SECURE ACT 2.0 Planning
Congress passed The SECURE Act 2.0 in late December 2022 to encourage retirement savings. The law has over 90 provisions that create various planning opportunities now and in the future. Some changes will take effect this year while others are delayed until later. We have laid out some of the more significant changes below, including the 529 Plan Roth Conversion option set to take effect in 2024.
2023 Changes
RMD Age: The Required Minimum Distribution (RMD) age for IRAs and 401(k)s was raised to age 73. Those who turned 72 in 2022 must still complete their RMD before April 1, 2023. The RMD age will increase again to age 75 in 2033.
RMD Penalty: The 50% penalty for missing an RMD was reduced to 25%. If the missed RMD is corrected in a timely fashion, the penalty is further reduced to 10%. Currently, there are no guidelines on what qualifies as a “timely correction.”
New Funding Rules for i401(k) Plans: New individual/solo 401(k) plans can make retroactive salary deferrals for the prior year if established and funded before the filing deadline (does not include extensions). Previously, only employer contributions could be made for the prior year. This effectively increases the amount that can be contributed to new i401(k) plans.
2024 Changes
529 Plan to Roth Conversion: The SECURE Act 2.0 allows for 529 education funds to be converted into a Roth IRA account in the name of the beneficiary. The lifetime maximum amount that can be converted from a 529 plan to a Roth IRA is $35,000 per individual. Additionally, the 529 plan must have been maintained for 15 years or longer and any 529 plan contributions (and the associated earnings) within the last 5 years are ineligible for conversion. It is not clear at this stage if the 15-year clock restarts with a beneficiary change to a 529 plan. To be eligible for a Roth conversion, the 529 beneficiary must have employment income. The annual conversion limit is the lesser of earned (employment) income or the IRA contribution limit. The limit is reduced further if any traditional IRA or Roth IRA contributions are made for the year.
Retirement Plan Catch-Up Contributions: Catch-up contributions are additional contributions that can be made to your retirement account beginning at age 50. Catch-up contribution limits for 2023 are $7,500 for qualified plans (401k, 403b, etc.) and $1,000 for IRA and Roth IRA accounts. Starting in 2024, individuals contributing to 401(k) plans that had wages over $145,000 in the previous tax year must allocate their catch-up contributions to a Roth 401(k). Pre-tax 401(k) catch-up contributions may still be available for some individuals who changed jobs mid-year but made over $145,000 in combined compensation. Also beginning in 2024, catch-up contribution limits for retirement plans will be indexed to inflation, including IRAs.
Roth 401(k) RMDs: Roth 401(k) owners are no longer required to take RMDs.
2025 Changes
Additional Catch-Up Contributions: Workers aged 60-63 can begin making larger catch-up contributions to their retirement plans. For qualified plans, such as 401(k)s and 403(b)s, the additional limit will be the greater of 150% of the regular catch-up amount or $10,000. For SIMPLE plans, the additional limit will be the greater of 150% of the regular catch-up amount or $5,000.
2026 Changes
Able Account Eligibility: Account eligibility expanded to include persons disabled prior to age 46.
As always, please feel free to contact WESCAP at (818)563-5170 if you would like to discuss any of this further.