By Joseph P. Marmorato, CPA  

The SECURE Act 2.0 was signed into law on Dec. 29, 2022. The bill was created to expand and encourage saving for retirement through qualified plans and Individual Retirement Accounts (IRAs). The changes to the retirement system arising from the act will impact retirees and those currently saving for retirement. Some already have gone into effect in 2023, while others are coming at a later time. It’s important to familiarize yourself with the new rules now and understand how the changes in the SECURE Act 2.0 may impact your clients this year and in the future.  

Age Increase for RMDs

Generally, tax-deferred retirement accounts become subject to income taxes only after funds are distributed. To ensure that these accounts are genuinely used for retirement and are not being used as a vehicle to pass on wealth to future generations, the IRS mandates that required minimum distributions (RMDs) be taken annually from certain tax-deferred retirement accounts, such as a traditional IRAs and 401(k)s.

Prior to 2023, those who attained the age of 72 were generally subject to RMD rules. With Americans working and living longer, Congress agreed to raise the RMD age.

So, effective Jan. 1, 2023, individuals born in 1951 through 1959 will be subject to RMD rules in the year they reach 73. The RMD age is increased to 75 for those born in 1960 or later. The extensions provide more planning flexibility and allow retirement funds to continue to grow tax-deferred for an additional few years. However, delaying RMDs too far into the future may result in larger taxable withdrawals over a shorter period of time.

Technically, the first RMD can be delayed until April 1 of the year following the year your client attains their RMD age. However, the second RMD still must be taken no later than Dec. 31 of that same tax year. So, if a client opts for the initial delay, he or she will likely increase their taxable income in that first year.

Clients with Roth IRAs don’t need to worry about RMDs. Roth IRA owners are not required to take annual withdrawals from the account during their lifetime. These accounts generally only become subject to RMD rules after the death of the account owner.  

Delaying the age for which RMDs must begin allows taxpayers to take advantage of other suitable planning strategies during those years. For instance, individuals now have more time to complete Roth conversions to help reduce those future RMDs and allow their dollars to grow tax-free for years to come.  

RMD Penalties Reduced  

If a client fails to take his or her RMD for the year, the IRS will impose a 50% penalty on the amount that should have been distributed. While this penalty may seem excessive, the IRS has a history of waiving it when due to reasonable cause. To waive the penalty, a taxpayer must complete Form 5329 and include details as to why the RMD was missed, along with a statement that a corrective distribution was taken to satisfy the missed RMD.

Effective Jan. 1, 2023, the SECURE Act 2.0 reduces this excise tax penalty from 50% to 25%. The penalty is further reduced to 10% if the missed RMD is corrected in a timely manner, which generally means within two-years.  

One concern among financial experts is that this reduction in the excise tax may encourage the IRS to be more stringent when enforcing this penalty.  

Catch-Up Contribution Changes  

Individuals tend to reach their peak earnings in their 50s. At this age they are more likely to have additional funds to set aside for retirement. The 50-and-older catch-up provision allows individuals to add money to their retirement savings above the standard cap. The catch-up contribution add-on for 2023 is $7,500.  

The SECURE Act 2.0 makes significant changes to how catch-up contributions will work going forward. Starting in 2024, all catch-up contributions for employees with wages higher than $145,000 during the previous year (indexed for inflation) will be required to be made as after-tax catch-up contributions. Under current law, catch-up contributions can be made on a pretax basis, regardless of income, reducing taxable wages. The IRA catch-up contribution of $1,000 will be indexed for inflation on an annual basis. However, this will only occur in $100 increments.

In 2025, the above rules from 2024 will continue to apply. Also, individuals aged 60, 61, 62, and 63 are allowed to make additional catch-up contributions. This allowance limits the catch-up contributions to 150% of the regular catch-up contribution amount for that tax particular year.

Convert 529 Funds to a Roth IRA

To save for college tuition, many of your clients will have invested in 529 plans as a tax-advantaged way to help save for future educational expenses. Contributions to a 529 plan grow free of federal and state income taxes, and payments made from a 529 plan for qualified educational purposes allow any earnings to avoid income tax as well. The SECURE Act 2.0 makes 529 plans even more attractive.  

Under current law, there is no ability to rollover unused 529 funds once an individual graduates from college. These funds would either need to be distributed for noneducational purposes (and be subject to a penalty) or transferred to another relative to be used for qualified educational purposes. Starting in 2024, if a child graduates from college and has unused funds in their 529 plan, the child may be able to rollover some of the remaining funds to a Roth IRA.  

A Roth IRA is an individual retirement account that is funded with after-tax dollars. These accounts grow tax-free and can be withdrawn in retirement without incurring any income taxes on the distributions. There are, however, a few stipulations:

• The account must have been in existence for at least 15 years.
• 529 contributions made within the past five years don’t qualify for rollover.
• The annual rollover is limited to that tax year’s Roth IRA contribution limit.
• The total lifetime rollovers per individual cannot exceed $35,000.

Any rollover to a Roth IRA will count toward the total Roth IRA contribution limit for the year. This means taxpayers cannot double dip by completing a rollover and making a separate Roth contribution in the same tax year. One benefit of completing a rollover versus contributing directly to a Roth IRA is that the rollovers are not subject to income limitations. Currently, taxpayers can only contribute to a Roth IRA if their adjusted gross income (AGI) falls below a certain threshold. Rollovers from a 529 to a Roth IRA are not subject to income limitations.

Student Loans and 401(k) Employer Matching  

Many student loan borrowers struggle to save for retirement because they must prioritize paying off their loans. As a result, these individuals can lose out on years of potential growth in their retirement accounts. The SECURE Act 2.0 includes a provision to help.

Effective Jan. 1, 2024, if an employee is paying off a qualified student loan, those payments are allowed to count toward their 401(k) plan. This phantom contribution would enable employees to receive matching 401(k) contributions from their employer, even though the employee may not be directly funding their own retirement account.

However, it is up to each employer if they want to offer this feature. This provision is not mandatory, so your clients will have to check with their employer to see if this is available to them.

Solo 401(k)s

Solo 401(k) plans are among the most popular retirement plans for sole proprietors and small businesses. One of the most significant benefits to a solo 401(k) is the ability for self-employed individuals to make contributions both as an employee and an employer. This increases retirement savings opportunities above and beyond other retirement plan limitations. For 2023, contributions to a solo 401(k) can be made up to $66,000, or $73,500 if age 50 or older, or 25% of net earnings from self-employment.

One caveat with these plans is that they must generally be established no later than Dec. 31 of the year for which an employee contribution will be made. In many cases, self-employed individuals are not aware of their allowable contribution limits until their tax return has been completed and all expenses and adjustments have been accounted for. At that point, it is often too late to establish a solo 401(k) to take advantage of the maximum contribution limits.  

Effective for plan years beginning Jan. 1, 2023, the SECURE Act 2.0 allows self-employed individuals and small businesses to establish and fully fund a solo 401(k) plan with deferrals for a previous tax year, up until the due date of an individual’s tax return (not including extensions).  

Penalty-Free Emergency Withdrawals  

According to a report by the Federal Reserve, almost half of Americans would struggle to cover an unexpected $400 expense. With so many Americans living paycheck to paycheck, Congress wanted to expand the resources available to taxpayers in the case of an emergency.

Effective for tax years beginning Jan. 1, 2024, any individual with a tax-deferred retirement plan is allowed to take a distribution of up to $1,000, without incurring any penalties. However, this distribution may still be subject to federal and state income taxes.

As retirement accounts are not intended to be used prior to retirement, Congress limited the ability to withdraw funds for emergencies. These emergency withdrawals are limited to one distribution every three years unless a prior distribution is recontributed to the account before then.  

Planning Ahead

The SECURE Act 2.0 includes more than 90 changes aimed at helping retirees and those saving for retirement. These provisions may change the way that your clients save for retirement, so be sure to review the details as you advise them.  

Joseph P. Marmorato, CPA, is a senior financial planner with Domani Wealth, now part of Savant Wealth Management. He can be reached at jmarmorato@savantwealth.com.

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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of the PICPA's officers or members. The information contained herein does not constitute accounting, legal, or professional advice. For actionable advice, you must engage or consult with a qualified professional.