Financial Planning: Some more changes for retirement accounts

On Dec. 23, 2022, the House of Representatives passed a more than 4,000-page bill called the Consolidated Appropriations Act of 2023. Deep inside the bowels of this beast was the much-anticipated bill known as SECURE Act 2.0. While the vote for the Appropriations bill was split along party lines, the SECURE Act portion was approved by the House last March by a 414-5 margin. Despite their inability to agree on almost anything else, both parties apparently concur that the average American needs help saving for retirement. President Biden signed the bill into law on Dec. 29.

Much in the SECURE Act 2.0 will not make much of a difference to most people. However, a few changes are worth noting, including changes to required minimum distributions, Roth SIMPLE and SEP IRAs, 529 plan transfers to Roth IRAs, and changes in catch-up contributions.

Required Minimum Distributions. The required beginning age for RMDs was set at age 70 ½ by the Tax Reform Act of 1986. Three years ago, the SECURE Act changed it to age 72. The language in the new law is a little more complicated. The law’s text says:

“In the case of an individual who attains age 72 after Dec. 31, 2022, and age 73 before Jan. 1, 2033, the applicable age is 73. …In the case of an individual who attains age 74 after Dec. 31, 2032, the applicable age is 75.”

If you feel a little confused by the dates in that paragraph, you are not alone. Apparently, the drafters of the legislation were, too. One commentator noted that under this language, a person born in 1959 will turn 72 before Jan.1, 2033, but will also

turn 74 after Dec. 31, 2032. In other words, a person born in 1959 would have two required beginning dates — one at age 73 and another at age 75. That obviously doesn’t make sense and will need to be corrected. In the meantime, you can assume that if you were born in the years 1951 to 1959, your RMDs will begin at age 73 and if you were born in 1960 or later, your RMDs will begin at age 75. To be clear, if you were required to start RMDs in 2022 or before, your RMDs continue as scheduled. However, if you turn 72 in 2023, your RMDs will not begin until you turn 73 in 2024.

Roth SIMPLE and SEP IRAS. In the past, SIMPLE and SEP IRAs could only accept pre-tax contributions. Under Secure Act 2.0, individuals can now make Roth contributions to these plans. If you have a SIMPLE or SEP, you should contact your administrator to see when a Roth option will be available. However, as with all Roth decisions, you would do well to consult with your financial advisors before opting to go with a Roth. There are some circumstances where a Roth makes sense, but in my experience, the traditional form of a retirement plan is usually a better fit for most people.

529 to Roth IRA transfers. The new law allows for $35,000 worth of 529 plan balances to be transferred into a Roth IRA. This provision has a lifetime limit of $35,000 per individual and the amount that can be transferred in any one year is subject to the recipient’s overall IRA contribution limits. In addition, the 529 plan account needs to be at least 15 years old and any contribution made to the account in the last five years is ineligible to transfer.

Catch-up contributions. Since 2006, IRA holders have been able to make catch-up contributions of $1,000 to their IRAs each year once they reach age 50. Under the new law, catch-up provisions will be inflation-adjusted in $100 increments starting in 2024. Starting in 2025, participants in 401(k) plans and the like, who are ages 60, 61, 62, and 63 will have catch-up contribution limits increased to the greater of $10,000 or 150% of their regular catch up contribution amount for such plans in 2024.

Steven C. Merrell is a partner at Monterey Private Wealth Inc., an independent wealth management firm in Monterey. He welcomes questions you may have concerning investments, retirement, or estate planning. Send your questions to Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email [email protected].