SECURE Act 2.0, which was recently passed, has been hailed as a way to help Americans get their retirement savings back on track. However, some of the provisions within the Act are particularly beneficial to wealthier clients. Here are four exciting aspects of the Act:
- Rollovers from 529 accounts to Roth IRAs starting in 2024 – More specifically, after 15 years beneficiaries of 529 college savings accounts will be allowed to roll over funds to a Roth IRA account in their name. This will be tax- and penalty-free, subject to certain limitations. These rollovers are subject to a number of limitations, including an aggregate lifetime limit of $35,000. Rollovers also cannot exceed the aggregate before the 5-year period ending on the date of the distribution. In addition, the rollover is treated as a contribution towards the annual Roth IRA contribution limit, currently $6,500. The benefit of this is that parents and grandparents can shift extra dollars to retirement savings if the beneficiary goes to a less expensive school, receives a scholarship or forgoes college altogether.
- SECURE Act 2.0 mandates that certain matching contributions to 401(k), 403(b), and governmental 457(b) plans be made on a Roth basis for employees whose wages exceed $145,000. In addition, catch-up contributions made by these employees to the aforementioned plans must also be made on a Roth basis. This means that higher earners can build up their tax-free accounts more quickly, with both matching and catch-up contributions being made on a Roth basis.
- Expansion of QCDs and charitable contributions – The SECURE 2.0 Act allows for the $100,000 cap on qualified charitable distributions (QCDs) to be adjusted annually for inflation. A one-time QCD of up to $50,000 to charities is also allowed through certain charitable trusts. This new charitable giving opportunity expands the ways in which clients can reduce their tax bill.
- RMD options for surviving spouses grow – Surviving spouses can now be treated as the deceased account owner for RMD purposes, which means they can delay taking RMDs from the inherited account. The surviving spouse will have to elect this treatment, and the election will be irrevocable. This change allows for more flexibility with the starting age for RMDs.
While much of the SECURE Act 2.0 is hyped, these four provisions are legitimately exciting and represent a bold change in the laws that favors wealthier clients.
