In recent years, Congress has continued to push for changes to retirement accounts as they look for new ways to encourage retirement saving and create tax streams for the budget.  The Secure 2.0 Act was passed by Congress and signed by President Biden in the final days of 2022 as part of the 2023 Federal Omnibus Bill. The omnibus bill was more than 4,000 pages, included $1.7 billion in spending, and builds on the original Secure Act of 2019, which was the first major change to retirement plans in several years and opened the door for continued retirement plan discussions.  

In the Secure 2.0 Act, there are dozens of changes that could affect retirement saving going forward. Following are some of the ones we believe are particularly important.  

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Changes to required minimum distributions (RMDs)

The 2019 Secure Act increased the RMD age from 70.5 to 72, which is the age retirement account owners are required to start taking distributions from retirement accounts. The Secure 2.0 Act took this another step and increased the RMD age to 73 years in 2023 and will eventually move this age to 75. 

The Secure 2.0 Act also removes the RMD requirement for employer retirement accounts that allow Roth contributions. This essentially treats Roth dollars the same whether they are in an IRA or an employer-sponsored retirement account like a 401(k). Prior to this change, there was no RMD for IRAs, but there was for an employer retirement account that included a Roth portion. 

What this means for retirement savers:

By increasing the RMD age and removing the RMD requirement in employer retirement accounts, savers will be allowed to delay distributions and the corresponding taxes on these distributions. For retirement account owners who can afford to push back distributions, there may be opportunities to strategically plan out distributions during lower income years prior to the start of RMDs. This can potentially save tax dollars. Combining this with a potential Roth IRA conversion could also be beneficial for many retirement account owners. 

529 Plan transfers to Roth IRAs

For years, individuals have been using 529 plans to save for their children and grandchildren’s education expenses. Occasionally, they save too much and wonder what to do with the excess funds. Currently, distributions from 529 plans not used for educational expenses are subject to income tax and a 10% penalty. In the past savers could change the beneficiary to another family member, but sometimes this is not a great option. The Secure 2.0 Act allows savers to rollover these dollars to a Roth IRA for the benefit of the beneficiary. 

What this means for 529 savers and beneficiaries:

If several conditions are followed, the 529 beneficiary (typically a child or grandchild) will be allowed to rollover up to $35,000 from the 529 to their Roth IRA during their lifetime. This option is an advantageous way to kick-start retirement savings for beneficiaries who have either completed or opted out of college. 

Increased catch-up contributions for retirement accounts

Catch-up contributions to retirement accounts have been around for decades to allow savers 50 years and older to save additional amounts into their retirement accounts. For example, the current catch-up contribution for IRAs is $1,000 annually. Secure 2.0 Act made a few changes to this process. 

What this means for retirement savers:

• In 2024, retirement savers in employer plans, such as a 401(k) or 403(b), who are age 60 to 63 will be allowed to increase their savings beyond the normal catch-up contribution. For example, if the normal catch-up contribution was $8,000, a person aged 60 to 63 would be allowed to increase this amount to the higher of $10,000 or 150% of $8,000. In this case the catch-up contribution would be $12,000. This may be a nice win for retirement savers who are behind in their savings goals.

• Under prior law, catch-up contribution limits were indexed to allow them to grow with inflation – except for IRA catch-up contributions. Secure 2.0 Act addressed this exception to allow inflation adjustments for the IRA catch-up limit as well, which means that the $1,000 catch-up contribution will be annually increased in $100 increments to match inflation.

Catch-up contribution change for high earners in employer plans

Starting in 2024, catch up contributions will be handled differently for high-wage earners, who are defined as those making $145,000 or more with their employer in the prior year. This amount will be indexed to correspond to inflation. 

What this means for high earners:

For high-income earners in employer retirement plans such as 401(k) and 403(b), catch-up contributions will be required to be made to the Roth portion of their plan. In the past, catch-up contributions have always been made in tax-deferred dollars for all employees. 

The Roth IRA catch-up contribution rule is an attempt by the Secure 2.0 Act to increase tax revenues, because contributions to Roth accounts are included in taxable income for the participant. It should be noted that not all employer plans allow Roth IRA contributions. For plans that don’t allow Roth IRA contributions, the plan will not be allowed to accept catch-up contributions for any participant regardless of whether the participant is a high-wage earner or not.  

Also, it is conceivable that an employee who qualified as a high-wage earner could fall out of this category for a year or two if they secure a new job with a new employer and split income across two organizations. For example, an employee who made $150,000 in year one with one employer would qualify as a high-wage earner in year two. However, in year two, if the employee made $80,000 with the first employer, left their job, and then made $80,000 with a second employer, they would be considered a high-wage earner with the first employer, but they would not be considered a high-wage earner during that same year with their second employer. They also would not be a high-wage earner in year three. 

New option for surviving spouse beneficiaries

Currently the surviving spouse has many options when they are named as the beneficiary. The Secure 2.0 Act adds an interesting new option to allow the surviving spouse to elect to be treated as the deceased retirement account owner for distribution options. 

What this means for the spouse beneficiary:

This appears to allow the surviving spouse to delay distributions until the deceased participant/owner would have reached RMD age. Under this scenario, a widow or widower aged 75, whose spouse was 67 when they passed away, might choose to hold off on taking RMDs until the year their spouse would have turned 73 (or 75 when the law changes in 2033). As outlined earlier, this could enable strategic distributions during lower income years and potentially save tax dollars. 

These are just a few of the changes we believe to be the most relevant to retirement savers, but the Secure 2.0 Act has many other provisions that will affect retirement savings. We will continue to monitor these closely and share our perspective and considerations for individuals, as the Secure 2.0 Act will certainly change the way we save in the future. 

Author: Josh Hahn is senior vice president and manager of Trust Administration for UMB Bank.