 1959, the RMD age is now 75 years old.

Planning Note: While deferral is an important component to income tax planning, the potential benefit in a delay in the RMDs needs to be evaluated for each taxpayer. By waiting until age 75, for example, the balance of a large retirement plan may be squeezed into fewer tax years, based on life expectancy and the now 10-year distribution rule at the owner’s death. This could result in an overall larger income tax bill than if the distributions in the retirement account started earlier or if the delay was instead used for partial Roth conversions.

2. Rollover of 529 plan balance to a Roth IRA

A 529 plan is a tax advantaged way to save for college, and now elementary and secondary school. The earnings accumulate tax-deferred while qualified withdrawals for certain educational expenses are free from federal income taxes.

Even with the best projections and planning, money is often remaining in a 529 plan when the beneficiary has completed their education. Starting in 2024, Secure Act 2.0 provides a new option to 529 owners to avoid paying a 10% penalty on the eventual withdrawal of the remaining funds. A 529 plan can now be directly rolled into a Roth IRA for the 529 plan beneficiary, subject to the following requirements:
  • 529 plan must be open for more than 15 years.
  •  Contributions must have been in the account for at least 5 years to be eligible for the rollover.
  • Rollovers are subject to annual contribution limits for a Roth ($6,500 for 2023).  The beneficiary must have compensation, although income phase out limits for Roth IRAs are not applicable to the rollover.
  • The lifetime limit of 529 plan balance that can be rolled to the beneficiary is $35,000.

Planning Note: The coordination of the 529 rollover with the current retirement savings for the beneficiary can facilitate generational discussion around the importance of saving and the impact of compounding in qualified retirement accounts. This, along with additional provisions allowing employers to consider an employee’s student loan payment as contributions eligible to “match” in a sponsored plan continue to address the impact of rising college costs and retirement savings.

3. Expanded recipient of Qualified Charitable Distribution (QCD)

First introduced in tax legislation in 2006, a Qualified Charitable Distribution (QCD) is available to those over 70 ½ to make up to $100,000 of charitable donations to qualified charities directly from an IRA. This QCD counts towards satisfying the required minimum distribution, while not being included as adjusted gross income (AGI) on Form 1040. Secure Act 2.0 has added an inflation adjustment to the $100,000 limit.

Secure Act 2.0 also provides for a one-time election to use a QCD to fund a Charitable Remainder Trust or Charitable Gift Annuities. Beginning in 2023, a QCD of up to $50,000 can be distributed to these recipients.

Planning Note: The restriction on the size of the contribution to a charitable trust, along with the tax treatment of all future distributions as ordinary income, could limit the practical application of this one-time distribution.

4. Changes to Employer Sponsored Roth Accounts

Beginning in 2006, employers were allowed to offer a Roth option within the 401(k) to their employees. A Roth 401(k) is similar to a Roth IRA, with a few important exceptions. The Secure Act 2.0 allows plans to be amended for the following changes:
  • Effective December 29, 2022, an employer-provided “matching” contribution may be deposited directly into a Roth 401(k). Previously this matching contribution was not allowed to be treated as a Roth 401(k) contribution.
  • Beginning in 2024, RMDs will no longer be required from a Roth 401(k). This aligns with the rule that already prevented RMDs from a Roth IRA.

Planning Note – as employees retired, the difference in the RMD rule between a Roth 401k and a Roth IRA was an important element in the decision to roll money out of a plan or keep it there. While the decision has many factors, it is important to note that this distinction no longer exists.

5. Catch-Up Retirement Contributions

A catch-up contribution is an additional amount above the statutory or plan limit that a taxpayer age 50 or older can make annually to their retirement plan. These contributions were introduced in the year 2001 legislation to give those eligible taxpayers a chance to boost their retirement savings before reaching retirement age.

The Secure Act made minimal changes to IRA catch-up contributions, only introducing inflation adjustments to the annual limit of $1,000 beginning in 2024. However, significant changes were made to catch-up contributions to employer sponsored plans such as a 401(k).

Catch-up contributions to employer sponsored plans, if permitted by the plan document, have been indexed for inflation since their introduction in the 2001 legislation. For 2023, the annual catch-up contribution for taxpayers age 50 or over is $7,500.

The Secure Act 2.0 made two important changes to these contributions for employer-sponsored plans:
  • Starting in 2025, taxpayers turning between 60 and 63 during the year will be eligible for an additional contribution that is the greater of $10,000 or 150% of the annual contribution limit for 2024.
  • Starting in 2024, plan participants with wages over $145,000 must deposit any catch-up contribution into the Roth portion of the plan. Contributions to a Roth plan are not currently deductible by the employee for income tax purposes. If the employer plan does not have a Roth option, no employee will be able to make catch-up contributions, regardless of their wages.

Planning Note – With the creation of Roth SIMPLE and Roth SEP IRAs in Secure Act 2.0, along with the requirement for high wage earners to utilize a Roth for catch-up contributions, many see this as further acceptance by Congress of Roth retirement accounts as current revenue generators. For high wage earners, the forced Roth contributions provide an opportunity to evaluate an overall retirement savings strategy and the potential value a Roth component adds through income tax diversification.

6. New Option for Surviving Spouse Beneficiary

As a retirement account beneficiary, surviving spouses have always had special treatment and options available only to them when inheriting these accounts. Prior to Secure Act 2.0, a surviving spouse could roll the deceased spouses’ account into their own plan or remain a beneficiary through an “inherited” account with unique RMD rules. Effective 2024, surviving spouses have an additional option to elect to be treated as the deceased spouse for the RMD rules. This may be beneficial if the deceased spouse was younger, although all options need to be considered when making the ultimate decision.

Please contact your SouthState Wealth Advisor for more information about the Act’s provisions and the impact it may have on your personal situation.
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