WRITTEN BY: Gideon Drucker, CFP® AIF® ECA
Congress recently rolled out the much anticipated and long-awaited retirement bill known as SECURE Act 2.0.
There is A LOT in this bill so I thought I’d save you all some time and highlight a few of the changes that are most impactful to us….Those that will have the greatest relevance to our mid-career professional clients and their planning long term.
First, a quick note on what’s NOT in the bill (which is actually most immediately important to us all).
SECURE Act 2.0 contains NO provisions that...
- Limit the use of Backdoor Roth or Mega-Backdoor Roth contributions
- Place new limits on who can make Roth conversions (such as limiting Roth conversions if your income is too high)
This is great news! There’s been a lot of talk over the last 12 months that these Roth strategies would be eliminated…so the fact that it remains an effective planning strategy moving forward is a definite win!
Ok, on to what IS included in the SECURE Act 2.0.
Employer Roth 401k/403b Contributions:
Starting immediately, the matching/employer contributions made to your 401k/403b can be directed to your Roth account! (Until this point, all employer contributions automatically went into the Pre-Tax Account). This is fantastic as it gives us the ability to choose how we want to be taxed (now or later) with employer contributions and allows us to be more strategic about our long term tax planning. (Quick caveat: While this is taking effect immediately, I imagine it will take employers quite some time before they’re able to actually have the ability to direct contributions to the Roth from a logistical standpoint…so there’s nothing we can do on this yet.)
529 Plan to Roth IRA Transfers:
Effectively, the IRS now has a clearer answer to the question “What can I do with the 529 account if I don’t use it for my child’s education?” One of the provisions in the Secure Act 2.0, is that starting in 2024, you will be able to move 529 money directly into a Roth IRA. This is an important & wonderful change as added flexibility with tax-free vehicles are always a good thing!
That said, there are some conditions to this that will limit it’s utility.
Here are the limitations of the 529 Plan provision in the SECURE Act 2.0:
- The Roth IRA receiving the funds must be in the name of the beneficiary of the 529 plan.
- The 529 Plan must have been maintained for 15 years or longer.
- Any contributions to the 529 plan within the last 5 years are ineligible to be moved to the Roth IRA
- The annual amount for how much can be moved from a 539 plan to a Roth IRA is the iRA contribution limit for the year (subtracted from any actual IRA/Roth IRA contributions you’ve made)
- The maximum amount that can be moved from a 529 plan to a Roth IRA during an individual’s lifetime is $35,00.
(As of yet, it’s not clear whether changing the beneficiary of the 529 plan will “restart” the 15 year period before you’re able to move it to a Roth IRA. It seems, thus far, like changing the beneficiary won’t change anything though…which would mean that if a parent contributed to a 529 plan for their child and they didn’t need/use the 529 money, the parent can change the beneficiary to themselves and transfer the 529 plan to their own Roth IRA.)
Roth SEP/SIMPLE Contributions:
A big one for the small business owners among you: You will be eligible to make Roth SEP IRA & Roth Simple IRA contributions (in the same way that you’re eligible to make Roth elections if we’ve elected to set up a Solo 401k.) These Roth contributions will be taxed in the current year (like the rest of your income) but now the funds in the account will grow tax free and be distributed tax free just like any other Roth account. Again, more optionality to create tax free income is a great thing!!
Solo 401k Deadline Flexibility:
Solo 401k’s now don’t have to be set up by December 31st of the tax year in question…Instead, they just need to be set up by the tax filing deadline (though not the extension deadline) the following April. (This is already the case for SEP IRA’s.)
Student Loan Payment & Matching 401k’s:
A big one for those of you with student loan payments. Effective for plan years beginning in 2024, employers will be able to amend their 401k plans to allow you to get the matching 401k contribution for any money you put towards your student loans….While it’s up to the employer themselves if they choose to implement this, I suspect many will as a way to attract and retain young talent.
457 Plan Flexibility:
A quick note for our favorite government employees: Starting in 2024, participants in government 557 plans will be able to update their contribution amounts at any given point throughout the year rather than only in the first month of the year (making it the same as 401k’s, 403b’s, and TSP’s all of which we can update whenever we want)
Required Minimum Distribution Updates:
As a brief reminder/explainer, required minimum distributions are the distributions that the government mandates you take from your 401k’s/IRA’s when you reach a certain age. That age has historically been age 70 1/2. In 2019, this was pushed back to age 72 and now it is being pushed back again to age 75 (at least for everyone getting this email who will turn 74 after December 31, 2032.)
Quite simply, this is either a neutral or positive development for all of us because you can still take money out of your retirement accounts at any age after 59 ½ if you want to…but you now have more time until you are OBLIGATED to do so. If you reach retirement and don’t need the money yet, pushing off retirement income for a few extra years will push out your income tax liability, grant you an extra few years of tax-deferred growth, stave off higher Medicare Part b/D Premiums and give us more time to do Roth Conversions & do estate planning.
Roth 401k’s & RMD’s Roth IRA’s already didn’t have RMD rules (you can let your Roth IRA’s grow as long as you want to without having to take distributions) & now Roth 401k, Roth 403(b)’s (aka Roth employer accounts) have this same feature as well.
Again, all of this will take some time for employers/custodians to start incorporating (even the elements starting immediately) but most of these are positive developments that will lead to more flexibility and tax-advantaged saving in the long run…Cool!
As always, let me know if you have any questions on this (or anything else). You can book your Right Fit Call with me here!