by Elissa Wurf, PhD, CFP®, CPA

US Capitol domeAt Agili, we like to keep our clients and friends apprised of legislation that may affect them. Today, we’re writing the first of two blog posts about portions of The SECURE 2.0 Act that go into effect in 2024. As you may recall, The SECURE 2.0 Act, which stands for Setting Every Community Up for Retirement Enhancement, was signed into law by the President on December 29, 2022. The Act provided a host of provisions (more than 90 in all) aimed at improving the retirement prospects of Americans.

Elissa Wurf, PhD, CFP®, CPA

Certain retirement-related changes took effect in 2023, but the more complex provisions won’t take effect until 2026 to give employers, custodians, and other financial institutions time to prepare. In last year’s blog post, SECURE 2.0 Act Blog Series: Changes to RMDs, we discussed key portions of the bill that took effect in 2023. The first element of the Act that went into effect in 2023 was delaying the age for Required Minimum Distributions (RMDs) from IRAs and qualified retirement plans such as 401(k)s and 403(b)s from 72 to 73 (if you were born before 1960) or 75 (if you were born in 1960 or later). The second element, effective in 2023, was reducing the harsh penalty (excise tax) for forgetting to take an RMD from 50% of the required distribution to a still severe but less draconian 25%, or 10% if the forgotten distribution is taken in a timely manner (within two years of the Required Beginning Date) and Form 5329 is filed with the tax return in the year the distribution is taken.

What Portions of The SECURE Act 2.0 Go into Effect in 2024?

Unused 529 Plan Funds Can Be Rolled Over into a Roth IRA

If there are unused funds in a 529 college savings plan that are not otherwise being used for future education, a transfer to other family beneficiaries, or repayment of student loan debt ($10,000 lifetime cap), they can now be rolled over to a Roth IRA. The following rules apply to the 529 account to Roth IRA rollover scenario:

  1. There is a $35,000 lifetime cap on the amount that can be rolled over into a Roth IRA from a 529 account.
  2. The 529 plan must have been open for more than 15 years.
  3. Rolled over money must have been in the 529 plan for at least 5 years.
  4. Only the plan beneficiary can receive the Roth contribution.
  5. The plan beneficiary must have earned income that meets or exceeds the contribution amount and the maximum amount that can be contributed during a year is equal to the Roth contribution limit. Total Roth IRA contributions for the year, including the plan beneficiary’s own contributions, are capped by the annual contribution limit. For example, there are unused funds in a child’s 529 plan; the child is a college graduate and does not plan further education and the other requirements are met. If the child earns $5,000 during a year, the total that can be contributed to that child’s Roth IRA for the year is $5,000, whether that $5.000 is a rollover of unused 529 plan money, the child’s own contribution, or a combination of the two. If the child is working full-time and earning $50,000, the annual contribution to the Roth IRA in total is the 2024 annual contribution limit (for people under 50) of $7,000.

Some of the benefits of using excess 529 plan money to make Roth IRA contributions are that it provides an alternate use for the money; parent or grandparent 529 plan owners can help their children get started with retirement savings, and there are no income limits on making 529 to Roth IRA rollovers, while Roth IRA direct contributions do have an income limit.

Note: Agili has been made aware that certain 529 institutions are requiring a medallion signature to rollover funds from a 529 college savings plan account to a Roth IRA.

Employers Now Have the Option to Help Employees Pay off Student Debt Using Their Workplace Retirement Plan (e.g., 401(k)s or 403(b)s)

Another new feature of the SECURE 2.0 Act is that employers may now offer to help employees pay off student debt using their workplace retirement plan. Please note that this is an EMPLOYER option and is not mandatory. Clients will need to verify that their employer has put the option in place. In addition, only “qualified” student loans are eligible (i.e., a loan taken out solely to fund educational expenses during a period when the student was in school at an eligible institution.)

How this work… The employee makes student loan repayments and the employer counts those repayments as 401(k) plan contributions. These “phantom contributions” would then enable the employee to receive a matching 401(k) contribution from the employer even if the employee isn’t yet able to make contributions (“elective deferrals”) into their own retirement account.

In our next blog post on additional portions of the SECURE 2.0 Act that go into effect in 2024, we’ll discuss how participants who leave money in a Roth 401(k) who reach RMD age are no longer required to take RMDs. We’ll also discuss the expansion of penalty-free withdrawal options.