In 2023, the SECURE Act 2.0 for retirement savings becomes federal law, reshaping tax incentives for years to come by making numerous changes to existing retirement account rules and related tax breaks. Though there are many changes, below are some of the ones that will impact high wage earners, those still working, and those who have or are about to retire.
Increased age of RMDs: For those who have yet to start taking Required Minimum Distributions (RMDs), SECURE 2.0 increased the RMD age to 73 in 2023 and 75 in 2033 giving individuals more years for their retirement accounts to grow in value.
Unused 529 funds: One of the Act’s more unusual provisions is the ability to convert unused college savings plans into tax-free Roth accounts. Starting in 2024, the SECURE Act 2.0 allows beneficiaries of 529 accounts to rollover up to $35,000 (in a lifetime) into a Roth.
Forgetting your RMD: If you forget to take your Required Minimum Distribution from your individual retirement account or 401(k) plan, SECURE 2.0 reduces the penalty by half from 50% of the RMD total to 25% or 10% if corrected in a timely manner.
Higher catch-up contribution limit: As an additional benefit to spur savings, those aged 50 or older can make catch-up contributions of $7,500 to their workplace retirement plan on top of the normal $22,500 limit in 2023. In 2025, people aged 60 to 63 will be able to contribute an extra $10,000 or 50% more than their current catch-up amount, whichever is greater.
The catch-up scenario is less generous if you can only contribute to an IRA. Under current law, those 50 and above can contribute an extra $1,000 each year, for a total of $7,500. The bill indexes that amount for inflation starting in 2024.
For those with an annual income of $145,000 or above, starting in 2024, all catch-up contributions each year must go into a Roth account with after-tax dollars. The income threshold will be adjusted annually for inflation.
One-time QCD: Another unique benefit from SECURE 2.0 is that people age 701⁄2 or older may elect a one-time gift as part of their Qualified Charitable Distributions (QCD) of up to $50,000 from a taxable IRA to a charitable remainder trust, a charitable annuity trust or a charitable gift annuity. While the gift isn’t deductible, it counts toward an individual’s RMD and thus can keep a donor from being pushed into a higher tax bracket when taking distributions.
Matching Roth contributions and RMDs: Also new in 2023, companies will be allowed to make matching contributions to workers’ employer-sponsored Roth accounts and in 2024, mandatory RMDs will no longer apply to Roth 401(k)s.
Emergency savings account: In 2024, companies can add an emergency savings account benefit structured as a tax-free Roth for lower-wage employees. Contributions are capped at a maximum of $2,500 each year. Need help with student debt? If yes, in 2024, companies can make a “matching contribution” to the amount the worker pays on their loans. As of this time, it is still unknown what the percentages might be.
New employer plans: Since SECURE 2.0 is about saving, companies that start a new employer-sponsored plan will be required to automatically enroll employees at a 3% contribution rate with a 1% annual increase until it reaches 10% of gross pay. Workers can choose to opt-out, and businesses with ten or fewer employees and those in operation for less than three years are exempt from so-called “starter 401(k)” plans.
We’ve only highlighted a few changes coming from SECURE Act 2.0. If you would like more information, please contact your Vision Capital Client Relationship Manager or check out https://www.congress.gov/bill/117th-congress/house-bill/2954/text for a full transcription of the bill.
