Highlights from SECURE 2.0 Act

The SECURE 2.0 Act, signed into law on December 23, 2022, has an extensive list of changes relevant to retirement planning. These include increasing the age at which retirees must begin taking RMDs from IRA and 401(k) accounts, changes to the size of catch-up contributions for workers over age 50, and a new provision that allows the transfer of 529 to Roth IRA in limited circumstances, among many others. The following is a brief overview of some of the changes:

Establishment of 529-to-Roth IRA Transfers

Limited transfers from a 529 plan to a Roth IRA are allowed beginning in 2024. While appealing at first glance, there are several rules to follow to take advantage of these provisions:

• Only the beneficiary of the 529 plan may receive the Roth contribution from a 529.
• The 529 must be open and funded for at least 15 years before any Roth IRA rollover.
• Any contributions, or earnings stemming from those contributions in the past five years, may not be transferred to a Roth IRA.
• Roth IRA contributions are still subject to the annual contribution limits (the sum of contributions from a 529 and direct contributions cannot exceed the annual limit).
• The lifetime transfer limit from a 529 plan to a Roth is $35,000 per individual.
• Typical Roth IRA income limits will not apply, but the individual receiving the Roth rollover must have earnings equal to or greater than the annual rollover.
• New York State tax considerations: Federal law allows for tax-free distributions for K-12 tuition and qualified education loan repayments. However, New York rules require recapturing New York State tax benefits unless used for higher-level education. New York may take a similar position with Roth IRA rollovers of 529 funds, but this still needs to be clarified.

The following is an oversimplified example of a 529 to Roth Rollover:

• Assume all investments return 8% annually-compounded
• Assume Roth IRA contribution limits remain at $6,500 and the lifetime limit for 529 to Roth IRA contributions remains at $35,000
• A child was born on 1/1/2009, and the parents deposited $10,000 to their child’s 529 plan that same day with no additional contributions.
• The child is a star basketball player and will likely receive a full scholarship with room and board to the college of their choice.
• On 1/1/2024 (the child’s 15th birthday), the 529 will have been opened for 15 years and has a theoretical balance of $31,721 (8% per year with annual straight-line compounding).
• The parents roll $6,500 into a Roth IRA on their child’s 15th birthday and repeat this each year until meeting the $35,000 lifetime on the child’s 20th birthday.
• That Roth IRA would be worth $1,024,924 on the child’s 61st birthday, assuming 8% annual compounding.

Required Minimum Distribution (RMD) Changes

• Born 1950 or earlier: No Changes
• Born 1951-1959: RMDs start at age 73
• Born 1960 or later: RMDs begin at age 75
• RMDs for non-inherited Roth 401(k) and Roth 403(b) accounts are no longer required to match the treatment of Roth IRA accounts.

Roth Retirement Plan Changes

• Employers can make matching and non-elective contributions to Roth accounts. Plan participants will be subject to tax on these employer contributions. Note: If a plan allows for Roth conversions, it may make sense to stick with traditional pre-tax contributions and convert to Roth later in the year if it makes sense for your tax situation. Similar to Roth conversions, Roth contributions from an employer will be taxable to the employee. Of course, if you are entirely sure that Roth is optimal, automatic Roth contributions may reduce a few steps.
• All catch-up contributions for employees who made over $145,000 in the previous year must be made to a Roth account starting in 2024. The salary threshold will be adjusted for inflation beginning in 2025.
• Retirement plans to allow additional catch-up contributions beginning in 2025 for participants aged 60-63 at the rate of 150% of the regular catch-up contribution.
• SEP and SIMPLE Roth IRA Accounts are allowed starting in 2023.

Other Retirement Plan and IRA Changes

• Student loan payments can be treated as elective deferrals for matching purposes starting in 2024. For example, an employer could offer a 100% match on the first 3% of the salary contributed to a plan or student loans. In this case, if an employee makes student loan payments of at least 3% of their salary, they will qualify for the whole match, even if they haven’t made any 401(k) contributions.
• IRA Catch-Up Contributions are to be adjusted for inflation starting in 2024
• Qualified Charitable Distributions allow IRA owners to distribute directly to a charity from their IRAs starting at age 70 ½. The annual limit remains at $100,000 per person in 2023, with limits adjusted based on inflation beginning in 2024. 
• SIMPLE IRA plans will allow employers to make additional non-discretionary contributions to employee accounts starting in 2024, with a $5,000 limit. The specific rules vary depending on the number of employees

Sources

• SECURE 2.0 Act

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