The sweeping new law will continue to be implemented over the next few years. Here are four areas in which your retirement savings could benefit.
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,” said 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:
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 (see “Convert now, save later?” below). Plus, funds in a Roth account aren’t impacted by RMDs, and any gains can be withdrawn entirely tax-free.1 Tax laws can change quickly, as can income and investment returns, so be sure to discuss with your financial consultant the risks for your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 said.
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.
Scenario 1: Without Roth conversions
Without Roth conversions, RMDs push this investor into the 32% tax bracket in retirement.
Scenario 2: With Roth conversions
Making regular Roth conversions, up to the limit of the 24% tax bracket, helps keep the investor out of the 32% tax bracket in retirement.
Savers age 50 or older may be affected by several changes over the next few years:
Beginning at age 50, both investors make maximum annual catch-up contributions. From age 60 through 63, Investor 1 takes advantage of the higher catch-up contribution limit while Investor 2 makes the same catch-up contributions as in previous years. From age 64 through 65, both investors make the maximum catch-up contribution. Both investors cease making catch-up contributions after age 65, when they retire.
Supersizing catch-up contributions to your workplace retirement plan can really add up.
“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 said. “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:
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 said.
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 said. 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:
“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 said.
“These are big, potentially positive changes,” Hayden said. “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.”
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