On December 27, the Congressional Appropriations Act of 2023 was signed into law by President Biden. Appropriation bills are typically procedural, designed to authorize the government to spend the money budgeted by Congress. A simple majority is needed in both houses of Congress to send an appropriations bill to the President’s desk. Because of this, other pieces of legislation are often tacked on to the appropriations bill to make it easier to pass.

One such piece of legislation, dubbed the SECURE Act 2.0, was tacked on to this bill and now has become law.

On balance, the changes will be good for retirees and pre-retirees. It is important to understand that many of the changes included in the bill will need to be further fleshed out by the Treasury Department and the Internal Revenue Service (IRS).

There is a lot to unpack with Secure 2.0. The agencies tasked with implementing these changes (the Treasury Department and the IRS), as well as advisors, tax preparers, tax attorneys, and actuaries, must get up to speed to begin implementing the changes.

Here are some of the more significant changes you need to know.

You Have More Time to Take Your RMDs

Before the new law, owners of retirement plans (e.g., IRA, 401(k), 403(b), etc.), upon reaching age 72, were required to begin taking minimum distributions from these accounts (with one exception). The new law changes the age to 73 for retirement plan owners born after 1950 and before 1960. For plan owners born after 1959, the age increases to 75.

This change continues the trend of increasing the age at which distributions must be taken. The original Secure Act, passed at the end of 2019, increased the age from 70½ to 72.

The increase in age will give retirees an extra year of tax deferral if they do not need the money. Having one extra year, or three extra years of deferral for those born after 1960, provides greater flexibility in managing tax brackets leading up to the age at which RMDs are required.

A New Rollover Option for 529 Plan Balances

Congress continues to change the way people can use 529 plans. Originally intended to be used strictly to fund a college education, 529 plans can now be used to pay for trade school expenses, pre-k through high school tuition (up to $10,000 per year), and student loan payments (up to a $10,000 lifetime limit).

The latest change by Secure 2.0 allows a portion of any unused 529 plan balance to be rolled over to a Roth IRA for the benefit of the 529 plan beneficiary.

Beginning in 2024, the new rule allows a 529 plan beneficiary to roll over up to $35,000 during their lifetime from any 529 accounts in their name to a Roth IRA in their name. There are limitations, however.

The amount that can be rolled over in any one calendar year will be the Roth IRA annual contribution limit in that year reduced by any Roth IRA contribution made by the beneficiary. So, for example, if the annual limit in a year is $6,500 and the beneficiary has already made a Roth IRA contribution of $6,500, no additional rollover would be allowed. The beneficiary would have to have earned income in the year that a transfer was being made from the 529 plan to the Roth IRA. But the adjusted gross income (AGI) limits that currently restrict someone from otherwise making a Roth IRA contribution would not apply in the case of a transfer from the 529 plan to a Roth IRA.

In addition, the beneficiary cannot roll over any money from their 529 plan into a Roth IRA unless the account has existed for at least 15 years. It is not clear just yet whether changing beneficiaries will restart that 15-year clock, but it would likely be the case.

A further limitation prohibits the rollover of any contributions or earnings on contributions made in the last five years.

So, for whom is this appropriate? If you have monies remaining in your 529 plan even after your beneficiary has graduated, you could, subject to the timeframes mentioned above, roll a portion of the balance to a Roth IRA for that beneficiary. Since Roth IRA contributions contain income limits, this could be a clever way to get funds into a Roth IRA, even for beneficiaries who otherwise would not be eligible to contribute to a Roth IRA.

We recommend speaking with a financial planner to help you evaluate this strategy against another option. Compare the benefits of this strategy to one where you leave the funds in place and change the beneficiary to a grandchild (or great-grandchild) to help create a legacy for the account owner.

Indexing for Inflation of QCDs and Funding of Split Interest Gifts

It is hard to believe that Qualified Charitable Distributions (QCD) have been part of the tax code since 2006. That is because they have only recently been more heavily utilized after the 2018 Tax Cuts and Jobs Act severely limited itemized deductions by increasing the standard deduction amount.

For taxpayers over age 70½ who no longer itemize their deductions, making gifts to charity via a QCD resulted in a better tax outcome than taking a distribution from their IRA and then sending a separate check to the charity of their choice.

The annual limit for QCDs was always $100,000 and was not indexed for inflation. The $100,000 will be indexed for inflation annually, beginning in 2024.

Before Secure 2.0, QCDs could only be made to charities if 100% of the amount was directed to the charity. In other words, split-interest gifts to a Charitable Trust or Charitable Gift Annuity were not allowed.

The new law allows a one-time exception to this rule, beginning in 2023. A one-time exception can fund up to $50,000 to a Charitable Trust or Gift Annuity. The Charitable Trust can only benefit the plan owner and spouse and can only contain monies contributed through QCDs. Given the expense of setting up these types of trusts, it is not likely most people will take advantage of this change.

Setting up a Charitable Gift Annuity is not expensive, but the small maximum amount won’t result in much interest.

It is interesting to note the changes that did not make it into the new law. There had been hope that the $100,000 maximum would be increased to $200,000 and that QCDs could be made to Donor Advised Funds. Neither of those made it into the current law.

An Increase in Catch-Up Contributions

Currently, retirement plan owners may make catch-up contributions to their IRA accounts up to $1,000 beginning in the year they turn age 50. This amount has stayed at $1,000 since 2006 since no provision was written into the law to index it to inflation.

The new law will index this amount for inflation beginning in 2024. Interestingly, the catch-up contributions for 401(k) and 403(b) plans have always been indexed for inflation.

Secure 2.0 introduces new catch-up contributions for 401(k) and 403(b) plan participants ages 60, 61, 62, and 63. Beginning in 2025, the catch-up contributions for those participants will increase to the greater of $10,000 or 150% of that year’s ‘over age 50’ catch-up amount.

For SIMPLE plan participants, the increase will be to the greater of $5,000 or 150% of that year’s ‘over age 50’ catch-up amount.

An interesting thing to note is that, once again, Congress is excluding IRAs from this additional catch-up.

Changes to Matching Contributions to Roth Accounts

Before the enactment of this new law, employers could only make matching contributions to employees’ pretax retirement accounts. Under the new law, employees can elect to have their matching contributions made to their Roth 401(k) account. However, the employer match amount would be subject to the current income tax for the employee.

The interesting part of this change is that beginning in 2024, employers would be required to make the match for certain high-income employees to the Roth 401(k) plan, thus removing the employee’s ability to choose for themselves. There is quite a bit of ambiguity surrounding this section of the Act, so more guidance will be needed to better understand how this applies.

Matching Contributions for Student Debt Repayment

Beginning in 2024, when calculating how much to match for an employee, employers must consider student loan payments employees made during the year. This is true even if the employee does not contribute to the retirement plan. Employees will be allowed to self-certify the amount of student loan payments they make each year, reducing some of the burdens that otherwise would have been put on the employer to keep track of an employee’s student loan payments.

This change in the law should assist young people with saving for retirement at the same time they are paying down their student loans. This is a nod towards the adage that the earlier you start to save for retirement, the better off you will be.

Penalty Reductions for Failure to Take RMD

The penalty for failing to take an RMD from your retirement account is 50% of the amount that should have been taken. This penalty is quite onerous. Beginning in 2023, the penalty is reduced to 25%, and if the failure is corrected within a certain period, the penalty is further reduced to 10%.

The time frame for correcting the failure begins January 1 of the year following the missed RMD and ends the earlier of:

  • A notice of deficiency is mailed to the taxpayer
  • Tax is assessed by the IRS
  • The last date of the second tax year after the tax is imposed

A likely outcome that may not be evident until many years from now is that many more new Roth accounts will be opened, providing tax-free income to those account holders at retirement. The government will receive a tax windfall from the taxation of matching Roth contributions and sacrifice more significant tax revenue in the future due to the tax-free nature of Roth accounts.

For taxpayers, this third bucket of money will be tax-free (compared to tax-deferred and taxable) and provide greater flexibility during retirement.

We continue to analyze these changes and will update you as the law is interpreted and implemented.

As always, please feel free to reach out to your advisor to see how the changes will impact your situation.


*This article has been updated for accuracy.

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