In December 2019, The Setting Every Community Up For Retirement Enhancement Act (Secure Act) was the first significant legislation enacted in decades that reformed retirement rules and regulations. Perhaps the most important changes expanded the accessibility for workers to participate in retirement plans. As is the case with sweeping legislation, many cracks and omissions were subsequently discovered and corrected resulting in the recent passage of Secure Act 2.0.
The most common changes occurred in Required Minimum Distributions (RMDs), catch up provisions and the enhanced use of Roth contributions. The Secure Act raised the age for RMDs from age 70 ½ to 72. Secure Act 2.0 raised the age to 73 beginning in 2023 and will increase to age 75 in 2033. Penalties for deficient RMDs have been reduced from 50% to 25% and as low as 10% if corrected in a timely manner. Catch up provisions beginning on January 1, 2025 for individuals ages 60-63 will be increased up to $10,000 annually for an employer sponsored retirement plan and that amount will be indexed for inflation.
The use of Roth contributions to an employer sponsored plan has been amended. If a participant earns more than $145,000 during the prior calendar year, all participant catch up contributions at age 50 or older are required to be directed to a Roth account using after tax dollars. On the flip side for company payments, employers will now be able to provide employees the option of investing vested matching employer contributions in a Roth account. Regardless of the source of funding, the Roth contribution will be considered taxable income in the year it is made. Under the old law, Roth 401(k)s were subject to RMDs unlike Roth IRAs that are exempt from this requirement. The new law eliminates this RMD for workplace based plans placing them on equal footing with their IRA counterparts.
IRA account holders who are age 70 ½ have the option of contributing up to $100,000 annually as a Qualified Charitable Distribution (QCD). Under Secure Act 2.0 as a portion of the QCD, a onetime gift of $50,000 adjusted annually for inflation is allowed to a Charitable Remainder Unit Trust, Charitable Remainder Annuity Trust or Charitable Gift Annuity. This change will allow individuals to receive income from the QCD while still eliminating the taxes on the distribution. For this distribution to be directed to such an entity, it must represent its sole source of funding.
Younger people can benefit from two new provisions. Beginning in 2024, employers will be able to “match” employee student loan payments with matching payments to a retirement plan even if those employees do not make retirement plan contributions. Another benefit for younger people is the ability to “rollover” a portion of 529 plan assets to a Roth IRA if a 529 plan has been open for 15 years. The rollover is subject to the annual maximum contribution of $6,500 with a lifetime maximum rollover of $35,000. Any contributions or gains in the 529 plan from the prior 5 years are not eligible to be rolled over.
Lastly, if a younger spouse dies and leaves their IRA to the older spouse, the surviving spouse may delay the RMDs until the age the decedent would have reached RMD age. They would also have the ability to use the Uniform Life tables rather than The Single Life tables which would lower the RMD.
While bi-partisanship in Congress has been sorely lacking for many years, the overwhelming support for these changes is welcome. Some critics have lashed out at provisions that tend to favor high income high net worth individuals but most provisions expand benefits for all participants in these plans. Among these benefits are liberal enrollment requirements, expansion or elimination of penalties for early distributions, use of annuities that guarantee lifetime income, and transforming education funds and loans to retirement plan. The main goals for both Secure Acts is to create incentives for greater employee participation as well as expanding options and benefits for distributions. In my opinion, it achieves both objectives.
Sincerely,
Clifford L. Caplan, CFP®, AIF®