Overview of the New Laws Impacting IRAs and Your Employer Retirement Plan

Sweeping changes for retirement plans were signed into law on December 29, 2022 as part of the Consolidated Appropriations Act.  The retirement plan provisions are known as “SECURE 2.0” and it builds upon the foundation laid by the 2019 “Setting Every Community Up for Retirement Enhancement” Act (now referred to as “SECURE 1.0”). SECURE 2.0 contains a whopping 92 provisions-don’t worry we will not cover them all in this article.   Many of the provisions mostly impact administrators of employer sponsored retirement programs. We wrote a separate blog geared towards that audience which you can access here. 

Below we break down what we believe to be the most important provisions based on whether you are retired or currently working.   We will be working with our clients to help them comply and leverage these provisions as opportunities are available.   

Changes primarily impacting retirees’ individual retirement accounts (ie. IRAs and ROTH IRAs) 

• Starting in 2023, Required Minimum Distributions (RMDs) are pushed back to age 73 and then to age 75 starting in 2033. 

This change builds off the changes from SECURE 1.0 that pushed the RMD age to 72.   Below is a breakdown of your RMD age based on year of birth.   This is helpful in retirement income and tax planning.  

• Beginning in 2024 the maximum annual Qualified Chartiable Distribution (QCD) amount will be indexed to inflation.  

The current limit of $100,000 has been in place since QCDs were introduced in 2006. 

FYI: some additional changes were made to QCD rules that we do not believe present an opportunity to most people and are beyond the scope of this article.  

Changes impacting employer sponsored retirement accounts for those actively working 

Lots of changes are in store that could impact your employer retirement plan.  Many of the changes deal with increasing the use of ROTH accounts.  Why?  Because ROTH accounts raise revenue (tax $) now.  So what happens to government tax revenue 10, 20, 30 years down the road when all this ROTH money comes out tax-free?   Hmmm...

Nevertheless, here is a run down of some of the most important provisions potentially impacting your employer retirement account: 

• Your employer retirement plan contributions can now be made to ROTH accounts 

Until now all employer contributions (ie. matching) made to your retirement accounts were required to be made pre-tax even if you chose to have your deferrals made to a ROTH account.  Beginning this year employers can make contributions to your ROTH account if you so choose.  The employer contributions will be included in your (the employee) taxable income for the year but will allow you to further fund a tax free nest egg if you so choose.  

FYI:   It will take a while for retirement plan and payroll providers to update their systems to accommodate this so don’t expect this to be actionable immediately.   Additionally, the law says that the employer contributions to ROTH account must be fully vested, SO if your company has a vesting schedule on their contributions then this feature will likely not be available to you.  

• Beginning in 2024, high wage earners (> $145k) will be required to make catch-up contributions to a ROTH account 

Beginning in 2024, if you personally made over $145,000 in the prior year (from your current employer) then any catch-up contributions you make to your company’s retirement plan will be required to be made to a ROTH account.   This means catch-up contributions will no longer be pre-tax or tax deductible at the time you save.  

Update (8/25/2023): Implementation of this provision was delayed until 2026.

• Beginning in 2025, while you are age 60, 61, 62 or 63 you will have a boost in your allowed catch-up contributions to employer retirement plans.

This is weird, but a benefit for savers, ONLY those people ages 60, 61, 62 or 63 will be eligible to make a larger catch-up contribution in an amount equal to 150% of the normal catch-up contribution amount.     

FYI: the 2023 catch-up amount is $10,000 so presumably the amount will be at least $11,250 in 2025 when effective.  

• No more RMD requirements for plan ROTH accounts

One of the many benefits of ROTH IRAs have been that you are not required to take RMDs from them during your lifetime allowing you to further grow a tax free pot of money for your heirs.  Prior to SECURE 2.0, ROTH accounts in retirement plans were subject to RMD requirements which made it a no-brainer to roll your ROTH accounts to a ROTH IRA later in life.  Beginning in 2024, it won’t be as much of a no-brainer. 

Other changes worth noting:  

• Beginning in 2024, you may be able to move some money from 529 plans to a ROTH IRA for the 529 beneficiary.

A lot of people are worried about what to do with leftover money in 529 accounts.  This provision helps to address that however there are lot of limitations associated with it: the 529 plan must have been maintained for 15 years, you can’t convert any of the 529 contributions from the prior 5 years, each year you can only convert an amount equal to that year's ROTH contributions limit (currently $6k) and the most you can transfer over a lifetime is $35,000 

 FYI: We can already think of a number of strategies to help leverage this provision to expand the $35,000.  

• There are a number of provisions that expand the ability to take distributions from retirement prior to age 59 ½ without having to pay the 10% early withdrawal penalty.  
• Beginning in 2027, disabled first responders who receive disability and retirement pensions will be able to continue to exclude their income from tax after reaching retirement age.  

We welcome any conversations to answer questions and discuss how these changes might impact you.   You can reach me at cthomas@fortywadvisors.com or 301.245.3587