How SECURE 2.0 Act May Help Boost Your Retirement

The SECURE 2.0 Act of 2022—the second overhaul of rules governing retirement plans in the past few years—aims to help savers augment their nest eggs via higher catch-up contribution limits, later mandatory withdrawals, and more.

"The law's goal is to provide more tax-advantaged ways for individuals to boost their retirement savings," says Rob Williams, managing director of financial planning, retirement income, and wealth management at the Schwab Center for Financial Research. "Higher earners, in particular, may benefit from many of the changes since they're the most likely to take advantage of increased limits."

Here's a look at key changes that could affect how you're saving—and what to consider to make the most of them.

The SECURE 2.0 Act includes three important changes to the required minimum distributions (RMDs) from tax-deferred accounts:

• Beginning in 2024, Roth 401(k)s are no longer subject to RMDs. "Now, all Roth savers, whether in a 401(k) or IRA, can keep their contributions invested their entire lifetime," says Hayden Adams, CPA, CFP^®, director of tax and wealth management at the Schwab Center for Financial Research.
• The penalty for failing to take an RMD drops from 50% to 25%. The penalty can be further reduced to 10% if the shortfall is corrected in a timely manner. "Whether you pay a penalty of 25% or 10%, it's still more than if you had simply withdrawn the correct amount," Hayden says.
• The RMD age is now 73—and will rise to 75 in 2033. Increasing the RMD age allows your money to stay invested longer, potentially providing you with more tax-deferred growth. However, bigger account balances also mean bigger RMDs—which are taxed as ordinary income and could bump you into a higher tax bracket.

One way to reduce the size of your RMDs is to perform a series of Roth IRA conversions in the years prior to turning 73. Doing so will mean paying ordinary income taxes on the converted amount each year, but it will help reduce your tax-deferred account balance and the size of future RMDs. Plus, funds in a Roth account aren't impacted by RMDs, and any gains can be withdrawn entirely tax-free.¹ Tax laws can change quickly, as can income and investment returns, so be sure to discuss with your financial consultant the risks for your particular situation.

If you're still working, you could also consider switching a portion of your retirement contributions from a tax-deferred 401(k) to a Roth 401(k). "It's essential to work with a planner who can help you create and implement a multiyear contribution plan and tax-smart withdrawal strategy specific to your situation," Rob says.

Converting small amounts each year from your traditional IRA to a Roth IRA prior to age 73 has the potential to reduce your RMDs significantly—and keep future taxes in check, especially if your future RMDs are likely to push you into a higher tax bracket.

Savers age 50 or older may be affected by several changes over the next few years:

• Starting in 2025, those ages 60 through 63 will be able to make even larger annual catch-up contributions to workplace retirement plans:
  • For 401(k)s and 403(b)s, qualifying individuals can make catch-up contributions of up to 150% of the regular catch-up contribution amount (currently $7,500) or $10,000—whichever is greater.² For example, if the provision were available in 2024, a 60-year-old could make a total catch-up contribution of $11,250 ($7,500 x 150%) for the year.
  • For SIMPLE IRAs, the limit is the greater of 150% of the regular catch-up amount³ (currently $3,500) or $5,000.

• Starting in 2026, if you earn more than $145,000,⁴ all catch-up contributions to workplace retirement plans must be made to a Roth account using after-tax dollars.⁵ Although the change means higher-income earners will no longer be able to defer taxes on such catch-up contributions, there are some potential benefits:
  • Your tax-deferred accounts are likely to be smaller, potentially reducing the size of your eventual RMDs.
  • Your taxes on those contributions are prepaid, meaning you won't owe taxes when you withdraw the money in retirement (assuming you're at least 59½ and the account is at least five years old).

"The government aims to collect tax revenues sooner rather than later by forcing people at certain income levels to pay taxes on those contributions upfront," Rob says. "Of course, savers may feel a sting now, but having access to tax-free income in retirement is often worth the trade-off, especially for higher earners."

For years, individuals ages 70½ and older have been able to satisfy their annual RMDs by donating directly from their IRA to a qualified charity—known as a qualified charitable distribution (QCD). Previously, QCDs were limited to just $100,000 per year.⁶ However, the SECURE 2.0 Act now adjusts that amount for inflation; in 2024, the limit is $105,000.

In addition:

• You have a one-time opportunity to distribute up to $53,000 in a single tax year to one or more split-interest entities, such as a charitable gift annuity (CGA), which counts against the annual QCD limit.^7,8

A CGA is a contract between a donor and a recipient charitable organization, whereby the charity pays the donor a lifetime annuity in exchange for their gift. As with a regular QCD, the entire CGA amount can be used to satisfy part or all of the donor's RMDs without adding to their taxable income (though the annuity payments themselves will be taxable). "If you don't need your full RMDs to cover current living expenses but nevertheless want to generate future income, a CGA could be a good option," Hayden says.

Consider a married couple, both age 75, who want to donate part of their RMDs but are worried about inflation. They each decide to transfer a one-time QCD of $53,000 to one or more CGAs. Based on their ages, they will receive a payout rate of 6.6%,⁹ resulting in annual payments of $3,498 each, or $6,996 in total, for the remainder of their lives (see "One and done," above right). "Although not all charitable organizations offer these programs, a CGA is one way to fulfill your charitable ambitions while creating a stream of steady income," Rob says. However, it's important to know that, unlike some annuities, all CGAs are irrevocable, and any future income payments are subject to the charity's ability to pay claims.

Previous federal 529 rules stipulated that you could change account beneficiaries to access unused funds, but the money still needed to go toward qualified education expenses to avoid paying taxes or penalties. However:

• Starting in 2024, 529 funds may be eligible for rollover into a Roth IRA. To qualify:
  • The rollover must be made into a Roth account owned by or established for the beneficiary of the 529 plan.
  • Rollovers can be made only from 529 accounts that are at least 15 years old.
  • The total lifetime rollover is limited to $35,000.
  • Rollovers are subject to annual Roth IRA contribution limits, meaning you will have to perform multiple rollovers to realize the full benefit.

"We're still waiting for the IRS to provide guidance on how this new rollover rule will work in practice, so you may want to hold off until the details are clear to help prevent complications in the future," Hayden says.

"These are big, potentially positive changes," Hayden says. "Your financial consultant or wealth advisor, with the assistance of a tax professional, can help determine which strategies are right for your situation—and help you execute them effectively."