Retirement Planning Update: SECURE Act 2.0

The $1.7 trillion-dollar Omnibus Spending Bill just passed by Congress contains provisions that are incredibly significant to retirement planning. So much so that they received their own name: “SECURE Act 2.0.”

Here are some of the changes most applicable to retirees and those planning for retirement.

Later RMD Age

The new legislation raises the RMD beginning age from 72 today to 73 for individuals born between 1951 and 1959 and age 75 for those born in 1960 or later. If you turn 72 in 2023, your RMD age will now begin at age 73. Note: The IRA Qualified Charitable Distribution (QCD) age remains the same at age 70 ½.

Considerations for retirement planning:  With some extra time to avoid taking taxable distributions from IRAs and retirement plans, you can control your taxable income for those additional years. Some people may decide to take some distributions from their IRAs before they are required to, to fill up lower tax brackets or to add to Roth IRA assets by way of Roth IRA Conversions.

Larger “Catch Up” Contributions

Effective for 2025 and in future years, SECURE Act 2.0 increases employer retirement plan (e.g., 401(k) and 403(b) plan) catch-up contribution limits for certain plan participants. More specifically, participants who are only ages 60, 61, 62, and 63 will have their plan catch-up contribution limit increased to the greater of $10,000, or 150% of the regular catch-up contribution amount (indexed for inflation) for such plans in 2024.

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IRA catch up contributions will increase as well: SECURE Act 2.0 will (finally!) allow the IRA catch-up contribution limit to automatically adjust for inflation, effective starting in 2024.

Considerations for retirement planning:  The higher contribution amounts allow you to shield more money from taxes in the year you contribute, as well as deferring the tax on the growth and income you earn from investing the contributions. As part of your individual tax planning, consider whether this “Pre-tax” saving will benefit you more than saving money in an “after-tax” account.

Roth-Related Changes

SECURE Act 2.0 includes a significant number of Roth-related changes (both involving Roth IRAs as well as Roth account in employer retirement plans). Here are some highlights:

·         Elimination of RMDs for Plan Roth accounts – SECURE Act 2.0 eliminates RMDs for Roth accounts in qualified employer plans beginning in 2024. Currently, employer plan Roth accounts, such as Roth 401(k) plans and Roth 403(b) plans are subject to the RMD rules, although such distributions are tax-free per the standard rules for Roth account withdrawals.

·         Additional Employer Contributions Eligible for Roth Treatment – SECURE Act 2.0 allows employers to deposit matching and/or nonelective contributions to employees’ designated Roth accounts (e.g., Roth accounts in 401(k) and 403(b) plans). Such amounts will be included in the employee’s income in the year of contribution and must not be subject to a vesting schedule.

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·         High Wage Earners required to use Roth Option for Catch-Up Contributions – Starting in 2024, certain high-income taxpayers will only be able to make catch-up contributions to the Roth part of their retirement plans. The new rule applies to catch-up contributions for 401(k), 403(b), and governmental 457(b) plans, but not to catch-up contributions for IRAs, including SIMPLE IRAs.

·         Creation of SIMPLE and SEP Roth IRAs – SECURE Act 2.0 authorizes the creation of both SIMPLE Roth accounts, as well as SEP Roth IRAs, for 2023 and beyond. Previously, SIMPLE and SEP plans could only include pre-tax funds.

Considerations for retirement planning:   Roth IRA assets receive better long-term tax treatment than do traditional “pre-tax” retirement assets. The trade-off is that contributions to a Roth are not shielded from tax in the year contributed. As part for your individual tax planning, consider which feature or mix of features will benefit your retirement planning the most.

Other Changes

SECURE Act 2.0 has many other interesting provisions which we will cover in later articles. 

How can I navigate these changes?

Retirement, tax, and investment changes are constantly happening. It pays to collaborate with a financial advisor who you can trust to look after your best interest. At Blankinship & Foster, our Wealth Management service includes in depth and proactive retirement and tax planning. We create a plan to maximize retirement income, considering all income sources, expenses, benefits, and withdrawal strategies. Contact us to learn more about how we can help bring clarity, confidence, and direction for your financial future.

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About Jon Beyrer

Jon Beyrer, EA, CFP® is a partner of Blankinship & Foster LLC and is the firm’s Chief Compliance Officer. As a lead advisor, he focuses on helping families achieve their goals with sound wealth planning. In the community, Jon serves on several boards and is co-founder of the Professional Alliance for Children, a legal/financial charity for families of ill children. He has been quoted in The Wall Street Journal, The New York Times, and the Journal of Financial Planning. Jon lives in San Diego with his family.

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