At the beginning of 2023 the SECURE ACT 2.0 was passed. As a preliminary note, like most government regulations, the SECURE ACT 2.0 is lengthy and at times can be confusing, redundant, and broad. Not everything in the SECURE ACT 2.0 applies to everyone, so my goal is to try to communicate the things that may become important for the employees we serve at each university. I have broken it down into 4 topics: contributions, taxes, RMDs, & education savings. The legislation of course does more than this but these are the main topics addressed that will be relevant to our clients. Of course, if you have questions about something. you read other than these items reach out.
Contributions - The main goal of the SECURE ACT 2.0 is to make retirement more accessible for the average American. Part of this is allowing increased contributions to retirement plans and accounts. Before SECURE ACT 2.0 the max contribution to a 403b plan was $20,500 with a catch up contribution of $6,500, for a total of $27,000, if you are over 50. Now in 2023 the contribution amount is $22,500, with a potential catch up contribution of $7,500 for a total of $30,000. This is mostly important for our high income earners who are in the position to contribute at the max levels. Both Ohio State University & University of Michigan employees have the ability to contribute to BOTH a 403b and 457b. Both offer pre and post tax (ROTH) contributions that are not affected by income limits. This is a great option for high income earners who need to save more to maintain their standard of living in retirement and want to create wealth.
Taxes- There are a couple specific tax consequences that come as a result of the SECURE ACT 2.0. There is an interesting new rule which has been dubbed by industry experts the "rothification" of catch up contributions. Catch up contributions to these plans (after the initial max contributions have been made) must be made to a Roth portion of the account. The likely reasoning for this is so the IRS can collect on the income tax of the catch up contributions, and not delay them. This likely means more individuals contributing for retirement will either have Roth money in their portfolio by choice, or by necessity. RMD's- A required minimum distribution, RMD, is a required withdrawal from all qualified retirement accounts you have not paid taxes on yet. This includes 403b's, 457's, and IRA's for example. The age of RMD's has increased to age 73 in year 2023. This means you can delay the required distribution from your account until that age. Per Jessica at TIAA, if clients are 73 and still working at the university, they do not have to take a RMD from these accounts. This doesn't include any previous retirement accounts or IRA's.
Education Savings- Many of my clients have kids for whom they plan to pay for a college education. The traditional way to pay for college for a child is a combination of savings, loans, and income. For parent's who don't want their children to take on the entirety of their college education cost on as a loan, they may contribute part or whole of the expense from their savings and income. The account that is traditionally used for saving is called a 529 account. This account has special features that are designed for college education planning. Contributions to 529 happen after tax and grow tax deferred. When funds are withdrawn for qualified education expenses, these funds are tax free. This essentially erases any tax liability from the gain on the investments in the account. There arises a problem however if children do not use all of the funds saved in the account for education expenses. Withdrawals for non-education expenses may incur a 10% penalty and federal income tax on the gains. The SECURE ACT 2.0 has made changes to aim to combat this issue. The first thing families can do if a child doesn't use the funds is transfer them to a sibling. Now if the child doesn't have...... a sibling, other family members qualify. But now there is an additional fix. If funds have been in the 529 for longer than 15 years, you can roll the 529 plan into a Roth IRA for your child and incur no penalty. This start the child off with college savings in excess of what they didn't use for college! Typically, the 15 year rule means that the child would have had to have been 7 or younger when the plan was started if they want to do the rollover at age 22 for example (or you can always wait for the 15 year mark if you were a late starter saving). I think the goal behind this change is to incentivize savings for college early and to allow for a head start on retirement savings for those who can take advantage of this rule!
The SECURE ACT 2.0 is regarded as bipartisan and has received praise from both Republicans and Democrats for improving the way Americans can prepare for retirement. If you or a colleague are interested in discussing in more detail how the SECURE ACT 2.0 affects your situation, reach out to an advisor today!