On December 29, 2022, the Consolidated Appropriations Act of 2023, containing a section known as SECURE 2.0, became law. It built on the SECURE Act, passed in 2019, that revised existing rules around retirement saving. Some changes included raising the age of RMDs and eliminating age limits for traditional IRA contributions as well as altering how money could be withdrawn from retirement accounts. SECURE 2.0 continues the favorable trend extending RMD dates, which may be especially relevant for higher-net-worth individuals looking to extend the tax-deferral benefits of IRAs. It also contained a host of other, more targeted provisions that might have a significant impact on a more select group of people.
There are a couple of caveats to keep in mind. Not all the provisions in SECURE 2.0 were effective immediately; some aren't scheduled to become effective until 2024 or even beyond. In addition, some of the changes to corporate plans are voluntary on the part of the employer and may require operational updates and clarifications from the IRS before they can be implemented.
You can find a detailed rundown of the highlights of SECURE 2.0, including details on the impact to retirement plans, new options for emergency savings, and more in SECURE 2.0: Rethinking retirement savings. Below, we'll focus on some of the main items that may have the greatest impact on higher-net-worth and other specific groups of investors.
The start age for RMDs from traditional IRAs and employer retirement plans increased to age 73 starting on January 1, 2023, for anyone turning 72 on or after January 1, 2023, and before January 1, 2033, and 75 for anyone that reaches age 74 after December 31, 2032. The table below provides a simplified way to look at it:
|Year of birth||RMD age|
|1950 and earlier||72 (70½ for those that turned 70½ before 2020)|
|1951 – 1959||73|
|1960 or later||75|
While you may not be required to withdraw funds until the RMD start age, it may be advantageous to consider tax-smart strategies such as Roth conversions and tax-bracket management ahead of the RMD start age to better manage your income and potentially reduce your tax liability.
In addition, the penalty for failing to take RMDs decreased to 25% of the RMD amount not taken from 50% previously. The penalty is reduced to 10% for IRA owners if the account owner withdraws the RMD amount previously not taken and submits a corrected tax return in a timely manner.
SECURE 2.0 also had provisions related to retirement plan contributions. In 2023 employers have the option to allow employees to elect to have matching contributions directed to their Roth 401(k), with employer contributions taxable to the employee in the year of the contribution. And starting in 2024, Roth 401(k)s will no longer have RMD requirements, similar to Roth IRAs.
Starting in 2025, catch-up contributions for employer retirement plans are increased to the greater of $10,000 or 50% more than the regular catch-up amount for savers aged 60 to 63, adjusted for inflation. However, starting in 2026, all retirement plan catch-up contributions for participants earning over $145,000 annually (indexed for inflation) must be made on a Roth (after-tax) basis. Also beginning in 2024, catch-up contributions to IRAs, currently only adjusted when rounded to the next $1,000 per year, will be adjusted for inflation each year by rounding down to the nearest $100.
Finally, there are some retirement plan provisions that may not be applicable to highly compensated employees, such as the option for employers to add an emergency savings account linked with their retirement plans starting in 2024, which would enable workers to save up to $2,500 in a Roth account.
For parents and grandparents with school-age children
Currently, a 529 plan withdrawal for anything other than qualified education expenses may be subject to income tax and a 10% penalty. Starting in 2024, 529 account owners can roll over up to an aggregate lifetime limit of $35,000 from a 529 plan into a Roth IRA for the benefit of the 529 plan beneficiary. The rollover is subject to the $6,500 per year rollover limit and must be in the same name as the 529 plan beneficiary, among other limitations. The 529 plan must have been in existence for at least 15 years prior to the rollover and any 529 contributions made within the last 5 years are ineligible.
For caregivers of special needs children or adults
An ABLE account allows families of disabled young people to set aside money for their care without endangering their eligibility for federally funded benefits such as Medicaid or Supplemental Security Income (SSI). Beginning in 2026, the age before which an individual must be disabled in order to establish an ABLE account will change from 26 to 46. This significantly expands the eligibility and applicability of ABLE accounts to those who may develop a disability later in life.
Finally, special needs trusts funded with retirement accounts can take advantage of the "stretch" provisions (the ability to spread distributions over their life expectancy) even if the trust names a charitable organization as a remainder beneficiary.
Expect more guidance to come
This is not an exhaustive list of all the changes and additions brought to pass by SECURE 2.0. We expect more guidance and instructions by regulators as the time approaches for these provisions to become effective. Here at Fidelity, we will continue to monitor the changes brought about by SECURE 2.0. Talk to your financial professional about how the changes might impact your financial plan, now and in future years.
David is responsible for Fidelity's estate and wealth planning activities, including creation of new thought leadership in these areas. He heads a team of professionals that develops and delivers the depth and breadth of Fidelity's wealth planning offering.
Prior to joining Fidelity, David was managing director and head of Insured Solutions for UBS Wealth Management Americas. He served as chief operating officer of UBS Wealth Planning. David first joined UBS as a senior member of UBS Private Wealth Management, and was involved in the creation of that business for the firm. During his tenure with UBS, he also served as the chairman and president of UBS Life Insurance Company USA, Inc.; the chairman and president of UBS Financial Services Insurance Agency, Inc.; and a board member of UBS Trust Company, N.A.
Prior to joining UBS, David was a director in Merrill Lynch's Private Banking & Investment Group. He joined the firm's International Private Banking business in London and was a key member of the firm's Corporate Strategy unit.