The Secure Act 2.0 was signed into law on 29 December 2022, and has some impact on the way that Americans invest for retirement. The changes affect both those saving for retirement and those approaching or already in retirement, writes Alex Ingrim, private wealth manager at Chase Buchanan.
One of the key changes revolves around required minimum distributions (RMDs). These are the minimum amounts that you are required to take from your retirement accounts each year once you reach a certain age. Before the Secure Act 2.0, clients invested in traditional IRAs, Sep IRAs, Simple IRAs, and retirement accounts were required to take minimum distributions from their accounts at age 72.
Account holders are responsible for ensuring they take the minimum distributions, and if they fail to do so, they can face significant fines.
After the passage of the Secure Act 2.0, the age has been increased for taking RMDs. If you turn 72 after 31 December 2022, the age has been increased to 73, and for younger account holders, the age will increase progressively to 74 and 75.
Roth 401ks and Roth 403bs will no longer have a RMDs, just like Roth IRAs.
For European based clients, the delay of RMDs can help lower income tax liabilities, particularly in higher tax jurisdictions. When account holders make contributions to retirement accounts or IRAs, they do so with pre-tax money. By requiring distributions through RMDs, the US government attempts to recoup some of the tax revenue they have lost as these distributions are taxed at income tax rates.
In many European countries, the double taxation agreements with the US states that these types of distributions are taxed in the country of residency, subjecting account holders to sometimes higher tax rates than those in the US. Any delay to RMDs can help account holders to delay their income tax liabilities and provide extra time for financial planning.
Another major change for clients living abroad is around 529 plans. These are university savings plans that can be set up to eventually pay for educational costs of specific beneficiaries.
Contributions are made with after tax dollars and can be withdrawn tax-free if used for qualifying educational expenses.
While tuition at many foreign universities, over 400, is a qualifying expense, many clients living abroad find that they either don’t use their children’s 529 plans at all, or they only use a portion of them. This makes sense given the lower cost of university education in Europe and other locations versus the US. These plans are governed by each state, and they have slight differences depending on the jurisdiction.
The Secure 2.0 Act has offered more flexibility around 529 plans and offered a solution for some of the unused funds. Beginning in 2024, beneficiaries of 529 plans will have the option to rollover up to $35,000 (£28,000, €31,670) from a 529 to a Roth IRA over the course of their lifetime.
These rollovers will be subject to annual contribution limits, and the 529 must have been open for more than 15 years. For international families, the added flexibility around 529 plans helps to provide more flexibility on how to use the funds and provides some gifting opportunities to beneficiaries.
While Roth IRAs are not recognized as tax free in many jurisdictions outside the US, the increased flexibility with 529 plans is a welcome change.
One of the longest lasting effects of the Secure Act 2.0 may be the requirement for auto-enrolment in employer sponsored 401k plans. From 2025, new plans will automatically have to auto-enrol employees with a default contribution rate of 3% of salary annually which will increase by 1% per annum until it reaches 10%.
Employees will have the option to opt-out, however this should help to create passive savings for employees across the wealth spectrum. The 401k is one of the most powerful savings plans available to American employees, and at the moment, employees are asked to opt-in rather than opt-out. The rule changes are designed to create a greater saving culture amongst active employees.
There have also been some changes with the ‘Catch up’ contributions allowed to 401ks, 403bs and other qualified retirement accounts. In 2023, persons aged 50 or older can contribute an additional $7,500 to their retirement accounts, above and beyond the $22,500 contribution limit.
From 2025, persons aged 60-63 will be allowed to contribute an additional $10,000 per annum to their retirement accounts, which is a 50% increase from the regular ‘Catch up’ contributions allowed. Again, the rule changes encourage a greater saving culture, especially in the years leading up to retirement.
While there are no sweeping changes to retirement rules in the US from the Secure Act 2.0, there are many small changes that can have a large impact on specific situations. For international families, the major changes are to RMDs and 529 plans, and the increased flexibility offered.
This article was written for International Adviser by Alex Ingrim, private wealth manager at Chase Buchanan.
