In December 2022, Congress passed the Consolidated Appropriations Act, 2023. The $1.7 trillion federal spending bill included a retirement bill called the SECURE 2.0 Act of 2022. As a brief reminder, the SECURE Act was passed into law in December 2019 and included changes to retirement plans for both employers and employees. The latest bill passed here may have an impact on you and your portfolio. We have outlined noteworthy changes and impacts below, and you should discuss with your financial advisor if any of the below may pertain to your financial plan.
In addition to noting provisions of SECURE 2.0, there are also statutory limit increases in contribution limits among retirement plans and accounts such as health savings accounts (HSAs) for 2023 that we want to highlight as you revisit your savings plan for the upcoming year.
- Required Minimum Distribution (RMD) Updates — Pushing back the age for RMDs for some clients.
- Higher Catch-Up Contributions — In a few years, some participants in their early 60s will have catch-up contribution increases indexed to inflation or have a higher baseline limit.
- Retirement plan and IRA contribution limits have increased, notable for 2023 given higher inflation.
SECURE 2.0 Notable Provisions
RMDs From Qualified Retirement Accounts
If you turn age 72 after December 31, 2022, RMDs will begin at age 73 (previously was age 72).
If you turn age 74 after December 31, 2032, RMDs will begin at age 75 (again, previously was age 72).
The original SECURE Act altered RMD ages for certain clients, and those RMD ages for clients whose birth year was 1950 or earlier have not changed (RMDs begin at age 72, or age 70½ for those who turned 70½ prior to 2020). The RMD age is 73 for those born between 1951 and 1959, and the RMD age is 75 for those born in 1960 or later.
What This Means
- This may provide for a few more years to consider a strategic Roth conversion before your RMDs begin.
- This may further delay increases in premiums for Medicare Part B/D by inherently delaying retirement income.
Increased Catch-Up Contribution Limits to IRAs and Retirement Plan Participants
Beginning in 2024, IRA catch-up contributions will automatically adjust and increase with inflation.
What This Means
Since 2006, the catch-up contribution for IRAs has remained a flat $1,000 in addition to the statutory contribution limit for those eligible to contribute who are age 50 and older. For 2022 if you were age 50 and older and eligible to contribute to a Roth IRA, you had the ability to contribute $7,000 ($6,000 limit + $1,000 catch-up limit being age 50 or older). Beginning next year, the $1,000 catch-up limit will adjust automatically for inflation in increments of $100 allowing more savings into tax-advantaged accounts such as IRAs.
Beginning in 2025, participants in employer retirement plans (401(k) plans, 403(b) plans and SIMPLE IRAs) who are age 60, 61, 62, and 63 at that time will have their catch-up contribution limit in the plan increase to a greater baseline amount based on inflation or the catch-up contribution limit at that time.
What This Means
In the year 2025 and at that time you are ages 60–63, your catch-up contribution limit to your employer retirement plan will be the greater of $10,000 or 50% more than the regular catch-up limit amount at that time for your particular plan, and going forward that $10,000 baseline is indexed for inflation.
SIMPLE plan participants in the year 2025 and within the same age range will have contribution catch-up limit increased to the greater of $5,000 (indexed for inflation going forward) or 50% more than the SIMPLE catch-up contribution limit amount for 2025. This essentially allows for the ability to contribute more to your retirement plan in your early 60s.
However, the SECURE 2.0 Act also changed how catch-up contributions will be treated for high-earning employees beginning in 2024. For employees who earn more than $145,000, SECURE 2.0 forces those catch-up contributions to be made as Roth deferrals, thereby precluding the ability to defer taxes on any catch-up contributions. This will apply only to employer-sponsored plans such as 401(k), 403(b), or 457, not to IRAs (SIMPLE or SEP). If an employer plan does not offer Roth deferrals, then no employee will be able to make catch-up contributions regardless of wages.
Look for plan sponsors to be adding the ability to make Roth deferrals in 2023 if not already offered. If you are a business owner who sponsors a company retirement plan, talk with your financial advisor about changes you might need to make in your plan this year.
Other Provisions in the SECURE 2.0 Act to Quickly Note
- In 2024, certain beneficiaries of 529 plan accounts could do a tax-free and penalty-free rollover up to a lifetime max of $35,000 to a Roth IRA in their name (subject to Roth IRA annual contributions limits and other provisions around the 529 plan). This may help those who possibly overfund a 529 or if the beneficiary does not need the full accumulated amount anymore.
- In 2024, there will be an elimination of RMDs for Roth 401(k) accounts and Roth 403(b) accounts (original plan participant prior to death) as long as the account owner or plan participant is still alive.
- In 2023, SIMPLE IRA and SEP IRA plans will allow Roth contributions (plan specific, not automatic).
- Starting in 2024, the maximum amount that can be donated to charity from an IRA as a “qualified charitable contribution” — currently $100,000 per year — will be indexed annually for inflation.
2023 Higher Contribution Limits for Retirement Accounts
Given the previous reads of higher inflation over the past year, the IRS has published statutory contribution limits for retirement accounts and other savings vehicles that are notably higher. This is a benefit to those who are continuing to save, are still working, or still eligible to contribute and able to pack dollars into these types of accounts for retirement and/or tax planning purposes.
In 2023, those who are eligible and have cash flow to do a mega backdoor Roth contribution can contribute up to $66,000 in total retirement savings and up to $73,500 for those age 50 and over (previously $61,000 and $67,500 in total). This total includes employee elective deferrals and employer contributions.
The income limits increased for receiving a deduction for contributing to a traditional IRA. The income limits for being able to contribute to a Roth IRA have also increased for 2023 as compared to last year.
You should discuss with your financial advisor whether or not your income prohibits you from any of the following:
- Receiving a deduction for your traditional IRA contribution
- Being able to contribute to a Roth IRA
- Contributing to a Roth IRA via a backdoor Roth conversion if your income is above the max threshold