Retirement Savings Changes

The Consolidated Appropriations Act of 2023 was signed into law in December 2022.  Part of this law included what is known as the Secure Act 2.0.  This portion spells out many changes to retirement savings rules that take affect over the next several years.  One might ask, how does this affect me?  Below is a short synopsis of a few provisions that you should be aware of.

Probably the biggest change that affects many of us is the modification in Required Minimum Distribution (RMD) time frames.  The original Secure Act (2020) moved the RMD age from 70 ½ to 72.  The Secure Act 2.0 has further extended this time frame.  For those born in 1951-1959, their new RMD age is 73.  For those born in 1960 or later, the RMD age is now 75.  This will allow many retirees in the future to delay taking distributions from their retirement accounts and defer taxes on them for several more years.  As a side note, the Secure Act 2.0 also reduced the penalty for failing to take an RMD from 50% down to 25% on any amount not withdrawn as required.  We recommend taking your RMDs on time and avoiding taking advantage of this change!

Although the 10-year withdrawal rule remains in effect for newly inherited Beneficiary IRA accounts, one additional option was added for surviving spouses.  Previously, a surviving spouse only had two options – treat the IRA as their own or as a beneficiary IRA.  Selecting the beneficiary option allowed them to delay RMDs based on their deceased spouse’s date of birth, but still had to use their own life expectancy for calculating RMD amounts.  Starting in 2024, surviving spouses will have the additional option to be treated as the decedent spouse, not only allowing them to delay RMDs like before, but also use their deceased spouse’s life expectancy for calculation purposes.  This could allow an older spouse to delay when their RMDs begin and defer income longer.

Another major change includes provisions that allow the beneficiaries of a 529 plan to rollover unused funds into a Roth IRA starting in 2024.  In order to do this, the plan has to be established for at least 15 years and is limited to a total of $35,000.  Rollovers are still subject to the annual Roth contribution limits (currently $6,000/year plus a $1,000 catch-up for those age 50 and over) and require the beneficiary to have earnings equal to or greater than the rollover amount.

These rollovers are not in addition to other Roth contributions (this isn’t doubling Roth contribution limits) but are not subject to any income limits or phase out restrictions.  This means those who are currently unable to contribute directly into a Roth due to high earnings can still use this new provision.  While we are on the subject, one area this Act did not address is the backdoor Roth IRA strategy which remains a viable option.  This is good news for high earners who still want to take advantage of this strategy allowing them to convert traditional IRA funds into a Roth IRA!

As with any law, there are a plethora of additional provisions that are not addressed above.  There were changes to employer retirement plans, enhancements to Qualified Charitable Distributions, Tax Credits for Small Business Owners, adjustments to some annuity rules, and a lot more!  If you or anyone you know are interested in learning more about the Secure Act 2.0 and how it may affect your own financial situation, please reach out!  We stand ready to assist in any way that we can and strive to help you understand and take advantage of all the resources available to you!

 

 

Sources:

 

1. Raymond James Publication – “10 key personal financial planning takeaways of the SECURE Act 2.0”. Retrieved July 24, 2023, from rjnet.rjf.com.
2. Raymond James Publication – “The SECURE Act 2.0 allows tax-free rollovers of 529 funds to Roth IRAs”. Retrieved July 24, 2023, from rjnet.rjf.com.

 

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