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SECURE 2.0 Act: Three key updates to improve your retirement finances

March 2, 2023 Article 3 min read
Phil Clark Wealth Management Jessica Caldwell Wealth Management
The SECURE 2.0 Act of 2022 (SECURE 2.0) makes several major changes to retirement savings rules and related tax incentives. Here’s how three of them could significantly improve your personal finances in the years to come.
View of skyscrapers and flags in a city.SECURE 2.0 — signed into law by President Biden on Dec. 29, 2022 — contains 92 new provisions to promote savings and add increased flexibility in retirement plans for American families. Here’s our top three changes to consider as you plan for your family’s financial future and security.

1. The required minimum distribution (RMD) age for IRA distributions has increased

SECURE 2.0 increases the RMD age from 72 to 73 beginning on Jan. 1, 2023, for those born between 1951 to 1959, and to 75 beginning in 2033 for those born in 1960 or later. While this won’t have an impact on individuals who rely on IRA distributions for living expenses, it allows some individuals to defer income for a longer period, providing additional opportunities to intentionally recognize income (for example, by coordinating Roth conversions or capital gain harvesting) in relatively lower income years before being subject to RMDs.

2. Retirement savings provisions have increased

The act also includes a litany of provisions either increasing the amount or flexibility in which participants can save for their retirement. For example, self-employed workers now have access to making Roth contributions to their SIMPLE or SEP IRA accounts. Previously, only pretax funds could be contributed to these plans. Employer contributions to 401(k) and 403(b) plans, such as matching contributions, are now also allowed to be designated Roth.

SECURE 2.0 also allows for IRA catch-up contributions to be automatically adjusted for inflation (beginning in 2024), and the catch-up limits for 401(k), 403(b), and 457 plan participants ages 60–63 are substantially increased to the greater of $10,000 or 150% of the “standard” catch-up amount for that year (beginning in 2025). These changes are a good excuse for you to reevaluate whether pretax or Roth contributions make the most sense in your retirement plans based on your tax situation. In addition, these catch-up amounts won’t be applied automatically, so it’s important to adjust your contribution percentage, if necessary, to ensure you’re deferring the maximum amount of dollars possible for your retirement.

3. 529-to-Roth IRA transfers are now permitted

An often-voiced concern is that leftover funds in a 529 college savings account will be trapped or subject to taxes or a penalty. As a result, some leave these accounts underfunded, or worse, they don’t even consider this powerful educational savings tool to help meet future educational expenses, which continue to rise at a fast pace. Beginning in 2024, qualified 529 account funds may be transferred to a Roth IRA free of any tax, penalty, or applicable income limits. This significant benefit adds to prior benefits of 529 plans: tax-free compounding, no age or time limits, generous account funding opportunities, unique gift and estate tax benefits, creditor protection, and varying tax deductions in many states.

There are some restrictions for the 529-to-Roth strategy to keep in mind:

  • The account must have been maintained for a minimum of 15 years, with the same owner and designated beneficiary. Given this, it may be an opportunity to open and fund a 529 account early in a child’s life.
  • Transfers are limited to an aggregate of $35,000 over the individual’s lifetime.
  • Funds transferred must have been contributed to the 529 at least five years prior.
  • Transfers are subject to the annual limit (currently $6,500 for individuals under age 50) and must be net of any other contributions in that year.
  • The beneficiary needs earned income equal to or greater than the rollover amount.
  • As with any new large piece of legislation, there are details still to be worked out. While planning conversations can and should begin with your advisor, it’s prudent to wait for official guidance from the IRS before implementing a new strategy and potentially having to correct something retroactively. Furthermore, it’s important to take your family’s specific circumstances into consideration — none of the provisions should be looked at in a silo.

As you and your family navigate SECURE 2.0, your tax and financial advisors can help by taking a holistic inventory of your cash flow needs, tax situation, financial independence projection, and overall balance sheet, while making sure you’re on track to meet your long-term financial goals. 

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