So wrapped up inside the $1.7 Trillion year-long federal government funding bill is Secure Act 2.0. The idea behind 2.0 is a collection of rules, provisions and sometimes just promises intended to build upon the retirement-system "improvements" that were passed under the original Secure Act of 2019.

Now the bill itself is 4,100+ pages long and funds the government for the 2023 fiscal year. The bill itself hasn't pass yet, but is expected to by the end of the year and possibly this week.

I am going to focus on the Secure Act 2.0 since it is most relevant to your retirement planning. Now there is nothing in 2.0 quite as game changing as the death of the stretch IRA. We(you, me and IRS) are still dealing from the fall-out of that particular rule change had on inherited IRAs.

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RMDs

So the first big piece, which I have been talking about for a year is the changed to RMDs (Required Minimum Distributions).

• Born in 1950 or earlier.......NO CHANGES

• Born in 1951-1958......RMDs will start at 73

• Born 1959 or later......RMDs will start at 75

Now there is a little complexity to this as someone born in 1959 but we shall wait until the law is actually passed to settle that.

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529 Plans and ROTH IRAs

First big surprise for me was this little insert. 529 plans are college savings plans that grow tax-free and are not taxed on withdrawals as long as they pay for school expenses. However if they were not need or not exhausted then when you took the money back out you had to pay taxes.

This new rule is kind of complicate but essentially starting with contributions made next year, you can moved unused 529 plan assets to a ROTH IRA for the same beneficiary after 15 years. However you can only moved a total of $35,000 and can only move up to the IRA limits for that year.

Example: Next year you put $5,000 in Timmy's 529 Plan when he is 3. Fast forward 15 years, the account is now worth $35,000. Timmy doesn't need the funds for college, you can transfer the $35,000 into a ROTH IRA for Timmy. Now at the current contribution limits of $6,500(2023), it would take you 5+ years (maybe less in the future based on increased contribution limits). So now Timmy is 23 and has $35,000 in his ROTH IRA for retirement.

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401k Rollover Rules

No there are no details on this but Secure Act 2.0 "would try" to modernize the direct rollover process by requiring the Treasury Secretary to standardize the process using standard forms.

If they ever get this done I might go streaking in joy. If you have never been through the process of moving money out of an employer plan (401k rollover, 401k to ira, etc) you are missing out on quite possibly one of the most mind numbing and angering events in the history of the world. Think DMV, cable company, mobile phone company, hr, etc type levels of anger and frustration.

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Retirement plan ROTH accounts

ROTH IRAs don't have RMDs (Required Minimum Distributions) but through some government meddling ROTH 401ks, ROTH 403bs, etc did have RMDs. So this provision removes that from all ROTH accounts.

You can now choose to have your employer make their matching contribution to your ROTH 401k, however you will be subject to income tax on those contributions in the year in which they are made.

The government loves ROTH accounts because that means they get the tax money today. Starting in 2024 if your wages in 2023 were higher than $145,000 than you catch-up contributions have to be made in ROTH 401k.

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Qualified Charitable Distributions (QCDs)

Beginning next year (2023) the new max on QCDs are $200,000 and starting in 2024 there is COLA(cost of living adjustment) added on.

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Catch-Up Contributions

IRA catch-up contributions in 2024 will finally get a COLA instead of the normal $1,000. This $1,000 catch-up limit has been in placed for 15 years, so it will be nice to see that increase over time

401k catch-up contribution for those 60, 61, 62 or 63 to $10,000 or 50% more than the regular catch-up limits starting in 2025. But remember all these contribution must go into your ROTH 401k

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Spousal RMDs

Starting 2024 a surviving spouse can now take RMDs from their deceased spouse account as if they were that deceased spouse. This is an obvious benefit to an older spouse because now they can delay RMDs on the account(if younger spouse wasn't eligible yet) and/or can take the smaller RMD on the younger spouse's account instead of the RMD getting stepped up to their age.

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RMD penalties

The current penalty for missing (or no taking enough of) an RMD is 50% tax on the RMD amount, which is one of the most vicious taxes in the system.

Under Secure Act 2.0 the new penalty will be 25% and if the mistake is corrected in a "timely" manner then it is reduced to 10%.

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Here are some more quick ones

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• Max QLAC purchases increase to $200,000 and the 25% account balance limitation is repealed

• 72T distributions upgrade

• Companies can make 401k matching contributions to student loans

• ETFs can be used in Variable Annuities in 7 years

• Part-time workers will only need 2 consecutive years of 500+ hours to qualify for retirement plan (401k,etc) participation. Previously was 3 years

• Auto-enrollment into 401k plans at 3% will be required starting in 2025

• Saver's Match replacing Saver's Credit

• Some goofy "Start 401k Plan"

• Some Simple IRA Plan changes, that are anything but simple

• Emergency Savings Account with a lot of moving parts

• A ton of way to access your money from your retirement accounts before retirement....that should help in retirement???

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That's it for now. Some of these rules can be strange but remember they are done inside a spending bill and there is an attempt to make the budget look better.

Obviously if/when this passes, I will be updating your plans and making suggestions on how this might change your retirement plans based on your individual situation as it applies.

About the Author

Erik Barnes, CFP®, is a fee-only financial advisor serving clients locally in Naperville, IL, and the surrounding Chicagoland area and throughout the U.S. He is a member of XY Planning Network, a group of fee-only financial advisors who focus on serving those in Gen X and Gen Y, as well as NAPFA, Fee-Only Network, and the Financial Planning Association. Erik has worked in financial planning for 20 years and takes great pride in helping clients on the road to retirement. When he’s not building financial plans, you can find Erik tinkering with his fantasy football roster or checking out one of the many food spots in Chicagoland.