SECURE Act 2.0: What you need to know
While you were on your holiday, the SECURE Act 2.0 passed the House and Senate and was signed into law by President Biden.
The bill aims to strengthen the retirement system by making several changes to existing policies, although it does nothing to shore up social security.
Let’s get into the details of what might impact you; I’ll follow up with clients individually to strategize how to maximize the new opportunities.
Let’s first cover what hasn’t changed:
- Back-Door Roth conversions (e.g., Accenture’s “After-tax 401k,” which enables the back-door Roth)
- Roth conversion restrictions/income limitations
- IRA/qualified account inheritance rules
The items listed above were potential changes with previous tax bills, but it will be advantageous for most people that they didn’t change.
Most of the changes in this bill will have a net positive impact; here are the big changes, along with a detailed review below.
- Required Minimum Distribution (RMD) changes
- Ability to convert 529 education savings to a Roth IRA
- 401k employer match can now be paid into the Roth 401k
- Increased 401k catch-up contributions
Required Minimum Distribution (RMD) changes
The RMD rules control when you’re forced to begin removing funds from qualified accounts (IRAs and 401ks). This change creates a planning opportunity as you have greater control over when and how to start using retirement funds. Here are the new rules:
- Born 1950 or earlier: no changes as you’ve already started RMDs
- Born 1951 – 1958: RMDs begin at 73 (pushed back from 72)
- Born 1959 or later: RMDs begin at 75 (pushed back from 72)
For the majority of currently employed MDs, these means your RMDs are pushed back a full three years. The biggest advantage is it can allow more time to live off tax-free capital gains and convert funds to the Roth.
Ability to convert 529 education savings to a Roth IRA
This is one of my favorite changes, as it allows flexibility for those who saved big bucks in 529s. The 529s can be a hugely advantageous way to pay for K-12 private school and college, but if you don’t use up all the funds, you were penalized for removing them.
The SECURE Act 2.0 allows you to convert funds from the 529 to a Roth IRA, but with quite a few restrictions:
- The transfer has to be made to the beneficiary (you can’t set this up and add it to your own Roth IRA)
- The account must have been opened and used for the 15 years previous to the transfer
- Each year’s transfer is limited to the annual IRA contributions for that year ($7k in 2023) combined with other Roth IRA contributions
- The lifetime transfer maximum is $35k
If you have adult kids with 529 money still in the account not needed for education, this 529 to Roth transfer could be for you. You’ll also have the option to change the beneficiary to someone else (or grandkids), but this might reset the 15-year requirement.
The 529 to Roth conversion is another opportunity to maximize intergenerational wealth. It will mainly be used by people who can max the 529 for education and have additional capacity to add funds that can be converted to the 529.
401k employer match can now be paid into the Roth 401k
If you contribute to a Roth 401k, your employer match is paid to the traditional or tax-deferred 401k account. However, the SECURE 2.0 Act changes this and allows the employer match to be paid into the 401k, but it will be taxable for the employee.
Even more impactful, in 2024, the law makes Roth contributions the only option for the “catch-up” contributions for those making over $145K/year. That means if you’re an Accenture MD over 50 and currently contribute to the $6,500 catch-up (increased to $7,500 in 2023), that total contribution is taxable as you have to add it into the Roth.
If you’re in California and taxed at a combined 45% marginal tax rate, that $7,500 catch-up contribution adds over $3,000 to your tax bill and should be evaluated to see if it’s still worth it.
This change requires strategic planning around the 401k catch-up and matching contribution as it has even bigger current and future tax impacts.
Increased 401k catch-up contributions
Beginning in 2025, if you’re between 60 and 63, your 401k catch-up contribution will increase to $10k indexed to inflation (the current amount in 2023 is $7,500). However, remember, if you make over $145k, this entire amount has to be contributed to the Roth, meaning you’re paying taxes on it at potentially the highest tax rates of your career.
These are the most likely impacting items for most people. However, there are additional changes that could impact you.
Additional SECURE Act 2.0 changes not covered:
- Changes to self-employed SIMPLE and SEP IRAs
- Removal of RMDs from Roth 401ks
- Qualified Charitable Contributions (QCDs)
- Changes to IRA catch-up amounts
- Emergency 401k withdrawals up to $1k/year
- Qualified LTC distributions
- Changes to the 72(t) distribution rules
- “Emergency savings account” tied to an employer 401k
- Employees paying down student loans can receive an “employer match” Into the 401k they’re not contributing to
- RMD penalties for not taking out the proper amount
There will likely be some changes as the IRS implements the rules created by Congress, so keep an eye on these items, as I’ll do for my clients.
This content is informational only, and you should consult with a professional before making any changes.
