SECURE Act 2.0: From Later RMDs, to 529-To-Roth Rollovers, And Other Tax Planning Opportunities

Jan 17

SECURE Act 2.0 arrives nearly 3 years to the day after its predecessor, the original SECURE Act, was passed in late 2019. Amongst other changes, the first bill included the massively impactful provision that eliminated the 'stretch' IRA option for most non-spouse beneficiaries of retirement plans.

It’s probably fair to say that no single change made by SECURE Act 2.0 will have the same level of impact across so many people’s plans as the elimination of the stretch, as retirement accounts were now required to be fully distributed within 10 years of the original account holder’s death, rather than withdrawals being spread out gradually over the beneficiary’s lifetime. Likewise, no change made by SECURE Act 2.0 creates the same level of urgency to consider nearly immediate changes to people’s plans before year-end as did the original SECURE Act. But that’s not to say that the provisions of SECURE Act 2.0 are either insignificant or small.

In fact, there are far more provisions in SECURE Act 2.0 that may have a significant impact on your Retirement than there were in the original version. The sheer volume of changes, combined with their more targeted impact, have the potential to make SECURE Act 2.0 a more challenging bill for us financial advisors and financial planning professionals to contend with.

The following is a 'brief' outline of some of the provisions of SECURE Act 2.0 that are most likely to impact you and your retirement – both now and in the years to come.

1. Required Minimum Distributions (RMDs) Are Pushed Back Again - For individuals who turn 72 in 2023, RMDs will be pushed back by 1 year compared to the current rules and will begin at age 73. Age 73 will continue to be the age at which RMDs begin through 2032. Then, beginning in 2033, RMDs will be pushed back further, to age 75.

2. Roth-Related Changes – There are significant number of Roth-related changes (both involving Roth IRAs as well as Roth account in employer retirement plans). Importantly, all of these changes should be neutral-to-good news for you in terms of the planning considerations and opportunities created.

To that end, SECURE Act 2.0 does not include any provisions that restrict or eliminate existing Roth strategies. To the contrary, the changes highlight Congress’s continued march toward ‘Rothification’, perhaps in an effort to grab tax revenue now in order to make Federal budget estimates look better (or at least less bad).

3. (Limited) 529-to-Roth IRA Transfers Allowed After 15 Years - One of the provisions of SECURE Act 2.0 that has grabbed a disproportionate percentage of headlines in financial media is the introduction of the ability, beginning in 2024, for some individuals to move 529 plan money directly into a Roth IRA. This new transfer pathway, created by Section 126 of SECURE Act 2.0, will be an intriguing option for some individuals, but it also comes with a number of conditions that must be satisfied for the transfer to be valid and that limit the ability to take advantage of (or abuse) the provision.

4. New Post-Death Option For Surviving-Spouse Beneficiaries Of Retirement Accounts - Under existing law, when a surviving spouse inherits a retirement account from a deceased spouse, they have a variety of options at their disposal that are not available to any other beneficiary (e.g., rolling the decedent’s IRA into their own, electing to treat the decedent’s IRA as their own, and remaining a beneficiary of the decedent’s IRA, but with special treatment). And beginning in 2024, Section 327 of SECURE Act 2.0 will extend the list of spouse-beneficiary-only options further by introducing the ability to elect to be treated as the deceased spouse.

5. IRA Catch-Up Contributions To Be Indexed For Inflation – In section 108 of SECURE Act 2.0 will finally allow the IRA catch-up contribution limit to automatically adjust for inflation, effective starting in 2024. Inflation adjustments will be made in increments of $100, so get ready to keep track of the $1,200 IRA catch-up contribution limit in the not-too-distant future!

6. Increased Plan Catch-Up Contributions For Participants In Their Early 60s - Effective for 2025 and in future years, Section 109 of SECURE Act 2.0 increases employer retirement plan (e.g., 401(k) and 403(b) plan) catch-up contribution limits for certain plan participants. More specifically, participants who are only ages 60, 61, 62, and 63 will have their plan catch-up contribution limit increased to the greater of $10,000, or 150% of the regular catch-up contribution amount (indexed for inflation) for such plans in 2024.

7. New Rules for Qualified Charitable Distributions (QCDs) - Qualified Charitable Distributions (QCDs) have quickly become the best way for most individuals 70 ½ or older to satisfy their charitable intentions. The rules for these distributions, for which no charitable deduction is received because the income is excluded from AGI to begin with (which is much better, since such income is also excluded for the purposes of calculating the taxable amount of Social Security income and Medicare IRMAA surcharges, among other things), are modified by SECURE Act 2.0 in the following 2 ways, Maximum Annual QCD Amount Indexed For Inflation, and One-Time Opportunity To Use QCD To Fund A Split-Interest Entity.

8. New Rules for Accessing Retirement Funds During Times of Need - In general, Section 72 of the Internal Revenue Code imposes a 10% penalty for distributions from retirement accounts taken prior to reaching age 59 ½. The rationale is obvious. Congress is trying to discourage the use of retirement funds for something other than their stated purpose… retirement! SECURE Act 2.0 picks up right where those bills left off, expanding the existing list of 10% penalty exceptions, creating new 10% penalty exceptions, and authorizing other ways for taxpayers to access retirement savings at young (pre-59 ½) ages without a penalty.

9. Creation Of Linked Emergency Savings Accounts - Beyond the significantly expanded ability to access retirement funds prior to age 59 ½ without incurring a 10% penalty (as described in detail above), to further help individuals save for unanticipated expenses at any age, effective in 2024, Section 127 of SECURE Act 2.0 creates a new type of “Emergency Savings Account”. Such accounts will not be available as standalone individual accounts, but rather, they will be linked to existing employer retirement plans with individual balances, such as 401(k) and 403(b) plan accounts.

10. Access to ABLE Accounts Expanded To Individuals Disabled At Older Ages - Under current law, ABLE (529A) accounts may only be established for individuals who become disabled prior to turning age 26. Effective for 2026 (it’s hard to understand why they’re waiting so long to implement this change when other, dramatically more complex changes are to be implemented sooner, but what do I know?) ABLE accounts will be able to be established for individuals who become disabled prior to 46. Notably, it appears that individuals won’t have to be under 46 in 2026 to be eligible to have such an account, but rather, must only have been under 46 at the time they became disabled. This is significant because many disabilities – and in particular, many mental health conditions that can cause a person to become disabled – develop after age 25, which means that individuals who suffered from such conditions were locked out of saving to an ABLE account under previous law.

11. Disabled First Responders Eligible To Continue To Exclude Certain Payments From Income After Reaching Retirement Age - Section 309 of SECURE Act 2.0 provides significant income tax relief for certain disabled first responders. Qualifying First Responders are law enforcement officers, firefighters, paramedics, and Emergency Medical Technicians (EMTs) who receive service-connected disability and retirement pensions.

12. Retroactive First-Year Solo-401(k) Plan Deferrals Allowed For Sole Proprietors - Taxpayers have long been able to create and fund certain SEP IRA accounts after the end of the year (up until the individual tax filing deadline, plus extensions) for the previous year. For instance, a SEP IRA first created in June 2022 could have received contributions for 2021 (even though no plan actually existed at that time). The original SECURE Act expanded that retroactive treatment to other employer-only funded plans, such as Profit-Sharing Plans and Pension Plans.

Effective for plan years beginning after the date of enactment (effectively, for plans that are established in 2023 or later), Section 317 of SECURE 2.0 now takes that ability one step further by allowing sole proprietors, as well as those businesses treated as such under Federal law for income-tax purposes (e.g., Single Member LLCs), to establish and fund solo-401(k) plans with deferrals for a previous tax year, up to the due date of the individual’s tax return (although notably without extensions).

13. New Relief For Retirement Account Mistakes - If it isn’t already abundantly clear, the rules for retirement accounts are incredibly complicated. To that end, it should come as no surprise that when it comes to such accounts, mistakes are pretty common. Thankfully, for many retirement account owners, SECURE Act 2.0 includes a host of changes designed to limit the impact of various retirement account mistakes. Like, REDUCTION OF THE 50% PENALTY FOR AN RMD SHORTFALL, STATUTE OF LIMITATIONS FOR MISSED RMDS AND (MOST) EXCESS CONTRIBUTIONS TO BE TIED TO FORM 1040, EXPANSION OF THE EMPLOYER PLANS COMPLIANCE RESOLUTION SYSTEM (EPCRS) TO ADDRESS IRA-RELATED ISSUES, & CONFIRMATION/CLARIFICATION THAT IRA PROHIBITED TRANSACTIONS ONLY DISQUALIFY THE INVOLVED ACCOUNT.

14. Annuity-Related Changes

SECURE Act 2.0 has been heavily championed by the insurance industry for a variety of reasons, but mostly due to its various changes and clarifications of rules related to annuities and, in particular, those annuities held within qualified accounts. To that end, annuity-related changes made by SECURE Act 2.0 include the following: Qualified Longevity Annuity Contracts (QLACs), Income Annuities Held Within Qualified Accounts & Expansion Of Eligible Investments For Variable Annuities And Variable Universal Life Policies.

OTHER IMPORTANT, MISCELLANEOUS PROVISIONS

Incredibly, even after all of the provisions covered above, there are still a substantial number of provisions contained in SECURE Act 2.0, there is a lot of changes coming, ultimately, as much additional complexity as SECURE Act 2.0 adds to the retirement planning landscape, one of the trickiest things about the new legislation might be simply keeping track of the dates that all of its many provisions take effect.

Charting the Progression

Because while the bulk of the provisions will be effective in 2023 or 2024, some also take effect immediately upon enactment (which would make them effective on December 23, 2022), others are pushed back farther to 2026, 2027, or 2028, while one (the reinstatement of Qualified Disaster Distributions) takes effect retroactively to disasters occurring on or after January 26, 2021. As shown below, there is a long and winding road until all of SECURE Act 2.0's provisions come into effect.

Now that you have read this ‘brief’ summary and if you find scratching your head and wondering where to start, well, we’re here to help. Retirement planning is complex, we are here to help you simplify the process and let you enjoy your retirement planning and retirement life.

This is a summary from SECURE Act 2.0: Later RMDs, 529-To-Roth Rollovers, And Other Tax Planning Opportunities written by: Jeffrey Levine, CPA/PFS, CFP, AIF, CWS, MSA is the Lead Financial Planning Nerd for Kitces.com, a leading online resource for financial planning professionals, and also serves as the Chief Planning Officer for Buckingham Strategic Wealth.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.