SECURE Act 2.0: 5 Major Changes

On December 20, 2022 SECURE Act 2.0 was signed into law. It’s primary objectives are to increase Americans’ retirement savings, reduce costs for employers who start new workplace retirement plans, and to promote utilization of Roth Retirement Accounts. Here’s what most Americans need to know about the bill.

  1. Required Minimum Distributions from IRAs and other retirement plans now begins at age 73, up from 72 in the first SECURE Act and up from age 70 prior to 2020. Why is this important?If you are preparing for or are currently in retirement and younger than age 73 then you may have an excellent financial opportunity to plan out conversions for your retirement plans and IRAs to Roth IRAs. Roth IRAs offer tax-deferral on growth in your accounts like your current plans, however they offer Tax-free distributions when you actually need to take money out for retirement.

    What’s the catch? You have to pay income tax when you make a Roth IRA conversion. This may sound like a negative, however through proper planning you can potentially pay a lot less in income taxes by controlling the years you choose to pay income tax while also controlling your income tax rate by making decisions based on your Federal and state income tax brackets. Once you turn age 73 the Federal government dictates that you must make withdrawals from retirement plans on a minimum schedule that escalates every year. If you have large retirement plan balances you will lose control of how and when you are taxed.

  2. Small business owners and plan participants now have the option to make SIMPLE and SEP IRA contributions as Roth contributions on an after-tax basis. We find this particularly interesting for start-up businesses that may not yet be showing a lot of profit resulting in low taxation based on Federal tax brackets. This is also a good opportunity for lower income employees who typically will see better long term results from investing in a Roth plan versus a Traditional plan.
  3. IMPORTANT: Are you age 50 or older, earning more than $145,000 per year, and making catch-up contributions to your 401(k)? Starting this year, you will be required to make the catch-up contribution as a Roth contribution. If your plan does not already offer a Roth option its time for you to push the decision makers in your company to update their plan for the benefit of all employees age 50+. With the Roth change if your plan doesn’t have a Roth option for highly paid employees to make their catch-up contributions then no one in the plan can make catch up contributions, both Roth or Traditional.
  4. Higher catch-up contributions are now available. Traditional and Roth IRA catch-up contributions will now have an inflation adjustment rather than the cap of $1,000 that has been static for 15 years. Additionally, Americans age 60-63 will be able to contribute in their major retirement plans a catch-up of $10,000 beginning in 2024.
  5. Is charity in your future plans? A one time $50,000 Qualified Charitable Distribution to a charitable gift annuity, charitable remainder unit trust or charitable remainder annuity trust is now permitted. This is terrific if you want to be charitable and use your retirement plans as the source. These types of gifting strategies can bring income from the gift back to the grantor on an annual basis with the remainder of the annuity or trust going to the charity after the grantor passes. If you know you will have left over money in your retirement plans when you are gone and want to do some good in the world this is a great option.

These are the 5 major changes we feel will impact the majority of our clients and much of the American people. The SECURE Act 2.0 was loaded with close to 100 relevant changes. If you would like to review the Federal summary of all the changes you can do so here: Senate Finance Committee SECURE Act 2.0 Summary.

Important Information

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA