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Secure 2.0 Act Tax Catch-up and 529 Plan Provisions

Steven Elliott, MST, CPA

Lead, Sr. Tax Manager

Summary

Our brief guide to SECURE 2.0 Act updates for 401(k), 403(b), Roth IRA, and 529 plans.

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The SECURE 2.0 Act was enacted by Congress in December 2022 with more than 90 provisions, many of which are related to individual retirement accounts (IRAs) and employer-sponsored retirement plans.

Why are these changes happening now? Many in the financial industry believe that retirement savings in the United States have not been keeping pace with the rate of inflation or with other workers around the world. Many taxpayers are now working significantly longer than previous generations—as well as living longer. SECURE 2.0 is a foundational first step toward increasing opportunities and optimizing retirement savings, especially in Roth accounts.

Why should you care? No considerable change to retirement plan legislation (other than adjustments for inflation) has occurred since the concept of catch-up contributions was introduced over 20 years ago. The new catch-up provisions become effective in 2024 and could impact your retirement savings in many ways, with additional opportunities for putting away pre-tax or tax-deferred dollars.

Mandatory employer-plan amendments will now cover the following changes:

  • Catch-up contributions for IRA. Prior to SECURE 2.0, catch-up contributions for traditional, Roth, SEP, and SIMPLE plans were $1,000 annually (not indexed for inflation). SECURE 2.0 eliminates catch-up contributions to pre-tax accounts for those whose income surpasses $145,000 (annually indexed) and requires that catch-up contributions be made to after-tax, designated Roth accounts. Employees with income lower than $145,000 may continue to make Roth catch-up contributions (if allowed by their employer plan). SIMPLE IRA will have lower catch-up amounts.
  • Catch-up contributions for 401(k) and 403(b). There are special catch-up provisions in 2025 for the participants of employer 401(k) or 403(b) plans who are age 60 to 63. The special catch-up is the greater of $10,000 or 150% of the regular catch-up amount in effect for that particular year (annually indexed for inflation).
  • Rollovers from 529 plan to Roth IRA. Beginning in 2024, rollovers from a 529 plan to a designated Roth account will be permissible in limited circumstances for unused 529 plan funds, with a $35,000 lifetime transfer cap:
    • As the 2023 limit is $6,500, it would take several years to reach the maximum.
    • The account beneficiary must be eligible to make IRA contributions based on earned income and is not limited based on the upper phase-out thresholds—meaning those with at least $6,500 of income from wages or self-employment will qualify.
    • The designated Roth account owner must be in the name of the 529 plan beneficiary.
    • The 529 plan must be at least 15 years old as of 2024, meaning that the account was opened in 2008 or earlier; recently opened 529 plans are therefore ineligible. Contributions and earnings within the past five years are not eligible for rollover.

Overall, the SECURE 2.0 Act offers more flexibility and access to Roth IRAs, with provisions for annual inflation indexing. Proper planning can help reduce anxiety about retirement funding. If you’re an existing client who has questions about how these changes can impact your specific tax or retirement situation, reach out to your Wealth Advisor today.

If you aren’t already working with Mercer Advisors, let’s talk about our process and how a Wealth Advisor can work in tandem with a seasoned team of in-house financial professionals, including tax strategists and estate planning lawyers, to create your comprehensive wealth plan.

Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.

All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.