Secure Act 2.0 Changes for Advisors To Evaluate

The recently passed $1.7 trillion omnibus spending package – legislation that some experts argue is a disaster when it comes to containing inflation – isn’t all bad news.

In fact, for advisors and clients alike, the 4,000-plus page novel contains some goodies that are worth paying attention over the near-term, including the SECURE Act 2.0. As its name implies, SECURE Act 2.0 builds on the SECURE Act, which was approved by Congress in 2019.

The new version contains plenty of topics relevant to advisors and clients, including fresh guidelines on required minimum distributions, or RMDs; Roth conversions and distribution alterations, emergency withdrawal relief and more.

Here’s a look at some of the marquee changes in the SECURE Act 2.0 that advisors can discuss with clients.

Roth Ira Updates, RMDs Are Gone, Sort Of

The Roth IRA is one of the most popular retirement accounts and the SECURE Act 2.0 contains some updates that are highly relevant to clients, indicating there’s opportunity for advisors to initiate value-add interactions.

“The new rules allow IRA catch-up contributions to automatically adjust for inflation, but not until 2024. The adjustments will be in increments of $100, so the 2024 limit will likely be $1,200 rather than the current $1,000,” notes Mornngstar’s Sheryl Rowling. “Beginning in 2025, the catch-up contributions of employer retirement plans such as 401(k)s and 403(b)s will increase depending on the participant’s age. For participants of ages 60 to 63, the catch-up contribution limit will be increased to the greater of $10,000 or 150% of the regular catch-up contribution amount (indexed for inflation).”

Another notable element in the legislation is that Roth plan accounts will no longer be subject to RMDs, meaning qualified distributions could become more compelling for a broader array of clients.

“Under previous law, qualified plan Roth accounts (such as 401(k)s and 403(b)s) were subject to RMDs—even though Roth IRAs were not. Beginning in 2024, qualified Roth accounts will not be subject to RMDs,” adds Rowling.

Speaking of RMDs, there are new rules governing when investors can take those distributions from converted Roth accounts.

“Under the new rules, depending on the taxpayer’s age, RMDs will not be required until age 75, at the latest. For taxpayers who attain age 72 after 2022 and age 73 before 2033, the RMD age will be 73. For taxpayers who attain age 74 after 2032, the RMD age will be 75,” according to Rowling.

529 Conversions, Too

The SECURE Act 2.0 also has some provisions for folks that saved for their kids’ college educations via 529 plans and now have some leftover capital in those accounts.

Under the new guidelines, clients can convert that excess into an IRA as long as the IRA is in the name of the 529 beneficiary and as long as the 529 plan is at least 15 years old. The maximum amount that can be converted to a Roth IRA from a 529 account is $35,000 over the life of the recipient.

“This opportunity can be very limited in most cases. For example, assume your client’s child, who is now an adult, is the beneficiary of a 529 account with funds in excess of what was needed for education and the account has been in existence for more than 15 years,” concludes Rowling. “Assume the beneficiary makes a Roth IRA contribution of $2,000 in 2024. If the IRA contribution limit in 2024 is $6,500, a maximum of $4,500 can be converted from the 529 account to the Roth. This can be continued in future years up to a maximum conversion amount of $35,000.”

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