Retirement planning with SECURE 2.0

Those on the road to retirement (or already there!) may benefit from one or more of the changes in the SECURE Act of 2022 (SECURE 2.0), which builds upon 2019’s Setting Every Community Up for Retirement Enhancement (SECURE) Act.

“There are absolutely some financial planning considerations for near-term and current retirees in SECURE 2.0,” said Joel Dickson, principal and head of enterprise advice methodology at Vanguard. “The changes create tax-advantaged opportunities to save more, delay required distributions, and transfer wealth to the next generation. The task for investors—and their advisors—will be to determine which of the new provisions can be best incorporated into their wealth management strategies.”

In another article we discussed how SECURE 2.0 may affect wealth accumulators; look out for even more content that focuses on how high net worth investors may benefit from the legislation. Here we cover what current and soon-to-be retirees should know about what’s coming or is already available in SECURE 2.0.

Starting in 2025: Defined contribution participants between the ages of 60 and 63 will be able to sock away up to $10,000 ($5,000 for SIMPLE plans) in annual catch-up contributions or 50% more than the standard catch-up amount, whichever is greater. (The catch-up limit for people age 50 and older in 2023 is $7,500 and $3,500 for SIMPLE plans.)  Starting in 2024, employees making more than $145,000 must make all of their catch-up contributions in an after-tax Roth account. Those earning less than $145,000 may continue to make traditional, pre-tax catch-up contributions.

For employees, this means an employer must offer a Roth option to allow a catch-up contribution. Also to note: Both the $10,000 and $145,000 amounts will be indexed for inflation.

For late-stage careerists, this change provides one additional opportunity to boost retirement savings. Some may find the after-tax stream of income beneficial as well.

Starting in 2023: The mandatory start date for required minimum distributions was pushed back to age 73 (up from age 72 in 2020 and age 70½ when the reform was first enacted in 1986) and rises to age 75 by year 2033.

“This is a fairly minor change in the short term, but when looking out over the next 10 years, it does raise some planning considerations,” said Dickson. “Those nearing retirement may want to consider whether strategic Roth conversions or delaying Social Security benefits can create the desired annual income generation or preferred income tax situation.”

Effective immediately: The penalty for an RMD shortfall was reduced from 50% to 25%. Penalties for shortfalls that are rectified within a “correction window” are further reduced to 10%.

For those with a past mistake, there is now a three-year statute of limitations for RMD shortfalls.

Starting in 2024: Unused 529 plan assets may be moved to a Roth IRA, as long as certain conditions are met:

• The 529 plan has been in existence for at least 15 years.
• The Roth IRA receiving the funds must be in the same name as the 529 beneficiary.
• Only funds that have been in the 529 for at least five years (as well as the earnings on those contributions) may be moved to the Roth IRA.
• The 529 to Roth IRA conversion limit is equal to the annual Roth IRA contribution limit ($6,500 in 2023), with a lifetime cap of $35,000 per beneficiary. (Note: the $6,500 annual Roth IRA contribution limit still applies. A $6,500 529 to Roth IRA conversion can be made in place of an annual Roth IRA contribution but not in addition to it.)

The benefits to savers are twofold. First, peace of mind for those concerned about overfunding a 529 plan. Second, a planning opportunity for higher-net-worth savers who want to leave a retirement nest egg for children, grandchildren, or other loved ones.

Starting in 2024: In general, SECURE 2.0 expands the opportunities for savers to make contributions into Roth accounts. Small business owners may create Roth options for their SIMPLE and SEP IRAs and employers can match contributions in 401(k) and 403(b) accounts with Roth dollars.*

Also worth noting: The legislation doesn’t restrict or eliminate the existing non-deductible traditional to Roth IRA conversion (backdoor Roth IRA) strategy, leaving higher-income savers with access to Roth IRA savings, even after phasing out of income limit requirements.

• What SECURE 2.0 means for young savers (article, issued April 2023)
• SECURE 2.0 offers new wealth-boosting opportunities (article, issued May 2023)
• SECURE 2.0 is a step forward for retirement planning (article, issued January 2023)
• Three small yet essential steps for financial wellness (article, issued January 2023)