Congress passed significant financial legislation at the end of last year. The latest edition, commonly termed as Secure 2.0 Act, has an impact that is wide ranging for retirees and savers, but for many its overall effect is relatively modest. There are scores of provisions that could apply to your situation.
To find them, you could wade through hundreds of pages of legalese. Here I’ll do my best to break down the most important aspects given your personal financial situation.
Retirees and near-retirees. As you might expect, those who have reached financial independence will generally be the most impacted. Starting this year those born from 1951 to 1959 can wait until age 73 before required minimum distributions (“RMDs”) begin from IRAs and retirement plans. If you’re born in 1960 or later, your mandatory distributions start when you turn 75 years old. This welcome change gives retirees more options to pursue Roth conversions and other strategies before being forced to take taxable distributions from their pre-tax retirement accounts.
I’ve always maintained that the penalty for missing your required distribution is among the most egregious. Secure 2.0 makes some welcome changes this year by lowering the penalty for missing an RMD from 50% down to 25%. This penalty is further reduced to 10% if you take a missed RMD in a timely manner. You can still ask for a complete waiver from the IRS, so don’t forget that is your first option for a missed RMD.
Finally, starting next year those 50 years and older making catch-up contributions into their retirement plan must do so into a Roth account if they are considered highly compensated ($145k in income this year) rather than having a choice. Those miffed by this change may benefit from a boost in retirement plan catch-up contributions for those aged 60 to 63 that starts in 2025.
Parents of college students. One of the aspects receiving widespread publicity is the ability to move 529 college savings plan balances into Roth IRAs. This change is perhaps less generous than advertised as there are several pesky rules.
First, you must fund a Roth IRA that is owned by the beneficiary of the 529 account (usually the child, not the parent). Second, the 529 account must have been in existence for at least 15 years with funds contributed in the last five years are not eligible for a rollover to a Roth. Third, the transfer can only be a maximum of the Roth IRA contribution limit, which now is $6,500 for a year, and up to $35,000 total. Finally, the 529 rollover uses up the allowance to contribute to the beneficiary’s Roth IRA for a given year.
Some questions remained unanswered, such as what happens with the state income tax break you originally received when you funded a 529. Do you have to pay it back? Another question is that if you changed the 529 beneficiary (say from your children to yourself), does that restart the 15-year clock? Stay tuned for details as they emerge.
Younger workers. A laundry list of changes help those who are getting started on their savings journey. In 2024, employers will need to admit part-time workers after two years of employment into a 401(k) plan. Employers making matching retirement plan contributions can also match employee student loan payments in a similar fashion. In addition, employers can offer an emergency savings account inside a retirement plan with automatic enrollment up to 3% of pay allowed. Once the emergency plan reaches $2,500, additional contributions shift to the Roth 401(k).
Finally, starting in 2025 most new 401(k) plans must have auto-enrollment provisions for eligible employees to save from 3 to 10% of their pay and increasing by 1% each year. The effect of all of these changes will hopefully mean higher savings and access to emergency funds for most workers.
I’d have to say one goal that was not achieved with enactment of this legislation was simplification. One attorney friend jokingly referred to it as the full employment act for attorneys, tax professionals, and financial advisors. Let’s hope the next iteration has simplicity as a key goal since Americans assuredly have the most complex and byzantine set of retirement rules in the world. A person can dream!
David Gardner is a CERTIFIED FINANCIAL PLANNER™ professional at Mercer Advisors practicing in Boulder County. The opinions expressed by the author are his own and are not intended to serve as specific financial, accounting, or tax advice. They reflect the judgment of the author as of the date of publication and are subject to change. Some of the content provided comes from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors.
Mercer Global Advisors Inc. is registered with the Securities and Exchange Commission and delivers all investment-related services. Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services.