January 2023 Market Brief
The Secure 2.0 Act
“Someone’s sitting in the shade today because someone planted a tree a long time ago.” — Warren Buffett
Although Congress is divided and everyone (including the markets) anticipates gridlock for the next two years, late last year Congress passed the Secure 2.0 Act as a part of the overall budget bill.1 Secure 2.0 changes many retirement rules, some of which are effective immediately and some of which don’t go into effect until 2033.2 Here are some key takeaways from the Secure 2.0 Act:
As many of you are aware, RMD rules required that those above age 72 take money from certain retirement accounts each year. The rationale is that the government wants to ensure that the funds are taxed and to prevent account owners from using the accounts as tax shelters. Failing to take a RMD resulted in stiff penalties (50% on the amount not withdrawn), which Secure 2.0 has reduced (25% on the amount not withdrawn and if timely corrected, 10%).3 Effective January 1, 2023, Secure 2.0 raises the RMD age from 72 to 73. Those who turn 73 this year must take their first RMD no later than April 1, 2024. In 2033, the RMD age again increases to 75. The RMD increase allows for more time for funds to compound and increases flexibility in devising a withdrawal strategy.
Rollover unused 529 funds into a Roth IRA
This change is huge for those seeking to build generational wealth and goes into effect in 2024. 529 plans are tax-deferred plans used to save for education costs. If the beneficiary doesn’t need all of the 529 funds to pay for education, you previously had few attractive options for unused 529 funds – namely, changing the beneficiary to another qualified family member or taking a non-qualified distribution (subject to income tax on the earnings portion and a 10% penalty). Now, beginning in 2024, you can directly roll over unused 529 funds into a Roth IRA on a tax-free basis, provided that the 529 account was maintained for at least 15 years. The rollover is subject to limits on Roth IRA contributions and the beneficiary/Roth IRA owner must have includable income at least equal to the amount of the rollover. Permitted rollovers would be limited to: (1) the aggregate amount of contributions to the account before the 5-year period ending on the date of rollover, and (2) a lifetime limit of $35,000. To illustrate, if you rolled over $35,000 from a 529 plan into a Roth IRA when the beneficiary is 22, the beneficiary would have nearly $1mm at 65 – tax-free and without additional contributions.4 If the beneficiary lets the Roth IRA grow until age 75, the amount roughly doubles to more than $2mm.
4At age 65, the beneficiary would have $957,832, assuming an 8% return, compounded annually.