Secure 2.0: What You Need to Know

On December 29^th, 2022, President Biden signed a massive omnibus spending bill, dedicated to bringing several changes beginning in fiscal year 2023. Buried within this 1,400-page document is a bill known as the “Setting Every Community up for Retirement Enhancement” Act, better known as the SECURE 2.0 Act. Although there are many legislative changes introduced within this bill, we have picked the three updates we think warrant a closer look…

1. 529 Plans can be Converted to Roth IRAs

This change attempts to address the frequently asked question, “what if my child doesn’t use all of his/her 529 account?” Beginning in 2024, the balance in 529 plans can be converted to a Roth IRA, subject to a few key requirements.

• • • • The beneficiary of the 529 plan must be the owner of the Roth IRA.
      • The 529 account must be established for a minimum of 15 years before the balance is eligible for conversion.
      • The funds being converted to a Roth IRA must be in the 529 plan for a minimum of 5 years.
      • Roth IRA annual contribution limits apply.
      • The beneficiary of the 529 plan must have earned income in the year of conversion.
      • The lifetime maximum conversion amount is $35,000.

2. Key Changes to Required Minimum Distributions (RMDs)

RMDs are forced distributions from qualified plans beginning at a certain age (previously 72). This bill relaxes those standards in the following ways:

• • • • Effective January 1^st, 2023, the RMD age has been pushed back to 73.
      • Beginning in 2033, the RMD age will be further pushed back to 75.
      • Previously, the only qualified assets that were exempt from RMD requirements were Roth IRAs. Moving forward, this exemption will extend to Roth assets held in employer sponsored plans.
      • Previously, the penalty for failing to take a distribution was 50% of the required amount. Moving forward, that penalty will decrease to 25% (10% if the error is corrected within a certain timeframe).

3. Employer Matching Contributions can be Deposited as Roth contributions- this rule extends to SIMPLE and SEP IRAs

Historically, all employer contributions were required to be deposited on the pre-tax side. This means that at distribution, those contributions are fully taxable. The SECURE 2.0 Act allows employers to make Roth matching contributions, allowing for a tax-free distribution. As always, there are a few things to keep in mind.

• • • • If your employer is making Roth matching contributions, those matching dollars will be counted as taxable income in the year in which the contributions were made.
      • Although this change is effective January 1^st, 2023, it will take time for plan sponsors and employers to make the required administrative changes to accommodate this rule.
      • For those who are self-employed, this change will also impact SEP IRA contributions, potentially increasing the usefulness of these plan types for those with 1099 income.

The changes highlighted above are a selection we view as the most exciting and impactful for our client base.  It is not an exhaustive list of the information included in the SECURE 2.0 Act.

To gain a better understanding of how these changes will impact your financial situation directly, please speak with your financial advisor or contact us. We are passionate about education at no cost to you.

Have questions? Don’t hesitate to call. We are passionate about education at no cost to you.

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