What's in store for SECURE 2.0 this year

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The SECURE 2.0 Act, signed into law in late 2022, was a follow-up to the original SECURE Act passed in 2019. The bill included more than 90 different provisions scheduled to be phased in over several years.

SECURE 2.0 introduced wide ranging changes to employer-sponsored retirement plans as well as IRAs.

For 2024, there are several key provisions taking effect that will impact saving for retirement, emergency funds, and college costs.

Here are the key provisions taking effect this year.

Transfer of unused 529 funds to a Roth IRA

Up to $35,000 in 529 funds (over a lifetime) can be contributed to a Roth IRA in the name of the 529 beneficiary. The 529 must be open for at least 15 years, and 529 contributions (and related earnings) within the last five years are not eligible for rollover. Rollover amounts may not exceed annual Roth IRA contribution limits (including other IRA contributions), and the beneficiary must have earned income. However, the income restrictions on making Roth IRA contributions do not apply to these contributions. For more details see the post, “SECURE 2.0 creates new backdoor Roth opportunity.”

Qualified charitable distributions (QCDs) adjusted for inflation

Since the ability to make a qualified charitable donation (QCD) with IRA assets was introduced in 2006 and subsequently made permanent in the tax code in 2015, the annual limit has been $100,000 per account owner or beneficiary. Going forward, this amount will be indexed for inflation. For 2024, the QCD limit is $105,000.

No required distributions for designated Roth accounts (i.e., Roth 401k)

While owners of Roth IRAs are not required to take minimum distributions from accounts once they reach their required beginning date (RBD), due to a quirk in the tax code, this rule did not extend to Roth 401(k)s. Beginning this year, the benefit of avoiding RMDs applies to Roth 401(k)s as well.

Student loan payments may be considered salary deferral for employer match

Employers now have the option of making matching contributions to accounts within retirement plans (including SIMPLE IRAs) based on a participant’s student loan payments. If an employee chooses to make a qualified student loan payment instead of contributing to their 401(k), their employer can still provide a match as if the payment was made to the plan.

New exceptions to early withdrawal penalty from retirement accounts

Up to $1,000 can be withdrawn each year penalty free due to “unforeseeable or immediate financial needs relating to personal or family emergency expenses.” Additionally, those subject to domestic abuse can take a penalty-free distribution of the lesser of $10,000 or 50% of the participant’s account. In the case of domestic abuse, an individual can repay the withdrawn funds from the retirement account over three years and will be refunded for income taxes resulting from the distribution. These provisions apply to retirement plans as well as IRAs.

For more detail on exceptions to the 10% early withdrawal penalty, see “Tracking ways to avoid withdrawal penalties from retirement accounts."

Retirement plan emergency savings accounts

Employers have the option of providing an emergency savings account within a retirement plan that allows a participant to accumulate up to $2,500 in a separate account. Once the cap has been reached, subsequent contributions are directed to a designated Roth account within the plan. Each year the participant can request up to four withdrawals not subject to early withdrawal penalties or fees.

Planning considerations

The changes being introduced this year may help savers as they review strategies for saving for retirement and college funding.

The new provision allowing parents to rollover unused 529 plan assets without penalty solves a challenging problem for many families. The provision creates an opportunity for parents to help jump-start retirement savings for children while saving for college at the same time. For example, if a 529 account is established during the first year of a child’s life, the parent could begin transferring funds from the 529 to a Roth IRA when the child is roughly 16 years old, assuming the child has earned income.

The language in the legislation ties the $35,000 lifetime limit to the beneficiary level, so a parent could transfer that amount for each child. This may allow time for contributions to appreciate tax free within the 529 and eventually be transferred to the Roth where it could be withdrawn tax free if requirements are met.

Business owners may want to consider adopting the SECURE 2.0 retirement plan provisions that help participants save for emergencies or pay down college debt. These advantages can be an important benefit when seeking new talent or for employee retention.

It is important to seek professional financial advice when considering changes to financial strategies, particularly with some provisions that are more complex in order to avoid triggering a tax liability.

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