Some beneficial changes to investors, particularly when it comes to 529 planning and required minimum distributions.
Last December, Congress passed a spending package which included updates to the SECURE Act originally passed at the end of 2019. The SECURE Act 2.0 of 2022 made some major changes to the retirement rules for individuals and employer plans—mostly to the benefit of investors.
There are many provisions in the act that will benefit my readers, but I’ve highlighted the two I think are most pertinent here—the raising of the age for required minimum distributions and changes in 529 planning that allows more flexibility.
Required Minimum Distributions
The beginning date for required minimum distributions (RMDs) was raised from 72 to 73, starting in 2023, and to 75 in 2033. This means that retirees can delay withdrawing taxable income from their pre-tax retirement accounts for another year starting this year. Note, however, that if you have already begun RMDs, this provision does not apply to you.
Also beneficial to retirees, the 50% penalty for failure to take an RMD was reduced to 25% and, if the failure is corrected within a 2-year correction window, the penalty is further reduced to 10%. This is a substantial reduction in penalties for failure to take the required withdrawals.
For retirees who do not need income from their pre-tax accounts, and would only be withdrawing because of the requirements, this enables them to receive another year of tax-deferred growth and avoid the income tax associated with any withdrawal from the retirement account.
529 Planning & Roth Funding
This provision is by far the most exciting! Families with leftover 529 money will be able to roll it into Roth IRAs. Meaning, if your child does not use all the funds you’ve saved into their 529, you may utilize the excess to supplement your retirement needs. This provision is effective in 2024, giving investors 2023 to factor this new rule into their long-term planning.
To rollover leftover 529 savings to a Roth IRA, several conditions apply:
The 529 account must have been open for at least 15 years.
There is a $35,000 lifetime limit per 529 account beneficiary.
The amount of each rollover is limited to the amount that can be contributed annually to a Roth. In 2023, Roth IRA contributions are limited to $6,500 for those under age 50, with an additional $1,000 contribution permitted for those 50 or over.
The Roth IRA owner must have compensation at least equal to the amount of the rollover.
There is no income limit for who can roll excess 529 funds into Roth IRAs.
Presumably, parents who are owners of 529 accounts for their children will be able to change the beneficiaries on 529 accounts to themselves―as they can now―and roll the excess to their own Roth IRAs. We are awaiting regulatory guidance on this point.
The Act has other favorable provisions to investors, but these two certainly impact anyone making retirement planning or college funding a part of their long-term financial plan.
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