On December 29th, 2022, the SECURE 2.0 ACT was signed into law. It includes a few provisions that are beneficial for taxpayers. I have outlined three of them here:

New IRA Required Minimum Distribution (RMD) Age

The act raises the age at which RMDs are required to age 73 (previously 72).  For taxpayers who were born in 1960 or later, the RMD age is increased to 75. 

The significance: Retired taxpayers who have not yet reached RMD age often have low taxable income. This can be true even for taxpayers with large account balances. Investors who hold tax-free municipal bonds and tax-efficient equities, and who live off tax-free withdrawals of principal, while deferring their IRA withdrawals until RMD age can use those low-income years to make partial conversions of traditional IRAs to Roth IRAs in reasonable tax brackets. The increase in the RMD age to 73 gives them one more year to do this. Younger taxpayers will have three more years to take advantage.

Employer Contributions Eligible for Roth Treatment

Employers are now permitted to make matching and non-elective contributions in 401(k) and 403(b) plans to Roth accounts.

Until now, employer contributions were restricted to before- tax accounts. This new employer Roth account is a nice feature, especially for younger employees who have not reached their peak earning years. Roth accounts allow for tax to be paid at the present (and known) tax bracket to avoid paying tax in an unknown, future (and perhaps higher) bracket.

Employers will need to update procedures to make this happen. It amounts to one more element of complexity, but it will be appreciated by some employees.

529 Plan Rollover to Roth IRA

Beginning in 2024, a maximum of $35,000 in a 529 plan can be rolled to a Roth IRA.

A 529 plan is designed to pay for education. If withdrawals are used for that purpose, they are generally tax free. But what happens when the 529 plan is not used for education? Until now, any 529 withdrawals of the gain not used for education were taxable and subject to a 10% penalty.

With the SECURE ACT 2.0, up to $35,000 in a 529 plan that has been in existence for at least 15 years can be rolled into a Roth IRA in the name of the 529 beneficiary. The amount that can be rolled into the Roth each year is equal to the IRA contribution limit for the year, less any IRA contributions that have been made in that year. For example, if the IRA contribution limit in 2024 is $7,000, and no IRA contributions take place, that amount can be rolled from a 529 plan into a Roth IRA. Rollovers can continue each year until the maximum $35,000 lifetime limit has been rolled. Note that the 529 beneficiary must have earned income to qualify.

This is beneficial because the tax- free status of the 529 withdrawals is maintained in the Roth IRA, which can grow tax-free for decades and ultimately be withdrawn tax-free in retirement.

As always, we must present this information along with a disclaimer: The information in this article is not meant to be used as advice for your unique situation. Please rely upon your financial and tax advisors.

James Twining
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