SECURE Act 2.0

On December 23rd of last year, Congress passed the Consolidated Appropriations Act of 2023, a spending bill that included the anticipated SECURE Act 2.0. Rather than sending you a copy of the approximate 4,000-page bill, we decided to highlight some key points that may affect you as our financial planning clients.

Required Minimum Distribution (RMD) Age changes:

The bill increased the RMD age from 72 to 73 for those turning age 73 this year. Note: This change does NOT affect those who have already begun RMDs. If you began RMDs last year or before, you will continue these distributions. For those born between 1951 and 1959, the RMD age is 73. For those born in 1960 or later, the RMD age is 75.

The bill also decreased the penalty for missed RMDs from 50% to 25%. If the missed RMD is corrected, the penalty is reduced to 10%.

*Planning tip Qualified Charitable Distributions (QCD): The law still allows for QCDs beginning at age 70 ½. Even if you are not required to take distributions yet, you can still donate from your IRA to a qualified charity beginning at age 70 ½. This strategy has the potential to be a more tax-friendly way to give charitably in retirement. Reach out to your Rivertree advisor if you have questions about the QCD.

Roth IRA and retirement plan updates:

The bill includes some major updates to retirement plan Roth provisions, all that appear to be positive changes. The major Roth 401k plan change is that beginning in year 2024, RMDs are no longer required just as is the case for Roth IRAs. Another positive update is that Roth SIMPLE and SEP IRAs are now allowed. Whereas previously, these two plans only allowed for pre-tax contributions.

Great news: The “backdoor” Roth IRA strategy has not changed. Discuss with your advisor if the backdoor Roth IRA strategy makes sense for your financial plan. 

529-to-Roth IRA transfers allowed after 15 years:

One of the most common questions/concerns we receive as advisors about 529 plans is this: “What happens if our child/grandchild has a surplus of unused 529 funds?” There have been several good solutions to address this concern. Now, we have another great option – a rollover to a Roth IRA for the beneficiary. Some strict requirements are involved to implement this strategy, such as:

  • The Roth IRA receiving the funds must be in the name of the beneficiary of the 529 plan.

  • The 529 plan must be maintained for 15 years or longer.

  • Contributions within the last 5 years plus earnings on those contributions are ineligible to be moved to a Roth IRA.

  • The annual limit is the IRA contribution limit for that year less any Roth IRA contributions already made for the beneficiary. For example, if the beneficiary contributed $2,000 this year due to earned income from work and he/she had unused 529 funds (and met all other requirements), the beneficiary could rollover $4,500 from the 529 to the Roth IRA ($6,500 limit less $2,000 contribution).

  • The maximum amount that can be rolled-over from the 529 to the Roth IRA during the beneficiary’s lifetime is $35,000.

  • At first glance it does appear that the beneficiary will need earned income to make these rollovers just as income is required to make Roth IRA contributions. Reach out to us for clarity on this question.

The list of planning opportunities from Secure Act 2.0 could go on. However, we may have already put some of you to sleep. We have highlighted some of the major changes. As always, please reach out to us with any questions concerning your personal financial plan.

Much credit for this update belongs to Jeffrey Levine, CPA from the Michael Kitces team. See the full article here.

*For financial planning clients of Rivertree Financial Planning: Please contact us as soon as possible if you have had any changes in circumstances, objectives, goals or risk tolerance.

**Indices are unmanaged and do not incur fees. One cannot directly invest in an index.  Past performance does not guarantee future results. Diversification does not guarantee investment returns and does not eliminate the risk of loss.

*** This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice.  The services of an appropriate professional should be sought regarding your individual situation.

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