SECURE ACT 2.0 – 4 THINGS YOU NEED TO KNOW NOW

In December 2019, the original SECURE Act was passed, bringing significant changes to the post-death tax treatment of qualified retirement accounts. Now, in its new Final Regulations of the SECURE Act 2.0 issued on July 18, 2024, there are more than 90 provisions that cover all types of retirement savings plans. Some requirements are in place as of last year, while other provisions become effective this year, in 2024, or later years, i.e., 2025, 2026, or 2027. 

Here are some things you need to be aware of now to help ensure your clients are best positioned to take advantage of these changes. 

1) RMD Age 

A required minimum distribution is money that must be taken out of a retirement savings plan each year once the account holder reaches a certain age. RMDs are generally designed to ensure that retirees gradually draw down their retirement savings and pay taxes on the funds as they withdraw them. 

• Under the law before SECURE 2.0, you generally had to take RMDs from your retirement plan beginning at age 72. SECURE 2.0 increased the required minimum distribution age to 73 as of January 1, 2023. However, if you turned 72 in 2022, you had to take your first RMD by April 1, 2023. The bump to age 73 is one of several new RMD rules. However, The RMD age will eventually move to 75. 

• Missing an RMD or failing to take the appropriate distribution amount incurs a 25% IRS penalty — down from 50% due to SECURE 2.0 RMD penalty changes — added to the amount that should have been withdrawn. However, the penalty can be as low as 10%.

2) RMDs and Roth 401(k)s  

Beginning in 2024, the SECURE 2.0 Act eliminates RMDs for qualified employer Roth 401(k) plan accounts. Previously, there was a difference in the rules that applied to Roth 401(k) accounts in employer plans versus Roth IRAs (only Roth IRAs were not subject to required minimum distributions). 

As a result, it is important to consider how SECURE 2.0 RMD changes could impact your clients and help them plan accordingly. 

• Emergency expense distributions. Beginning in 2024, under the SECURE 2.0 Act, clients are allowed to take an early “emergency” distribution from a retirement account to cover unforeseeable or immediate financial needs. That emergency distribution of up to $1,000 can only be taken once during the year and won’t be subject to the usual additional 10% tax that applies to early distributions. 

Note: If clients choose not to repay the distribution within a certain time, they won’t be allowed to take other emergency distributions for three years. 

• Higher catch-up contribution limit. Right now, if clients are 50 or older, they can make catch-up contributions to retirement plans, up to certain limits. This option allows clients to increase their retirement savings more quickly in the years leading up to retirement.  

Beginning in 2025, the SECURE Act increases these catch-up limits to the greater of $10,000 or 50% more than the regular catch-up amount if a client is 60, 61, 62, or 63 years old. After 2025, those amounts will be indexed for inflation. 

3) 529 Plan Rollovers 

Beginning in 2024, SECURE 2.0 changes 529 plan rules. Named after Section 529 of the Internal Revenue Code, these plans allow individuals to set aside money for a beneficiary’s educational costs, typically for college but also potentially for K-12 education in some cases. The funds in a 529 plan grow tax-free, and withdrawals are also tax-free when used for qualified educational expenses. 

• States or educational institutions usually sponsor these plans and offer various investment options. While the funds are primarily used for the account beneficiary, the account owner maintains control over the funds and can change beneficiaries if needed. 
• In limited circumstances (there are number requirements that must be met, including that the Roth IRA account must be in the name of the 529 plan beneficiary), clients may be able to rollover a 529 plan that they’ve maintained for at least 15 years to a Roth IRA. 

• Annual limits for the rollover would have to be within the annual contribution limit and there will be a $35,000 lifetime limit on what can be rolled to the Roth IRA.  

4) Inherited IRAs  

The final regulations to the SECURE Act on July 18, 2024, include some clarifications and changes specifically affecting Inherited IRAs. Below is a summary of a few significant changes that may impact your clients’ retirement and estate planning:  

• Roth Accounts.  The final regulations provide that amounts held in Roth IRAs are excluded when calculating RMDs during the account owner’s lifetime. 
• Changes to Required Beginning Date (RBD). SECURE 2.0 adjusts the RBD for account owners. After 2022, the RBD will rise from 72 to 73 years old. After 2032, the RBD will rise to age 75. This provides more time for individuals to defer taking required minimum distributions (RMDs), which allows retirement assets to grow for a longer period. 
• 10-Year Rule for Designated Beneficiaries (DBs) when Account Owner Dies on or after Required Beginning Date (RBD). If the account owner dies on or after the RBD, a designated beneficiary must take distributions over the 10-year period. Beneficiaries who are not “Eligible Designated Beneficiaries” (EDBs) must deplete the retirement account by December 31 of the tenth year after the account owner dies. Beneficiaries who are EDBs must continue taking annual payments until the beneficiary is no longer an EDB (for example after the child of the account owner reaches the age of majority), after which, final distribution must occur within the following 10 years. 

• 10-Year Rule for Designated Beneficiaries (DBs) when Account Owner Dies before RBD. If the accountholder died before his or her RBD (or if the accountholder’s entire plan balance was in a designated Roth account), the designated beneficiary does not need to take RMDs and may wait until the 10th year to withdraw the funds. 

• Special Treatment for Spouses. Surviving spouses can roll over a retirement plan or take distributions based on their life expectancy. Additionally, a surviving spouse will also have the option to step into the shoes of their deceased spouse, which will allow them to delay taking required minimum distributions until the date their deceased spouse would have reached the RBD and have the surviving spouse’s beneficiaries treated as the deceased spouse’s beneficiaries if the surviving spouse passes away before distributions begin. 

• Expanded Definition of “Child” for Eligible Designated Beneficiaries. The final regulations expand the definition of “child” to include stepchildren and eligible foster children. This change ensures broader protection for minors under the EDB provisions, aligning more families with beneficial distribution rules. 

As a whole, these regulations introduce significantly more complexity to the process of tax planning around retirement accounts, particularly after the death of the account’s original owner. This is your opportunity to meet with clients to review these new rules and their planning implications for various circumstances.  

Financial professionals should act now to: 

1. Review Client Plans: Reassess retirement strategies to align with updated RMD ages and distribution rules. 
2. Educate Clients: Inform them about new savings opportunities, like 529 plan rollovers and emergency distributions. 
3. Optimize Tax Strategies: Leverage the extended timelines and Roth account benefits for tax efficiency. 
4. Engage with Beneficiaries: Update estate plans to reflect expanded definitions and distribution options for inherited IRAs. 

Staying proactive helps to ensure clients can fully benefit from these changes while securing their financial future. 

Questions about this topic or any other compliance issues? The professionals at DMI stand ready to assist you with all aspects of your business, including compliance. Part of DMI’s commitment to your success includes a partnership with Summit Compliance Group, LLC, a leading provider of compliance services for the financial services industry. 

Editorial Note: Please note that information in this blog is for educational purposes only and is not meant to address all aspects of the SECURE Act, nor is it to be construed as investment, tax or legal advice.