Key Takeaways – SECURE Act 2.0

A new retirement bill signed into law late last year could provide additional opportunities to maximize your retirement plans. On December 26th, President Biden signed the Secure Act 2.0 into law. The highly anticipated follow-up to the Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed in 2019, made headlines with news that Americans could delay taking Required Minimum Distributions (RMDs) from their retirement accounts. The bill also reduced the penalty for failing to take RMDs (or taking too little) and increased the amount many Americans could save to their retirement plans. While much of the focus remains on these attention grabbers, we want to discuss some of the lesser-known items that could meaningfully impact your retirement.

Roth-Related Changes

The Secure Act 2.0 includes a significant number of Roth-related changes, but most importantly it does not restrict or eliminate any current Roth strategies. Over the last 18 months, lawmakers discussed the possibility of eliminating backdoor Roth contributions and prohibiting high-income earners from making conversions. However, the new legislation did not change any of these existing strategies and individuals can continue to take advantage of these techniques.

PLANNING TIP: Individuals should review and discuss with their Altair team and CPA whether a Roth conversion and backdoor Roth contributions make sense.

The legislation does address Roth accounts in other ways. Beginning this month, small business owners and self-employed individuals will have two new opportunities for Roth contributions: SEP Roth IRAs and SIMPLE Roth accounts. Previously, SEP and SIMPLE vehicles could only include pre-tax funds. To the extent that a Roth election is made, these contributions will be included in a taxpayer’s income, but will not be subject to any further taxes in the future. Additionally, Section 604 of SECURE Act 2.0 will allow individuals to elect to have employer matching and non-elective contributions deposited into designated Roth accounts (if the employer amends their plan to allow this).

PLANNING TIP: Consider creating a SEP Roth IRA or SIMPLE Roth to accumulate tax-free withdrawals in retirement and forgo the need to convert these dollars to Roth in the future.

Solo 401(k) Changes

Individual business owners and sole proprietors will now have some parity with IRA owners. SECURE Act 2.0 will allow these individuals to make retroactive salary deferrals into a new solo 401(k) up until their tax filing deadline (without extension). This strategy will only be allowed in the first year of a plan.

PLANNING TIP: Individuals with board fee compensation can increase their retirement savings by coupling a solo 401(k) with contributions to a defined benefit plan.  However, if the individual is still working for another company into which he/she is deferring salary, deferrals cannot be duplicated.

529 Plan Changes

Legislators are also sweetening the pot for individuals and families with overfunded 529 plans, within limitations. Beginning in 2024, Section 126 of Secure Act 2.0 will allow individuals to convert a lifetime maximum of $35,000 from a 529 plan to a Roth IRA. To execute the transfer, the 529 plan must have existed for 15 years and the Roth IRA receiving the funds must be in the name of the beneficiary of the 529 plan. Furthermore, annual transfers are limited to the IRA contribution limit and contributions to the 529 plan within the last five years will be ineligible.

PLANNING TIP: Individuals with overfunded 529 plans that do not meet these requirements can consider changing the beneficiary to another family member. (If money is transferred to a family member of a different generation, it could be subject to GST tax.) To avoid GST tax, consider rolling $17,000 per year (annual exclusion amount) to a family member of another generation.

The material shown should not be construed as accounting, legal, or tax advice. All investments are subject to the risk of loss. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, and actual results may differ materially from those anticipated in forward-looking statements. As a practical matter, no entity is able to accurately and consistently predict future market activities. Therefore, actual results may differ materially from those anticipated herein.