By Austin Winsett, Senior Wealth Advisor
In the final hours of the 2022 legislative session, Congress passed a $1.7 trillion spending bill that includes changes to how individuals can save for retirement. The new rules are part of The Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 and build upon the original SECURE Act, passed in 2019. The legislation is lengthy and includes nearly 100 new retirement plan provisions impacting employers, employees and retirees.1 Below, we unpack how some of the key provisions will impact many investors’ retirement plans, from those saving for retirement to those who retired years ago.
To begin, the latest version of the SECURE Act raises the starting age for Required Minimum Distributions (RMD) from 72 to 73 for individuals born between 1951-1959, and to 75 for those born in 1960 or later. This creates more potential planning opportunities in pre-RMD years, including partial Roth Conversions to control tax brackets, freezing some future tax liability associated with IRAs and 401Ks and allowing more capital to grow and compound tax free.2
For those nearing retirement, The SECURE Act 2.0 may help increase how much individuals can save. The legislation expands catch-up contributions to include participants ages 60-63 by the end of the tax year. The increased catch-up contribution for older participants is effective for the 2025 plan year and increases the savings amount to the greater of $10,000 or 150% of the catch-up amount in effect for 2024, as indexed. In addition, the IRA catch-up contribution limit for those ages 50 and over is currently $1,000 but will be indexed to inflation starting in 2023.3
The new legislation also allows qualified plans to add a provision for employees to designate employer contributions as Roth. However, it is taxable to the employee upon deposit into the account. This election can be attractive for younger investors or those that may find them in higher tax brackets in retirement, as the current, lower tax brackets passed under the Tax Cuts and Jobs Act of 2017 will sunset in 2026 and revert to the older rate.
The bill also opens the possibility of transferring 529 plan balances to Roth IRAs, albeit with a variety of limits and restrictions. Even with these restrictions, this new law provides opportunities for families with leftover 529 balances after the account beneficiaries have completed their college. Additionally, investors might consider ‘priming the retirement plan’ for children by making a 529 contribution when a child is very young, with the intent of transferring it to a Roth IRA once the account has been in existence for over 15 years. That allows the account to compound until the child is ready to retire. This can be a great strategy for utilizing some annual gifting allowed under estate tax laws.
Finally, there is a tweak to an existing rule that will affect spouses who inherit retirement accounts from a deceased spouse. The bill introduces the ability to elect to be treated as the deceased spouse, which means that, among other things, RMDs for the surviving spouse would be delayed until the deceased spouse would have reached the age at which RMDs begin. This strategy could be attractive to surviving spouses who inherit retirement accounts from a much younger spouse (allowing them to delay RMDs longer, and to have smaller RMDs, compared to making a spousal rollover or remaining a beneficiary of the account).
These are just a few of the ways the new legislation will provide new, and in many cases advantageous, ways to save for your retirement, but as previously mentioned, the legislation is complex. If you have any questions about how this legislation may impact your financial plan, please contact your Exencial Advisor.
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