The retirement landscape continues to shift underneath our feet. To wrap up the year on Capitol Hill, lawmakers in the House of Representatives pushed through a revised version of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The first version of the bill passed in 2019, and it included a higher required minimum distribution (RMD) age for retirement accounts, among other changes.
This bill includes a host of provisions that have impacts beyond just retirees. It also makes some other savings and insurance vehicles, like annuities, potentially more attractive. Let’s dig into some of the key facets of the legislation bound to impact retirees and even younger individuals and families.

1. Another increase in the RMD age

The original SECURE Act was somewhat controversial in that it delayed the starting age for RMDs from pre-tax retirement accounts from 70½ to 72. While that tweak meant folks had more time to perform strategies like Roth conversions and perhaps using an annuity to bridge the gap between leaving work and taking taxable IRA distributions, it also implied a higher tax bill for older retirees and potentially the beneficiaries of their accounts.

With the SECURE Act 2.0, initial RMDs are pushed further to age 73 starting in 2023 and 75 beginning in 2033 (for those born in 1960 or after). A saving grace offered in the new bill is that folks who miss an RMD don’t have to sweat quite as much about paying Uncle Sam a massive penalty (50% currently). The new slap on the wrist will be just 25%, or even 10%, if the error is corrected quickly.

2. More qualified account “catch-up” contribution wiggle room

People nearing retirement need all the help they can get. Congress was kind enough to increase the so-called “catch-up” contribution amount. Beginning in 2025, those aged 60 to 63 will have the opportunity to contribute up to $10,000 per year to an employer-sponsored retirement account as a catch-up. Going forward, the limit will increase with inflation. That is separate from catch-up contributions for those age 50+ which is $7,500 in 2023. For IRAs, the current $1,000 per year of catch-up contributions will also be indexed to inflation.

3. Roth account changes

Roth accounts are quite popular these days with tax rates lower than historical norms and their flexibility regarding withdrawals in retirement. So, whenever lawmakers make changes to Roth IRA and Roth 401(k) plans, investors might get a bit nervous. For background, a Roth IRA allows individuals to put after-tax cash into an account so that it can grow tax-free forever. Roth IRA contributions can be withdrawn at any time without owing either income tax or a 10% early withdrawal penalty.
The SECURE Act 2.0 does not change that; all it does is make Roth 401(k) accounts more like Roth IRAs by eliminating RMDs from Roth employer-sponsored retirement plans. There are a few income limitations with this feature of the Act. But what’s also a welcome change in the eyes of retirement savers is that matching contributions in a workplace plan will soon be able to come in Roth form care of the SECURE Act 2.0’s new rules. Under the current law, all employer matches are done on a pre-tax basis.

4. Flexibility with annuities

The incoming retirement provisions might make annuities a more attractive option when building a retirement plan. For one thing, folks looking to retire early have a new choice: they can use an annuity to take 72(t) distributions from their retirement accounts. That could make it easier to determine substantially equal periodic payments with the new relaxed rules.

Moreover, qualified longevity annuity contracts (QLACs), another savvy way retirees can flex their retirement asset muscle, will no longer be capped at 25% of an individual’s retirement account balance. The QLAC limit jumps from $145,000 under the current terms to $200,000. What’s great about QLACs is that they can reduce RMDs by moving ordinary qualified plan money into a deferred annuity.

Finally, Qualified Charitable Distributions (QCDs), among the most valuable methods for reducing taxes in retirement while funding someone’s most important causes, are expanded. Those aged 70½ or older will now be able to elect as part of their QCD a one-time gift of up to $50,000 to a charitable gift annuity, charitable remainder annuity trust (CRAT), or charitable remainder trust (CRT). It’s another reason an annuity could be a useful withdrawal strategy to help minimize taxes in retirement. QCDs can help satisfy yearly RMDs and many charities, including most religious organizations, count.

5. 529-to-Roth IRA transfers

Among the most noteworthy parts of the SECURE Act 2.0 is a new provision that allows money to be moved from a 529 college savings plan to a Roth IRA if certain conditions are met. Financial advisors’ eyebrows perked up regarding this one since any new method to get assets into a Roth account can mean serious tax savings for families.

Here’s how it will work: Subject to annual Roth contribution limits, parents can roll over 529 money to a Roth IRA for the beneficiary. The House included a lifetime contribution cap of $35,000 as well as a rule that the college savings plan must have been open for at least 15 years. Also be aware that the rollover is considered an annual contribution, so you can’t put more into the Roth if you have already hit the yearly contribution limit.

6. Student loan debt repayment

The SECURE Act 2.0 really has something for everyone. Folks who have outstanding student loans will soon be able to benefit from employer retirement account matching contributions. As with a 401(k) plan match, if an employee pays down his or her student debt, the employer has the option to match that repayment, but in the form of a 401(k) match.

7. Building an emergency fund

Part of a good long-term financial plan includes maintaining an emergency fund of cash to pay for inevitable but unexpected one-off items or to fund daily expenses should a job loss strike. The new law includes the ability to access 401(k) or 403(b) assets more easily by way of a new Roth account, which can be established for non-highly-compensated employees.

Emergency savings contributions, including an employer match, can then be directed into that account starting in 2024. The annual contribution limit is set at just $2,500, and it could be lower depending on a company’s plan rules. The first four distributions in a calendar year would be tax- and penalty-free.

The Bottom Line

People planning for retirement along with current retirees will have a bit more strategizing to do with the suite of changes outlined in the SECURE Act 2.0. More savings and withdrawal flexibility are helpful as well as more options with annuities. Financial advisors have the opportunity to add even more value by understanding all of the key rules.

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