This Tax-Saving Retirement Plan Just Got Even Better

Your IRA has some new superpowers.

The SECURE Act 2.0, which was signed into law in December, made significant changes to the way Americans will save for retirement. Many of the 90-plus sections of the bill centered around reforming employer-sponsored retirement plans. However, savers using individual retirement accounts, or IRAs, should still pay attention to these three changes.

1. A change to catch-up contributions

For many Americans, traditional and Roth IRA contributions are capped at $6,500 in 2023. However, for those aged 50 and up, that limit is increased by $1,000 for so-called "catch-up" contributions. Thanks to the SECURE Act 2.0, that catch-up limit is about to keep up with inflation.

Section 108 of the new legislation dictates that the catch-up limit be indexed by inflation starting in 2024. That may not seem like a big deal to some, but consider that the standard IRA contribution limit sometimes remains unchanged for years.

Between 2019 and 2022, the IRA contribution limit was stuck at $6,000 per year. Over the same period of time, it is estimated that inflation compounded to over 16%. Had the standard contribution limit kept up with inflation, like the catch-up limit now will, you would be able to stash about $6,960 in an IRA in 2023. That's nearly another catch-up contribution in itself.

2. 529 rollovers

One of the most headline-grabbing provisions of the new law is the ability to roll unused 529 funds into a Roth IRA. Prior to the legislation, penalties and income taxes led many to shy away from 529 accounts. If your child decided not to go to college, or if you overfunded the account, you might have had to take a nonqualified withdrawal, which would be subject to a 10% penalty and may have been partially taxable. Your state might have tacked on an additional penalty, too.

However, the SECURE Act 2.0 allows 529 funds to be rolled over to Roth IRAs tax and penalty free, on a few conditions. First, the Roth IRA must be in the name of the 529's beneficiary. Second, the account must have been opened for over 15 years. Third, the amount that can be rolled over in a year is limited to the Roth IRA contribution limit in that year, and reduced by any other Roth IRA contributions made that year. Finally, a beneficiary may only roll up to $35,000 out of a 529 during their lifetime.

How this section of the law will work in practice is as of yet unclear, and many taxpayers are seeking additional guidance from the IRS. One closely-watched issue is whether changing beneficiaries on a 529 plan will reset the 15-year waiting period. Hopefully, taxpayers will have some clarification prior to the section's effective date of Jan. 1, 2024.

3. Expansion of charitable gifting

Charitable gifts support a good cause, make you feel good, and just might help you save on taxes. That's the idea behind Qualified Charitable Distributions, which allow retirees to replace their Required Minimum Distributions with a gift to a qualified charitable organization. Capped at $100,000 for the past 15 years, the QCD limit will be inflation indexed starting in 2023.

Split-interest entities, such as charitable trusts, may be in for a hey-day thanks to new funding opportunities in the SECURE Act 2.0. Beginning in 2023, the IRS will allow taxpayers to make a one-time, $50,000 distribution to certain entities which benefit charitable organizations. The provision will provide another avenue for charitably-inclined retirees to reduce their tax liability.

While a major focus of the SECURE Act 2.0 was reforming employer-sponsored retirement plans, IRA owners weren't entirely left out in the cold. Those aged 50 and above will see their catch-up contribution limits increase regularly in future years, 529 beneficiaries will soon be able to bolster their Roth IRAs with unused college savings, and those nearing RMD age have more ways to reduce their tax liability through well-timed charitable contributions.