SECURE 2.0 was signed into law December 29, 2022.  Employer retirement plan, IRA, and 529 education plan changes are creating more choices for investors.  Integrating these updates into your financial plan may allow you to make better, less reactive decisions overtime.  Here’s are six of my favorite changes that impact investors across all wealth spectrums.

#1. A planned Roth account is a Roth 401k, 403b, 457 employer retirement plan that allows employees to make Roth contributions versus pretax contributions.  Our firm has been big fans of Roth retirement plan investing for well over a decade.  Why?  Tax diversification, investing in various tax environments, not just a pretax environment, supports sustainable spending through retirement.

Investing in a Roth IRA has restrictions, couples who earn more than $218k in 2023 lose the ability to fully fund a Roth IRA.  Not so when choosing Roth retirement contributions via your employer plan.  There are no income limitations, so all employees, regardless of their income, may contribute to the Roth option inside their 401k, 403b, or 457 plan.  With Roth contributions, you prepay the taxes today so that your investments may grow tax deferred and ultimately be tax free when distributed from your Roth IRA.

Ok, back to the recent change.  Starting in 2024, planned Roth accounts will no longer require employees who are actively working in their 70s to remove monies each year from their employer retirement account.  So what?  Many investors are working with employers longer today, some by choice, some by necessity.  This allows regular and catch-up contributions to stay in the Roth retirement plan longer.  Once an employee retires, they may choose to rollover their Roth 401k into their Roth IRA and spend from that account as necessary.

One significant benefit that a Roth IRA has when compared to a pretax IRA is that there are no required annual distributions necessary from the account.  This supplies an investor who embraces ongoing planning the flexibility and spending choices of when to remove Roth dollars when they want.  A pretax IRA will require dollars to be distributed each year, but that is changing too.

#2.  Your birth year will now decide when you MUST remove monies from your pretax IRA.  These guidelines are in place setting the smallest dollar amount that must be removed each year from your IRA so taxes can be collected.  Of course, you may take more if necessary for spending.  This simply pushes back the age when needed distributions must begin, no more age 70 ½ or age 72.

Moving forward your birth year will decide required distributions which will now move to age 73 and then ultimately to age 75.  It may be tempting to keep more invested in your pretax IRA and use Social Security and other investments for essential and discretionary spending in retirement.  One draw back of this approach will be the tax consequences to your loved ones, who may one day, inherit your pretax IRA.

#3.  Starting in 2024, surviving spouses who are listed as beneficiaries on their deceased spouses IRA, will have more planning flexibility.  Currently, a surviving spouse may set up an inherited IRA or rollover the deceased spouse’s IRA into their own IRA account.  Next year there are more ways for a surviving spouse to pick how to treat the deceased spouse’s IRA account.  This includes when to take required distributions and the corresponding taxes that will be due.

Too many scenarios to elaborate on here, the key take away is this.  If your spouse passes away and you inherit their IRA, more planning choices should be explored prior to any dollars leaving the account.

#4. Employer matching contributions to your retirement plan have historically been pretax.  You may make Roth or pretax employee contributions into the plan, but all employer matching has been pretax until now.  Retirement plans will soon offer the possibility for your employer match to be made via a Roth contribution.  What this means for employees is that they may further increase their Roth investments from their employer’s match.  More Roth investments equals more flexibility on building and spending your wealth in retirement.

#5.  One draw back to investing in a 529 education plan has been the “what if” scenarios.  What if my student gets a full scholarship, what if they don’t attend college, or what if there is money left over?  Beginning in 2024, monies in a 529 plan may be directed towards a Roth IRA.  The key is that the beneficiary of the 529 plan must match the Roth IRA owner.  As this continues to be hashed out, it also appears that changing beneficiaries may be possible.

Guidelines state, that the 529 plan must be kept for 15 years prior to making a transfer of dollars from 529 to Roth IRA.  What this mean is it may be valuable for parents and grandparents to hold on to any old 529 plans and not close out the account.  The largest lifetime transfer amount from 529 to Roth IRA is limited to $35k and is NOT indexed for inflation.  That hurts, but it’s better than leaving monies in a 529 plan with no purpose.  There are earned income requirements by beneficiaries and annual IRA contribution limits that will slow the transfer of dollars overtime.

#6.  Beginning in 2025, contributions to employer retirement plans will have “super-sized” catch-up provisions for participants aged 60, 61, 62, and 63.  This increases the traditional catch up contribution by 150% for only those four years.  Both before age 60 and after age 63, catch-up contributions will return to their normal levels.

Qualified plan limits and catch-up contributions continue to increase overtime.  It’s worth noting that all employees may make increased retirement contributions totaling $22,500 in 2023.  Those age 50 in this calendar year may contribute an added $7,500 in catch-up contributions.

Our financial lives continue to evolve as our wealth contracts and expands overtime.  As the complexity level rises AND the costs of being wrong increase, it may be beneficial to speak with a CFP® professional.  As fee-only planners, we work to create a financial plan that reflects your priorities, not ours.  When you’re ready to chat, reach out below.

Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Flowerstone Financial are not affiliated.

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