Secure Act 2.0 – Digging Deeper
Hopefully you have read or watched our updates on the first seven categories of changes we think are likely to apply to many of our Clients, but Secure Act 2.0 included over 100 changes that could affect you or your loved ones! And while the Secure Act 2.0 items we’ll cover below may apply more narrowly than the first round, we think these are important to know about (just in case they ring a bell now or in the future).
For our deeper dive into the Secure Act 2.0 changes, we’ll cover:
- 529 to Roth IRA Transfers
- Qualified Charitable Distributions (QCDs)
- Exceptions to the 10% Early Withdrawal Penalty for Retirement Accounts
- Changes to Allow Employer Match Contributions for Employees Paying Off Student Loan Debt
Transferring Money from a 529 to a Roth IRA
In our first piece on the Secure Act 2.0, we shared a provision that will allow transfers of funds no longer needed in a 529 to a Roth IRA, but only in specific situations. The requirements are many:
- The 529 must have been open for 15 years;
- The Roth IRA must be in the name of the 529 beneficiary;
- Only contributions that have been in the 529 for more than five years are eligible;
- The maximum annual transfer amount is limited to the annual IRA contribution limit ($6,500 in 2023); and,
- The lifetime maximum amount allowed to be transferred from the 529 to the Roth IRA is $35,000.
This new provision could be a nice way to transfer unneeded funds in a 529 to a Roth IRA in the beneficiary’s name. Roth IRAs are a great component of an overall investment portfolio given the fact that all Roth IRA balances grow tax-free forever. That being said, there are a lot of rules to this new provision and it may be hard to qualify.
One thing that remains to be seen is whether changing the beneficiary of the 529 (something that is very easy to do within immediate family or the same generation) will restart the 15-year clock.
If you give to charity every year, are subject to Required Minimum Distributions (RMDs, which now start later thanks to Secure Act 2.0) and aren’t able to itemize your deductions (due to the higher standard deduction currently in place), QCDs are for you!
QCDs are tax-free distributions from an IRA that count toward satisfying your annual Required Minimum Distribution (RMD). If you have an RMD of $50,000, give $10,000 of that to charity via QCDs, and take the rest of the RMD ($40,000) for yourself, you will satisfy the full $50,000 RMD, but only have taxable income of $40,000 (essentially a $10,000 tax deduction).
If you are able to itemize your deductions and your other deductions are above the standard deduction amount before you give to charity, making contributions in cash or via QCDs will have the same overall effect on reducing your taxable income.
The change? Previously, the amount you could donate via QCDs in any one year was limited to $100,000. For tax years after 2023, this limit will be indexed for inflation.
10% Early Withdrawal Penalty Exceptions
Because retirement accounts (like 401(k)s, 403(b)s, and IRAs) are intended for tax deferral and use in retirement, there are penalties if you withdraw money before a certain age (59.5, usually). For tax deferred accounts, you pay taxes on the withdrawal, but if it’s not a qualified withdrawal you also pay a 10% penalty on top of those taxes (Federally – some states have additional penalties).
That being said, there are instances where you can take early distributions without penalty (like in the case of death or disability or needs for education or medical expenses, when taking distributions from an employer plan if you retire after 55 – or 50 for public safety workers, and when taking substantially equal periodic payments through Section 72(t), among others). This list of exceptions to the 10% penalty continues to be expanded to include the below (which will take effect between now and 2026):
- Increased disaster distributions – this change is retroactive to 1/26/2021 and allows those in Federally declared disaster areas to withdraw up to $22,000 within 180 days of the disaster. These distributions can be spread out as taxable income over three years and may also be paid back fully within three years.
- Distributions by those who are terminally ill or victims of domestic abuse.
- Distributions by any taxpayer with “unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses” needing to withdraw up to $1,000 (allowed once per year maximum). This amount is required to be repaid and the employee cannot take another distribution of this nature until the earlier of: when the prior distribution has been fully repaid; when regular deferrals to the plan total at least as much as the amount of the distribution; or, until three years have passed.
- Distributions by those who retire after age 50 (currently in place for public safety workers) with 25+ years of service for one employer, or who were private-sector fire fighters or state and local corrections officers.
- Distributions for long-term care insurance premiums up to the lesser of 10% of the vested balance of the account or $2,500 per year.
Paying Off Student Loans and Employer Matching Contributions
Employers will now be able to make elective matching contributions to an employee’s retirement account related to amounts that employee pays toward student loan debt starting in 2024. This means that even if the employee can’t afford to pay down the student loan and contribute to their retirement account, they can still benefit from the employer match (free money!). This is extremely attractive to newer entrants to the workforce who may be focused on paying off high student loan balances.
For those looking for in-depth reviews of even more changes, check out some of our favorite resources:
If you want to discuss any of the changes above, in our prior article or recording, or anything else you read, we’re good people to think with. Let’s chat!