SECURE 2.0: Answering your questions about some major changes for retirement readiness and spending
By Keven DuComb, JD,
Senior Financial Planning and Estate Specialist, Altfest Personal Wealth Management
A new law that will significantly change Americans’ retirement readiness and spending was passed by Congress and signed by President Joe Biden at the end of last year. Part of a larger government spending bill, what’s being called the “SECURE 2.0” Act builds upon and expands many retirement account provisions added by the SECURE Act of 2019.
We at Altfest know our existing and prospective clients are likely to have several questions about the impact of this important legislation on their retirement, so we asked our in-house legal expert and senior financial planning specialist, Keven DuComb, JD, MBA, to explain the most critical aspects of SECURE 2.0. A few of the law’s changes take place immediately; others will start in 2024 or later.
Q: Does the SECURE 2.0 Act change the age at which you must begin taking required minimum distributions (RMDs) from a retirement savings account?
A: Yes. One of the most substantial changes from SECURE 2.0 is the immediate delay of RMDs to the year you turn 73 (up from age 72 now). This requirement will be pushed back even further, to age 75, beginning in 2033. As before, that means you must take an RMD for the year you turn 73, but you’re allowed to delay your first RMD until April 1 of the following year. If you do defer, you must take two RMDs the first year (one for the calendar year you turned 73, and the regular one for the calendar year you’re turning 74). Unfortunately, the act doesn’t offer a retroactive pause for RMDs. If you were required to start RMDs in 2022 because you turned 72, you still must take your 2023 RMD this year.
This delay in starting RMDs is favorable news and is likely to create more time for Roth conversions that are taxed when converted, not upon withdrawal. This has positive implications for your future tax bills and your heirs, as they can inherit the Roth IRA and take tax-free withdrawals.
Q: What about the penalties for missing an RMD – any changes there?
Effective immediately, penalties for missing RMDs are greatly reduced, now generally assessed at 25% of the undistributed amount, down from 50%, with a potential reduction to 10% under certain circumstances.
Q: Will Roth accounts with an employer still have RMDs?
Unlike with Roth IRAs, if you have had a Roth account within an employer plan, it has been subject to RMDs (albeit tax-free) under the normal rules. But starting in 2024, this will be eliminated under SECURE 2.0. In certain situations, this may mean you should consider balancing your Roth (after-tax) and pretax contributions — even if you are not maxing out the pretax plan contributions.
Q: Does the new law alter rules about catch-up contributions for older workers’ retirement saving?
As of Jan. 1, 2025, employed people aged 60 to 63 can contribute the greater of $10,000 or 150% of the “standard” catch-up (set at $7,500 for 2023 for those aged 50 and older) to their employer plans above the typical annual contribution limit. This “Super Catch-Up” provision applies to 401(k), 403(b), and most governmental 457 plans. While the math is a little confusing, the goal appears to be to allow workers aged 60 to 63 years to put in an additional 50% above the standard catch-up amount. However, the $10,000 Super Catch-Up baseline will receive a federally determined cost-of-living adjustment (COLA) starting in 2026 to reflect inflation, so there may be years when the Super Catch-Up limit exceeds the 150% figure. Additionally, in 2024, both the standard catch-up and Super Catch-Up must go into Roth accounts if a worker had “wages” in excess of $145,000 from that employer in the prior year. That annual salary benchmark also will get a COLA increase annually starting in 2025, in multiples of $5,000.
So, if you are 50 or older after 2023 and above the $145,000 wage cap, you can contribute the standard amount to your employer plan on a pretax basis — in 2023, this is $22,500 for most plans mentioned above and $15,500 for SIMPLE (Savings Incentive Match Plan for Employees) plans, which provide an option for employees and employers at smaller firms to contribute to qualified plans. But you could only allocate the additional $7,500 catch-up, or the $3,500 SIMPLE catch-up, both in 2023 dollars, to a Roth account within your employer plan. Similarly, after 2024, the Super Catch-Up amount can only go to a Roth account for those high wage-earners aged 60-63.
As you may know, IRAs currently have a $1,000 catch-up contribution limit for people aged 50 and over. Under the new law, in 2024 that limit also will be indexed to inflation, rising in $100 increments over time.
Q: Are there changes I need to know about for Qualified Charitable Distributions (QCDs) from my retirement account?
SECURE 2.0 in 2024 also will make inflation adjustments to QCD limits (now $100,000 per year) when you make a charitable contribution from your IRA (a tax-free strategy only if you’re over 70.5 years old). That’s good news because many people like to treat their QCD as part of their annual RMD to avoid taxable income, so hopefully more of the RMD can be covered by the QCD in 2024 and beyond. The new rules also will let certain charitable trusts receive QCDs. But be aware that there are significant restrictions, including that this QCD is limited to a one-time $50,000 contribution, and a distribution from an eligible charitable trust back to the account owner (or the owner’s spouse) will be taxed as ordinary income, which creates a delayed RMD effect and won’t avoid RMD-like treatment the way a traditional QCD does. In this area, once these QCD options become available next year, it’s always best to coordinate carefully with your attorneys or accountants; ideally, the IRS will provide thorough guidance and technical language about these options through its r.
Q: I read about changes in this law related to 529 plan savings and Roth accounts. Can you explain?
For those savers not so close to retirement, SECURE 2.0 also has some good news. Starting in 2024, you will have the ability to roll over up to $35,000, or about five years’ worth of contributions, left over in certain 529 education savings plans to a Roth IRA. (As a reminder, a 529 plan is a tax-advantaged investment vehicle designed to encourage saving for the future higher education expenses of a beneficiary).
The new law says only 529s open longer than 15 years will be eligible for the rollover, and it will need to be made to the 529 beneficiary’s Roth IRA. These rollovers can’t exceed the annual Roth IRA contribution limit in any particular year and must be coordinated with any other Roth IRA contributions made by the beneficiary in that year. In addition, you can’t roll over amounts contributed to the 529 plan within the last five years.
Note: The income limitation for Roth IRA contributions is waived as part of this provision, so anyone with a qualifying 529 may elect to do a 529 plan rollover as of 2024, regardless of income. This new Roth rollover provision also can be seen as federal encouragement for parents to build up a healthy 529 plan before their children start higher education because, as of next year, excess funds will no longer be “locked up” in 529 plans if not used.
Q: What else does SECURE 2.0 contain for younger workers?
Interestingly, employers in 2024 will be permitted to match student loan payments that an employee makes with contributions to the employee’s workplace retirement account. Also, next year there will be further expansion of the list of situations when withdrawals can be made before someone is age 59.5 without the 10% penalty. These are primarily focused on minor, emergency withdrawals.
Q: I have a medium-sized dental practice with about 20 employees. Are there changes in this legislation that can help me as an employer?
Yes, SECURE 2.0 offers some new benefits for smaller employers offering retirement plans. For example, immediately in 2023, SIMPLE and SEP (Simplified Employee Pension) IRAs for businesses of any size or sole proprietors now can be drafted or amended to allow Roth accounts. Furthermore, all employer plans can now allow an employer match in the form of a vested Roth contribution. Before, only pretax employer match contributions were allowed. In 2024, SIMPLE plans can allow for larger non-elective employer contributions, as well as receive larger catch-up contributions, as noted above.
Also starting in 2024, employers with certain retirement plans can add emergency Roth accounts that let employees contribute up to $2,500 (or a lower amount set by the plan) for certain unexpected financial hardships. It’s also good to be aware as an employer plan sponsor that in 2025 there will be an added requirement for many new retirement account plans to automatically enroll new employees in the plan at set percentages.
Find out more
We realize this is a lot of information to absorb, and that the changes will have unique impacts for each client, so we encourage you to reach out with any questions you may have. Your Altfest advisor is ready to explore any consequences this new law may have for you and your family, as well as to work through needed updates to your retirement account funding and planning. We’re also actively reviewing potential new opportunities or tax advantages that SECURE 2.0 creates.
If you’re not yet an Altfest client, please book some time for a complimentary consultation.