As part of the 2023 Consolidated Appropriations Act, the SECURE (Setting Every Community Up for Retirement Enhancement) Act 2.0 was signed into law on December 29, 2022. The purpose of the act is to provide incentives for retirement savings. It includes dozens of new provisions impacting businesses and individual retirement savers.
A great feature of many of these provisions is the increased flexibility with retirement funds. One of our primary purposes in financial planning is to ensure that you have options in the future. Many of these provisions make it easier to keep your options open.
RMDs Delayed until age 75
Required Minimum Distributions, RMDs, the distributions that you are required to take from qualified retirement plans when you reach the specified age, are now delayed until age 75 if you were born in 1960 or later. Previously, under the first SECURE Act, RMDs were required at age 72. This delay allows your qualified retirement funds to potentially (hopefully) grow for a longer period of time without the headwinds of an annual income tax bill on those funds.
New Roth options
Roth contributions to retirement accounts are after-tax contributions, meaning that you do not take a tax deduction for them in the year that you contribute the funds. However, the funds that you withdraw from your Roth account in retirement are not taxable (subject to some qualifying rules). This means that the growth in those accounts is never subject to federal income tax*.
There are a few ways to make Roth contributions to your retirement savings including Roth IRAs, Roth 401k and Roth 457 accounts as examples. However, not all employer plans include Roth accounts. And, many people cannot contribute directly to Roth IRA accounts because their income is over the limit. Plus, the limit for IRA contributions is pretty low to be the sole source of retirement savings.
SECURE Act 2.0 opens up additional options for retirement savers to build Roth accounts. First, the act allows employer matching contributions to retirement plans to be designated to Roth accounts. Prior to the SECURE Act 2.0 all employer contributions were required to be pre-tax contributions. And, for those who have SEP-IRAs or SIMPLE IRAs, Roth contributions are now permitted to these accounts as well.
One of the strange features of qualified employer plans that included a Roth component prior to SECURE Act 2.0 is that RMDs were required from the Roth component of those plans even though RMDs were not required from Roth IRAs. One of the provisions of the new act eliminates the requirement to take RMDs from your employer plan Roth accounts.
Not all provisions of the act are effective right away. And, these changes came about quickly so plan providers and custodians will need some time to set up their systems to accommodate these changes. Also, these new provisions allow for this increased flexibility – they do not require that employers offer these new features. As an example, even before the first SECURE act, relatively few employers offered Roth components in their 401k plans despite the fact that they were legally permitted.
Usual Caveats
While we appreciate the increased flexibility the SECURE Act 2.0 provides, there are still the usual caveats. Everyone’s situation is unique and should be evaluated individually. Just like this tax law introduced changes, a future tax law could introduce other changes. Any tax law changes mean that your plan should be revisited.
*According to the current tax treatment of qualified withdrawals from Roth accounts.
This article is intended to be educational and thought-provoking rather than financial advice. When we work together in a financial planning engagement, we discuss your unique personal situation and your unique goals. During our financial planning process, we examine these factors and many others to determine appropriate financial strategies for YOU.