The SECURE Act of 2019 made sweeping changes to the retirement planning landscape—including eliminating the stretch rule for most non-spousal inherited retirement accounts. Arriving nearly three years after its namesake legislation, the SECURE Act 2.0 was signed into law by President Biden on December 29, 2022. This legislation builds on the original SECURE Act and aims to strengthen the nation’s retirement system while enhancing retirement security for individuals. Although not all of the provisions will be effective immediately, here are some key highlights and planning opportunities you may want to consider as part of your wealth management strategy.

Delayed Required Minimum Distributions (RMDs)

The age you must begin taking withdrawals from traditional IRAs and qualified retirement plans has jumped from 72 to 73 for individuals born between 1951 and 1959. Those born in 1960 or later have their starting RMD age delayed even further to age 75. These changes do not apply to individuals who turned age 72 in 2022 or earlier.

An individual’s first RMD can still be delayed until April 1 of the year following their required beginning date. Delaying, however, still requires the second RMD to be taken by December 31 of that same year. All following RMDs must then be withdrawn annually by December 31. Lastly, the SECURE Act 2.0 cuts the penalty for failing to take RMDs in half from 50% to 25% (or 10% if the mistake is corrected in a timely manner).

• Planning Opportunity: The flexibility provided by delayed RMDs creates several options for individuals. These include leaving the funds in a retirement account to grow longer, taking smaller distributions before RMD age to lower the size of future RMD payments, and/or converting assets to a Roth IRA if you are in a lower tax bracket prior to RMD age. Additionally, Roth conversions may help lower future RMD amounts, provide asset tax diversification, and create more favorable tax treatment for assets intended to be passed on to heirs.

Planning Note: For individuals planning to leave pre-tax retirement account assets to their non-eligible designated beneficiaries, delaying RMDs can help limit the income the original owner recognizes during their lifetime. However, in doing so, this may increase the total tax liability paid on the assets if beneficiaries are required to distribute the entire pre-tax retirement account balance by December 31 of the tenth anniversary of the original owner’s death. Withdrawing inherited assets over ten years condenses tax recognition for heirs over a shortened timeframe and potentially increases the total amount of taxes paid overall.

• Planning Opportunity: Qualified charitable distributions (QCDs) are still allowed starting at age 70 ½. Those who are charitably inclined and do not anticipate needing the assets for retirement spending may benefit from starting QCDs at age 70 ½ to reduce their account balance and the size of future RMDs. Working with your tax and financial advisors will help determine if this is a viable strategy.

Employer Roth Contributions

If included as part of an employer’s retirement plan, employees can elect for all or a portion of their employer match and non-elective contributions to be treated as Roth contributions. Before the SECURE Act 2.0, all employer contributions were required to be made on a pre-tax basis. To make the Roth election, the employee must be 100% vested in the plan and the employer Roth contributions will be included in the employee’s taxable income for the year.

• Planning Opportunity: Depending on your financial circumstances and expected tax bracket, it may be advantageous to accumulate Roth assets rather than pre-tax assets. Individuals should discuss their situation with their tax advisor to determine if it would be beneficial to utilize employer Roth contributions to increase their Roth asset base.

Mandatory Roth Catch-Up Contributions

Currently, catch-up contributions can be made on a pre-tax or Roth basis (if allowed by the employer retirement plan). Starting in 2024, employees who earned more than $145K in the prior year (adjusted for inflation) will only be allowed to make Roth catch-up contributions up to the allowable annual maximum. Please note, that employer plans are not required to offer Roth contributions. Plans that don’t have a Roth feature will need to add Roth contributions as part of their plan or eliminate the ability for employees to make catch-up contributions altogether.

• Planning Opportunity: For high-wage earners that are phased out of making Roth IRA contributions directly or have traditional IRA balances that make them ineligible for backdoor Roth IRA contributions, taking advantage of Roth 401(k) contributions—both regular and catch-up—can be a simple and effective way to increase the tax diversification of their asset base and potentially lower the taxes they pay in retirement.

No Roth 401(k) RMDs

Assets held in a Roth-designated account of an employer retirement plan will no longer be subject to RMDs.

• Planning Opportunity: Workers looking to increase their Roth asset exposure for tax diversification purposes may benefit from contributing money to their employer plan’s designated Roth account. If they are happy with their plan’s investment options and fee structure, they can now maintain these accounts without needing to roll them over to a Roth IRA to avoid RMDs.

Surviving Spouse Treated as Employee

Surviving spouses listed as the sole beneficiary of a worker’s employer-sponsored retirement plan can elect to be treated as the employee.

• Planning Opportunity: This election allows the surviving spouse to start RMDs at the worker’s RMD age instead of their own. This is particularly relevant for older surviving spouses who can use the provision to delay RMDs until the year their younger deceased spouse would have been required to start taking distributions.

529 Plan Asset Rollover to a Roth IRA

Tax and penalty-free trustee-to-trustee rollovers will be permitted from a 529 plan to a Roth IRA for the benefit of the named 529 plan beneficiary. To qualify, the 529 plan must be open for at least 15 years and only the contributions and earnings that have been in the account for more than five years are eligible to be transferred to the Roth IRA. Rollovers are restricted to the Roth IRA annual contribution amount with a lifetime maximum of $35,000 per beneficiary. It’s also worth noting that the annual income phaseouts for Roth IRA contributions do not apply to these transfers.

• Planning Opportunity: For unused 529 plan balances that account owners do not plan to use for themselves, their children, or even grandchildren, an amount up to the annual Roth IRA contribution limit could be transferred to a Roth IRA for the named beneficiary over several years (until the $35K limit is reached) to boost assets available for retirement. Additionally, account owners could potentially change the beneficiary on the 529 plan to themselves and make transfers to a Roth IRA for their own benefit.

Increased Catch-Up Retirement Plan Contributions

Workers age 60, 61, 62, and 63 will be able to contribute catch-up contributions in their employer retirement plan (i.e., 401(k), 403(b), etc.) equal to the greater of $10,000 or 150% of the regular contribution amount for 2024. For SIMPLE IRAs, the limit will be increased to the greater of $5,000 or 150% of the allowable regular catch-up contribution in 2025. Additionally, these catch-up contributions will now be indexed for inflation annually starting in 2026.

• Planning Opportunity: Consider contributing the additional annual catch-up maximum amount from ages 60 through 63 to bolster your retirement savings and potentially defer additional wage income to lower your taxes before retirement (if your wages were under $145K in the prior year).

Online “Lost and Found” for Retirement Savings

Employers will be required to provide information to the Department of Labor as part of an online database that will allow workers and their beneficiaries to request contact information of plan administrators to inquire about retirement benefits a worker may have lost track of over the years.

• Planning Opportunity: Prepare a personal financial organizer that lists your assets, liabilities, income sources, the location of important documents, and the contact information of your trusted advisors to make it easier for your loved ones to take over your financial obligations in the event of your incapacitation or death.

The SECURE Act 2.0 provisions are complex and we recommend discussing the provisions with your Aldrich Wealth Advisor to determine if there are any strategies you should undertake now or in the future. As more details surrounding the SECURE Act 2.0 become available, we will continue to provide relevant updates and offer additional planning opportunities to help you achieve your financial and wealth transfer goals.