Ask the CFP® -What did Congress change in SECURE Act 2.0?

This month’s Ask the CFP® question is What did Congress change in SECURE Act 2.0? 

Within the large appropriations bill passed by Congress in December of 2022 were multiple changes to retirement accounts and tax rules, also known as SECURE Act 2.0. The original SECURE Act was passed in 2019 and made similar changes. While there are too many changes to list in this video, we’ll cover a few of the highlights.  

First, Required Minimum Distributions, or RMDs, require someone to withdraw a percentage of their retirement account balances once they reach a certain age. When Congress passed the original SECURE Act, the age was pushed back from age 70 and a half to age 72. Now, RMD ages are being pushed back further to age 73 starting for tax year 2023. This means if someone turns 72 in 2023, they do not need to take an RMD until next year. Starting in 2033, the RMD age pushes out to 75. Keep in mind, RMDs are different for inherited retirement accounts. This update generally applies to someone’s individually-owned retirement account.  

Second, if you miss the deadline for taking your RMD or you don’t take the full RMD, the penalty drops from 50% to 25% starting in 2023. Also, the penalty drops down to 10% if a taxpayer rectifies underpayment issues within a “correction window.” The correction window is generally two years, starting with the year just after the missed RMD, but can be shorter if the IRS sends notification.  

Third, starting in 2024, for employees age 50 and over who save to a 401(k) or similar group retirement plan, catch-up contributions must be made as Roth dollars instead of pre-tax dollars if prior year wages were over $145,000. In other words, higher wage earners can still make catch-up contributions to their 401(k) plan, but they must be made to the Roth portion of the plan, not the pre-tax portion. This generates more tax revenue for Uncle Sam. There are some administrative challenges with this rule, so it’s possible the IRS could provide clarification on this rule in the near future.  

Finally, starting in 2024, a limited amount of 529 plan dollars can be transferred to Roth IRAs. There are multiple stipulations to this new rule, including that the Roth IRA must be in the same name as the 529 plan beneficiary and the annual limit cannot exceed the Roth IRA contribution limit. Also, the 529 plan must have existed for at least 15 years and no more than $35,000 can be transferred over an individual’s lifetime.  

There are numerous additional changes in SECURE Act 2.0, as well as more details from the updates we mentioned here. Contact us if you want to dive into greater detail on these updates or discuss the impact of other provisions in the law.  

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