A new tax law – Secure Act 2.0 has opportunities and traps.
The new law was enacted on December 23, 2022, and is known as part two of a law enacted in 2018 – the SECURE Act (Setting Every Community Up for Retirement Enhancement). The new law known as the EARN (Enhancing American Retirement Now) aka SECURE act 2.0 has unique benefits and pitfalls to avoid. We begin with some of the major benefits to keep in mind.
1) The mandatory age to take the traditional IRA Required Minimum Distributions (RMD) has changed for the benefit of IRA account holders. In the years 2023 to 2032, people turning 73 must start taking RMDs; the old law required RMDs to begin at age 72. The federal government mandates RMDs which represent the annual minimum amount of distributions to the IRA owner. In addition, in the year 2033 retirees 75 or older must begin taking their RMDs.
2) Emergency expense withdrawals are now available for certain IRAs. The allowed withdrawal amount is limited to $1,000 in every 3-year period unless amounts are re-contributed. This change is effective in 2024.
3) 529 plan rollovers are now allowed to ROTH IRAs beginning 2024. Originally, 529 plans were designed to assist with higher education costs. 529 plan contributions are nondeductible, and funds grow tax-free; later the funds can be used tax-free for higher educational expenses such as tuition, room and board. The rollover to a ROTH IRA from a 529 plan has requirements.
The 529 plan must be in effect for 15 years before the rollover; the contributions to the 529 must have been made 5 years previously to qualify; the rollover must be a direct trustee-to-trustee transfer to the educational institution; and the rollover is limited to $6,000 per year adjusted for inflation. Income limits do not apply, and the lifetime limit is $35,000.
As with many IRS regulations, there are traps to avoid. Following are two of the potential pitfalls.
a) Effective 2025, the law allows for higher IRA retirement plan catchup contributions. The annual limit will increase to $10,000 for retirees aged 60 to 63. Catchup contributions are additional contributions for people over age 60 in this ruling. Potential traps include only retirees aged 60 to 63 qualify, and the contributions must be ROTH contributions. There is no tax deduction for ROTH contributions. In effect, this is a revenue increase for the government with the “ROTH only” requirement.
b) Beginning in 2023, SIMPLE IRAs and SEP IRAs (Simplified Employer Plans) are eligible to be classified as ROTH IRAs. This may not benefit taxpayers if their tax rate remains the same or decreases over the long-term. ROTH IRAs should be considered with each taxpayer’s financial situation and determine the long-term tax benefits.
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This article is for informational purposes only and is not to be construed as investment or tax advice. Readers are strongly advised to consult with their professional advisors before attempting to employ any concepts stated herein.