Congratulations – you survived 2022! In a year characterized by uncooperative financial markets, geopolitical tensions, and a midterm election, we can all look forward to 2023 in hopes it will usher in more positivity than its predecessor.
As luck would have it, in the waning hours of 2022 our friends in Congress delivered a “gift” to kick-off the new year via SECURE Act 2.0. If you just read “Congress” and immediately glazed over or felt your blood pressure increase, please hang with me! Our team has reviewed the key aspects of this new legislation and highlighted some of the most important elements below to keep you informed about how it might affect your retirement plan and savings strategies.
Changes to the Required Minimum Distribution Age
Beginning in 2023, the new Required Minimum Distribution (“RMD”) age is 73. That is a one-year delay from the prior RMD age of 72. So, what’s the big deal if it’s just one year? That’s one additional year for your investments to grow tax deferred. Keep in mind, that also compresses your timeline for withdrawing, which may lead to larger tax bills in the future (cue the tax planning!). If you already reached RMD age by the end of 2022, then this change does not impact you. For those with longer investment time horizons, SECURE Act 2.0 also delays the RMD age further to 75 in 2033.
Roth matching
SECURE Act 2.0 will allow employers to make Roth contributions to the employee’s Roth 401(k). This is a big change from prior rules because previously, all employer contributions were considered traditional, and thus fully taxed when withdrawn! This change may allow employees to increase their Roth savings in their workplace plan, which is a great benefit in retirement. Keep in mind that since these employer contributions get Roth treatment, the contributions will be included in the employee’s taxable income for the year. This increases taxes today for the tax-free Roth benefit in the future. At Stonegate, we are proponents of diversifying not only your portfolio, but also your retirement savings buckets among (1) traditional, (2) Roth, and (3) taxable investments. If you’re fortunate enough to enjoy the Roth 401(k) benefit through your employer, this change provides more opportunities to fill your Roth bucket!
529 to Roth transfers
Beginning in 2024, there will be opportunities to transfer 529 plan assets into a Roth IRA. While this is a big change to 529 rules, it comes with plenty of strings attached. For example, the Roth IRA must be in the name of the beneficiary (typically the younger student), NOT the owner. Also, the 529 plan must have been established for at least 15 years. And finally, the maximum lifetime transfer is $35,000, which is further restricted by annual Roth limits. There are plenty of other handcuffs here, but at least these changes might allow some unused 529 dollars to be invested in a very tax-friendly way, and without penalty!
SECURE Act 2.0 is over 300 pages of legislation, buried within a 4,000-page bill (anyone smell pork?)! There are plenty of other important pieces to this new law, including: (1) a reduction in the RMD penalty from 50% to 25% of the undistributed RMD, (2) new exceptions to the 10% early withdrawal penalty for retirement accounts, and (3) bigger, better catchups for those over age 50. At Stonegate, we are here to help clients identify which aspects matter to them and their future. That’s one way that we can help them architect a strong financial plan that avoids pitfalls and takes advantage of legislative changes coming out of Washington. If any of these topics are of interest to you, please don’t hesitate to call your Stonegate team today!
Any opinions are those of Trey Stilley and Stonegate Financial are not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors we are not qualified to render advice on tax or legal matters. Raymond James does not provide tax or legal advice. Please consult your own legal or tax professional for more detailed information on tax issues and advice as they relate to your specific situation.