Hi everyone. Welcome to the Podcast. I’m Elean Mendoza and I’m here with the Evan Shorten, the firm’s founder and principal.
Evan
Hello everyone. I hope you’re all doing well. I want to thank you for tuning into the podcast as we have a lot of important information to cover. You definitely want to listen to this one.
Elean
Ok. So at the very end of last year, and I mean December 29th very end of last year, congress signed into law the SECURE Act 2.0. Just how the original SECURE Act of 2019 brought about some of the most comprehensive changes to retirement accounts, the SECURE Act 2.0 did not disappoint. Fortunately, this time around congress is giving you some lead time to review and reassess the various changes and apply them to your long-term retirement planning.
Now the SECURE Act 2.0 has over 350 pages of text so we’re going to discuss the most important items that are relevant to the clients we work with.
Evan
The first major topic I want to discuss is catch-up contributions to retirement accounts as there were several changes dealing with just catch-up contributions. First and foremost, catch-up contribution amounts will be increasing across the board for all account types, but not all at once. Starting on January 1st, 2025, employees aged 60 to 63 will be able to make catch-up contributions of up to $10,000 to their employer sponsored retirement account in addition to the annual contribution limit. Furthermore, the catch-up contribution amount will be indexed to inflation from that point on. For reference, in the current year of 2023, an employee of the same age may contribute an additional $7,500 in catch-up contributions on top of the 2023 contribution limit of $22,500.
The next item along these lines is an incredibly important one as it’s going to change many of your retirement plans. Starting on January 1st, 2024 all catch-up contributions must be made to a Roth 401k for individuals earning $145,000 or more. Individuals making under $145,000 will still be able to continue making pre-tax catch-up contributions, but higher income earners will have to contribute after-tax income.
Elean
As a quick reference note, for people who may be new to retirement planning, catch-up contributions only apply to individuals aged 50 and older.
Evan
Another rule change regarding catch-up contributions are catch-up contributions to IRA accounts. Starting on January 1st 2024, the catch-up contribution limit which is currently set at $1,000 will also be indexed for inflation.
Elean
And every time we mention “indexed for inflation,” we’re referring to the Federal Governments annually determined cost-of-living increase or COLA as some of you may be more familiar with.
Evan
Another major rule change regarding employer-sponsored retirement plans deals with employer matching contributions. Starting this year, employers who offer matching contributions to their employees will now have the ability to make those contributions pre-tax or post-tax into a Roth 401k. Previously, matching contributions could only be made on a pre-tax basis.
Elean
One thing to make note off. Not all employers offer Roth 401k options at the moment. Not even all the major brokerages offer Roth 401k options either. However, this new change to matching contributions that will most likely encourage many employers to add a Roth option for their employees.
Evan
Continuing along with Roth options, the SECURE Act 2.0 adds two entirely new Roth account types – the Roth SEP IRA and Roth SIMPLE IRA. Moving forward small business owners and individual entrepreneurs are going to have a lot of flexibility when saving for retirement and planning around taxes.
Elean
Of course, as with the expanded Roth 401k offerings, congress passed the SECURE Act 2.0 so late in 2022 that many brokerage still have not expanded their offerings to include all of the new Roth options. I imagine we’ll see brokers begin to announce the availability of these accounts over the second half of this year and we may not see mass adoption of these plans well into 2024.
Evan
Now the next few items with significant rules changes deal with required minimum distributions or RMDs.
First and foremost, the RMD age is being increased. Starting January 1st 2023 the new RMD age will increase to 73. Starting in 2033, or ten years down the road, the RMD age will increase again to age 75.
So what does this mean for current retirees? Unfortunately, if you turned 73 or are turning 73 in the current year of 2023 that means you were 72 last year and have to follow last year’s RMD rules. In other words, you will be required to take an RMD and the SECURE Act 2.0 RMD rule change unfortunately does not apply to you.
The next major change dealing with required minimum distributions deals with the penalty in the event you forget to take an RMD. Starting this year, 2023, the penalty for not taking an RMD is decreasing from 50% to 25% of the missed RMD. You can decrease the penalty further to 10% once you take the RMD and file a corrected tax return.
The last rule change I want to discuss regarding RMDs are Roth 401k RMDs. Historically, Roth 401k plans required you take RMDs similar to pre-tax 401k plans. However, starting in 2024, the rules regarding RMDs for Roth 401ks are being brought in line with their Roth IRA counterpart. Meaning as of 2024, RMDs for Roth 401k plans are eliminated. Just like Roth IRAs are not subject to RMDs, Roth 401k plans will not be subject either.
Elean
Finally, there is one other major change in the SECURE Act 2.0 we wanted to discuss specifically because it relates to many of our clients who have large 529 plan balances for their children and grandchildren.
Evan
Yes, starting in 2024 529 plan assets can be rolled over to a Roth IRA for the beneficiary. This is huge a win for those with larger IRA balances who perhaps could not fully exhaust their 529 plan assets while attending college. With this rule change, instead of possibly taking non-qualified withdrawals and incurring a tax liability for unused 529 plan assets, the tax-benefit of the assets can be preserved and grown for future decades.
There are however a few caveats to keep in mind. First, the 529 plan must have been opened for at least 15 years. Second, converted funds from a 529 plan to a Roth IRA are subject to the annual Roth contribution limits, meaning you cannot convert assets in addition to your Roth IRA contribution. The conversion itself is considered a Roth IRA contribution. Additionally, there is an aggregate lifetime amount of only $35,000 that can be converted from a 529 plan to Roth IRA.
Elean
The SECURE Act 2.0 brings a lot major changes to retirement accounts, retirement savings, and the use of retirement assets. It’s fair to say that everything has changed and it’s important to review your financial plan as soon possible. Due to the new rules changes, it’s more than likely that part of your financial plan is now outdated. If you haven’t created a retirement plan or are meaning to talk to someone, the time is now.
If you have any questions or would like to discuss any of the topics mentioned in more detail, please don’t hesitate to contact us. Lastly, if you have not done so already, please subscribe to the podcast.
Thank you for listening. We’ll see you hear next time.
