Three Things to Know About SECURE Act 2.0

Range Certified Financial Planner
Range Certified Financial Planner
January 8, 2023

A new spending package signed into law last month contains over 90 provisions that could affect your financial plan. This $1.7 trillion federal spending bill, signed into law by President Biden, includes the SECURE Act 2.0 —  a follow-up to the “Setting Every Community Up for Retirement Enhancement Act” (SECURE Act) of 2019.  Here, we’ll focus on the three notable changes that stuck out to our planners. 

529 to Roth IRA Rollovers - a new way to utilize unspent 529 savings

Sometimes, students earn scholarships or find other ways to save money on the cost of college. But there’s been a downside to those savings:  many families end up with unused funds in a 529 plan they had earmarked for education.  And unfortunately, that incurs an unintended penalty that still exists: leftover money withdrawn for non-education expenses is taxed and subject to a 10% penalty. 

Thanks to SECURE 2.0, starting in 2024, it will be possible to transfer unused 529 plan funds into a Roth IRA.  Instead of incurring taxes and penalties, the money can grow tax-free and give children an early start to saving for retirement.  The provision eliminates some of the concerns around opening a 529 plan, for instance, “What if my kid doesn’t go to college?” And presents a unique opportunity for planning.

Here are the new rules: 

  • 529 must be maintained for at least 15 years prior to the rollover 
  • Beneficiary must be the same for both accounts (old 529, new Roth IRA)
  • Rollovers are limited to annual Roth IRA contribution limits  
  • Lifetime limit of $35,000 in aggregate 

Here’s an example:

Assuming an annual limit of $6,500, you could rollover $6,500 from the 529 to the Roth IRA for years 1-5 ($32,500) and in year 6 you could rollover the remaining $2,500. Your child could then contribute an additional $4,000 from their earned income ($6,500 annual Roth IRA limit - $2,500 remaining lifetime 529 rollover limit = $4,000)

Employer Matching for Student Loan Payments - leveling the playing field 

Student loan debt can put even the most motivated employees at a disadvantage when it comes to retirement savings, especially early career professionals who choose to pay down student loan debt instead of contributing to a retirement account.  Getting the matching retirement contribution from an employer into a 401(k) or 403(b) is often considered “free money.”  The problem is that it’s called a “matching” contribution for a reason - employers match what employees contribute. But what if they aren’t contributing?  

Starting in 2024, employers are permitted to make a matching contribution to workplace retirement plans for those employees who aren’t investing in a retirement plan but are making qualified student loan payments.  This provision aims to level the playing field and will allow younger workers  to focus on student loan debt without missing the employer match.  

Roth employer contributions- matching to pre-tax or Roth 

When deciding between a traditional (pre-tax) or Roth (after-tax) 401(k) plan - the decision only applies to the amount that employees contribute. And all employer matches are pre-tax, so those opting for Roth contributions effectively have two different accounts.  

With SECURE 2.0, starting this year (it will take some time for employers and plan administrators to prepare) employers now have the option to match contributions as either pre-tax or Roth.  While technically a revenue raising provision (wages are being taxed today) this is welcomed news for those who prefer Roth contributions and don’t want to track both a pre-tax and an after-tax bucket.  

Range is here to help. 

As with any new legislation it’s likely the IRS and Congress will provide additional guidance as financial and tax professionals digest each new provision.  Our team will continue to monitor any changes and update our planning process accordingly.  Should you have any questions about how this could affect you - now is a great time to reach out!

With Range, you can work with our team of CERTIFIED FINANCIAL PLANNER™ professionals and get answers to all your money questions.  

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