SECURE Act 2.0 Tax Planning Opportunities | Roth IRA Conversions

Secure Act 2.0 Presents Retirement and Tax Planning Opportunities

Published on by Cheryl Ganim in Tax Services

Secure Act 2.0 Presents Retirement and Tax Planning Opportunities

The Secure Act 2.0 includes several changes that offer opportunities for retirement and tax planning. Signed into law on December 29, 2022, as part of the $1.7 trillion omnibus spending deal, the Consolidated Appropriations Act, 2023, P.L. 117-328. Secure Act 2.0 has over 90 new retirement plan provisions.

Convert a 529 plan to Roth IRA

Secure Act 2.0 allows tax-free, penalty-free rollovers from IRC Section 529 accounts to a beneficiary’s Roth individual retirement account (IRA), effective 2024. The 529 plan must have been open for at least 15 years. The lifetime limit for the rollover is $35,000 per beneficiary, and the Roth IRA must be in the name of the beneficiary of the 529 plan.

Contributions made within the past 5 years (& earnings on those contributions) are ineligible to be moved into a Roth IRA. (The eligible rollover amount must have been in the 529 account for at least 5 years). The annual limit on the rollover is the IRA contribution limit for the year, less any other IRA contributions.

The current IRA contribution limit is $6,500. If the beneficiary made any IRA contributions, the rollover amount must be reduced by those contributions. The rollover must be a plan-to-plan or trustee-to-trustee rollover. This means you cannot take a check from the 529 plan to deposit into the IRA. The beneficiary is not subject to income limitations to contribute to a Roth IRA.

For example, even if the beneficiary’s income is over $153,000 (if single), the beneficiary can make a rollover from the 529 plan to the Roth IRA. The beneficiary must have earned income, and the amount that can be rolled over is the lesser of earned income or the IRA contribution limit. Therefore, if the beneficiary is not working, no rollover is available because there is no earned income. This may be advantageous for beneficiaries with 529 balances remaining after completing school.

Required Minimum Distribution (RMD) age increases

Required withdrawals from amounts that have accumulated tax-free in employer-sponsored retirement accounts (RMDs) must begin in the year the individual reaches a certain age (generally age 72).

Starting in 2023, the age for RMDs will increase from 72 to 73. The RMD age will increase again in 2033 to 75. The existing penalty for failing to take a required minimum distribution is 50%.

Starting in 2023, this penalty will be reduced to 25%. If the individual corrects the failure in a timely manner, the tax on the penalty is reduced further to 10%.

Withdrawals from IRA accounts, whether RMDs or larger sums, can result in additional income taxes, subject more Social Security benefits to tax, or increase Medicare Part B and D premiums.

Beginning in 2024, RMDs will no longer be required from Roth accounts in employer retirement plans. Your advisory can assist you in planning for your RMDs if you are age 72 or older.

Qualified charitable distributions

Although the SECURE Act 2.0 delays the beginning age for RMDs, Qualified Charitable Distributions (QCDs) still can begin at age 70½. Currently, a donor 70½ years or older may give $100,000 per year to qualifying charities from the donor’s IRA.

The IRA assets go directly to charity, so donors do not report QCDs as taxable income and do not owe any taxes on the QCD, even if they do not itemize deductions. The distribution can also satisfy the donor’s required minimum distribution.

An RMD is not recognized as income to the donor but does not qualify for a charitable contribution deduction under IRC Section 170. Changes made under the SECURE Act 2.0 annually index the $100,000 cap on this QCD for inflation for tax years after 2023.

Catch-up contribution limits and Roth contributions

The Act increases catch-up contributions limits for individuals aged 60-63 by 50%, effective for tax years after December 31, 2024. Individuals ages 60 through 63 years old will be able to make catch-up contributions of up to $10,000 annually to a workplace plan, and that amount will be indexed to inflation.

The catch-up amount for people age 50 and older in 2023 is currently $7,500. For taxable years beginning after December 31, 2024, the catch-up limit increased for individuals aged 60-63 to the greater of:

  1. $10,000, or;
  2. 150% of the regular age 50 catch-up amount for 2024, indexed for inflation.

For taxable years beginning after December 31, 2024, increased catch-ups must be Roth contributions if the participant earned at least $145,000 in the prior year.

This means the Roth catch-up contributions will be made with after-tax dollars, and withdrawals in retirement will be tax-free. The Roth component will need to be tracked separately from pre-tax contributions.

Go beyond the numbers

If you’ve got questions about the new provision and how it might affect your planning and your overall tax situation, contact us for a free consultation with one of our tax pros. As always, the Barnes Dennig team is here to help. Get in touch, and let’s start building a brighter future, together.


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