Now that the SECURE 2.0 Act has become law, there are a few changes that might influence how you’re thinking about your estate plan and what happens to your retirement assets after you die.
The first iteration of the SECURE Act in 2019 had some drastic changes like raising the age at which retired people have to start taking required minimum distributions (RMDs) from their retirement accounts, removing the age limit for IRA contributions, and eliminating the “stretch” option for the majority of IRA and 401k beneficiaries.
The SECURE 2.0 Act has more subtle changes, which have a greater impact on overall retirement planning that they do on estate planning.
Changes to RMD Age & Penalties
One new provision is that the RMD is being raised again to age 73 (from 72 previously), starting on January 1, 2023. For people who are turning 72 in 2023 and had been planning on taking RMDs this year, they can now delay that if they choose.
For estate planning purposes, there could be implications in the RMD age change if a beneficiary dies — a surviving spouse can elect to use the age of the decedent as the determining factor for taking required distributions. And if the surviving spouse dies before RMDs begin, the surviving spouse’s beneficiaries would be treated as if they were the original beneficiaries.
Another noteworthy change is that the penalty for not taking RMDs will decrease to 25% of the amount that wasn’t taken, down from a 50% penalty previously. For IRA owners, the penalty will be 10% if the account owner withdraws the RMD that they were supposed to take and also files a corrected tax return.
For those who are looking far out into the future, the age for RMDs will increase again to 75 starting in 2033.
Catch-up Contributions
The new law also lets people ages 60 to 63 make catch-up contributions of up to $10,000 to workplace plans, and the amount will be indexed for inflation. The current catch-up cap is $7,500 for anyone 50 or older, so the new provision allows people in a certain age bracket to save a greater amount.
Individuals who make $145,000 or more in the previous calendar year and are age 50 or older must make catch-up contributions with after-tax dollars to a Roth account.
Roth Matches
Another change is that employers will be able to give employees the option of getting vested matching contributions to Roth accounts, which would be an after-tax basis so that future gains would be tax-free.
Automatic Enrollment
The law now requires employers who are starting new 401(k) and 403(b) plans to automatically enroll eligible employees with a beginning contribution rate of at least 3%, which is another way the law is trying to encourage Americans to save for retirement.
Plan Portability
It also lets retirement plan service providers offer automatic portability services to plan sponsors so they can transfer an employee’s low balance retirement accounts when they change jobs in an effort to make it easier for people to continue saving in another retirement plan rather than cashing out low balances when they leave jobs. We hope that this will prevent an accumulation of old IRAs, which are often hard to track in estate planning.
Student Loan Debt Matches
Many younger workers don’t start saving for retirement early in their careers because they’re paying back student loans and can’t afford to also make contributions to retirement accounts. Beginning in 2024, employers can make a “match” on the student loan payments employees make by contributing a payment to a retirement account, which gives employees extra incentive to save for retirement while they’re still paying off college and other educational loans.
529 College Savings Plans
Sometimes beneficiaries don’t end up using all of the funds in a 529 college savings plan, so starting in 2024 the new law allows up to $35,000 over a lifetime to be rolled over directly to a Roth IRA after 15 years. The rollovers can’t exceed the aggregate before the 5-year period that ends on the date of distribution, and the rollover amount counts toward the annual Roth IRA contribution limit.
Roth-Eligible Emergency Savings
Many Americans don’t have enough emergency savings to cover unexpected expenses for things like a major car repair, home maintenance necessity, or medical costs. Starting in 2024, the SECURE Act 2.0 lets people contribute up to $2,500 per year to an emergency savings account that is a designated Roth account that can accept participant contributions for employees. Employees can then make up to four withdrawals in a year without tax implications or penalties. Some plan rules might allow employer matches.
Qualified Charitable Deductions
One final change we want to highlight is that people who are 70½ or older can make a qualified charitable deduction (QCD) one-time gift of up to $50,000 starting in 2023 to a charitable remainder unitrust (CRUT), a charitable remainder annuity trust (CRAT), or a charitable gift annuity (CGA). This change expands the types of charities that receive a QCD (but doesn’t apply to all charities), and the gifts must come from your IRA by the end of the calendar year.
To recap, while the SECURE Act 2.0 doesn’t have massive changes like the first iteration of the law did, there are some important nuances that can influence your approach to estate and retirement planning.
Disclaimer: This content is for informational purposes only, and does not constitute legal advice nor create an attorney-client relationship with Bequest Law.