The SECURE Act, which stands for “Setting Every Community Up for Retirement Enhancement” was originally passed in 2019 with the stated intention of making retirement savings easier and more accessible. You can read more about the original SECURE Act in our previous Navigator, The SECURE Act.
The SECURE Act 2.0 was recently signed into law via the $1.7 trillion-dollar Omnibus bill, which was unveiled on December 19th, passed by Congress on the 23rd, and signed by President Biden on December 29th. In this Navigator, we will explain numerous key provisions that have now become law via the SECURE Act 2.0.
Required Minimum Distributions (RMDs)
As part of the original SECURE Act, the age at which RMDs must commence was changed from age 70 ½ to 72 for anyone reaching that age after 2020. With SECURE Act 2.0, RMDs are further delayed to age 73 for those reaching this age starting in 2023. In 2033, the beginning RMD age will move again to age 75. To clear up any confusion, if you turned 72 in 2022, you were still required to take an RMD for 2022. However, if you don’t turn 72 until January 1st, 2023, or later, you will no longer be required to take a required minimum distribution until the year in which you turn 73.
.This provision is a mixed bag. Many Americans, up to 80%, take distributions from their retirement accounts before they reach their RMD age, leaving this change in the law meaningless. On the other hand, people who do not wish to receive a distribution from their retirement accounts will be able to choose to delay retirement distributions for a few more years. With that said, it may make sense for some to make strategic Roth IRA conversions prior to their RMD date in order to minimize taxes.
Pre-Death RMD Removal
Section 325 of the SECURE Act 2.0 outlines the removal of pre-death RMDs for all Roth accounts. Currently, Roth IRAs are not subject to the pre-death RMD rule, but Roth 401(k) and 403(b) accounts are. Due to this discrepancy, many people found themselves having to go through extra steps to avoid Roth RMDs by rolling their Roth 401(k) or 403(b) into a Roth IRA. With 2.0, this extra step will be unnecessary, as Roth 401(k) / 403(b) account holders will not be required to take a distribution before death. However, once the owner has passed away, his or her heirs will still be subject to the original RMD requirements.
529 Rollover to Roth Account
Before The SECURE Act 2.0, funds from 529 accounts that were used for non-educational purposes were subject to taxes and penalties. Under 2.0, 529 account beneficiaries can now rollover an aggregate amount of $35,000 from a 529 account into a Roth IRA. In addition, income limits to contribute to a Roth IRA are removed for any 529 to Roth IRA rollovers.
This rule comes with two important limitations:
1. The 529 plan will need to be in existence for at least 15 years
2. Rollovers are subject to Roth IRA annual contribution limits
Despite these limitations, this is a sensible change that increases the flexibility of 529 plans
Currently, if you are age 50 or older you make an annual catch-up contribution of $1,000 to an IRA, resulting in an aggregate contribution limit of $7,500. Section 106 in the Act continues this limit but will now account for indexing factors such as inflation. Moreover, section 107 includes a specific catch-up limit that applies to people aged 62, 63, and 64. Starting in 2023, if you fall into one of these three ages, you can make an additional contribution of $3,500 annually to a retirement plan, resulting in an aggregate contribution limit of $10,000.
These contributions do carry stipulations. Currently, catch-up contributions can be placed in either Traditional IRA or Roth IRA accounts. The new requirement under 2.0 abolishes this flexibility, making all catch-up contributions subject to Roth (after-tax) rules. However, if the account owner has an income less than $145,000 during the previous year, Traditional (pre-tax) IRA catch-up contributions will still be allowed.
The pressures of this rule will be felt the most by high earners; they will be required to pay taxes on catchup contributions during high earning years at high marginal tax rates, instead of deferring taxes into a future, more convenient, time.
Simple and SEP IRAs
Simple and SEP IRAs are not available on a Roth basis. This law would add a nuanced change for small business owners and self-employed people, allowing Roth accounts for SIMPLE and SEP plans for employee and employer contributions. This option would not be automatic, leaving the final decision to the plan/employee.
The SECURE Act 2.0 will now allow employers to let participants receive their 401(k), 403(b), and 457(b) matching contributions on a post-tax, Roth, basis. Providing this option is not a requirement for employers. This treatment will be seen as a preferential tax benefit for employees that are lower-income earners.
Part-time Employee Participation
The SECURE Act 2.0 will reduce the number of years that part-time employees are required to work to be eligible for an employer-sponsored 401(k). The original Act required three years of service to be eligible, and the new requirement is two years.
Reduction in Excise Tax
Under section 302, the penalty for a failure to take an RMD has been reduced from 50% to 25% of the missed RMD amount. If a failure to receive an RMD from an IRA is corrected in a reasonable time (defined in the law), the excise tax is further reduced from 25% to 10%.
The SECURE Act 2.0 may have implications for your retirement account strategy, depending on your age, income, tax bracket, and employment situation. If you would like to better understand the implications of this law on your financial plan or if you have questions about the Secure Act 2.0, please contact your Pekin Hardy portfolio manager to discuss.
This article is prepared by Pekin Hardy Strauss, Inc. (dba Pekin Hardy Strauss Wealth Management, “Pekin Hardy”) for informational purposes only and is not intended as an offer or solicitation for business. The information and data in this article do not constitute legal, tax, accounting, investment, or other professional advice. The views expressed are those of the author(s) as of the date of publication of this report and are subject to change at any time due to changes in market or economic conditions. Pekin Hardy cannot assure that the strategies discussed herein will outperform any other investment strategy in the future, there are no assurances that any predicted results will occur.