Photo Courtesy : Ajay Parthasarathy
The long-awaited retirement bill is now law. Let’s Look at its major provisions and how they may affect you.By Jon Aldrich
In the waning days of 2022, President Biden signed into law the Securing a Strong Retirement Act of 2022 (SECURE Act 2.0), it had bipartisan support in the House where it passed back in March of 2022 and finally passed the Senate late in the year after a fair amount of discussion and compromise. You may recall the original SECURE Act which was enacted into law in late 2019. The big item in the first SECURE Act was the elimination of the “stretch” IRA provision that used to allow a person inheriting an IRA from a non-spouse the ability to stretch withdrawals from the IRA over their lifetime. Now IRAs inherited from a non-spouse have to be totally liquidated within 10 years. There is nothing as game-changing as this in version 2.0, but there are a number of changes that you may want to be aware of. Let’s discuss some of the highlights of this new law that may affect the lives of our clients.
Raising Required Minimum Distribution (RMD) age from 72 to 75, eventually:
Before SECURE 1.0, you were required to start RMDs from your IRA the year you reached age 70 ½. With the original SECURE act, this was raised to age 72. Now with 2.0 the age is raised to 73 starting in 2023 and will be increased to age 75 beginning in 2033. If you started RMD’s in 2022 at age 72, you will continue taking them every year. For those still working at these ages, if you are still working (even just part-time) and not a greater than 5% owner of the Company you work for, you are able to delay taking any RMDs from your Company 401k or other qualified retirement plan until you either stop working, or own more than 5% of the Company.
Chart courtesy of Kitces.com
Age When You Can Begin Qualified Charitable Distributions (QCD) from IRA remains 70 ½:
Many of our clients like to take advantage of having some or all of their RMD from their IRA go directly to a charity, known as a Qualified Charitable Distribution (QCD). This allows many people who don’t have enough deductions to itemize to still get some tax benefit by donating some or all of their RMD (up to $100,000 per year) directly to a charity. By doing this, the amount going to charity is not counted as income to the taxpayer, but they also do not get a charitable deduction. This can be helpful in situations where you are trying to keep your income below certain limits to avoid additional taxes, higher Medicare premiums or other things that may increase your taxes or disqualify you from benefits because of your income. Another note to add to this, the $100,000 annual maximum amount has not been increased since it was enacted over 15 years ago, however, starting in 2024, it will be increased annually for inflation.
Penalty For Not Taking the RMD Reduced:
I tell people all the time, the IRS does not have a sense of humor and if you had failed to take your RMD from your IRA in the past, you may have received a “love letter” from the IRS saying that you owed a 50% penalty on the amount of the RMD you did not take. Ouch! (For Focus clients this is not an issue as we will always make sure you have taken your required amount each year.) SECURE 2.0 alleviates some of this pain by reducing the penalty for not taking your RMD to 25% of the amount not taken and if the shortfall is corrected within a specified “correction window” the penalty is reduced further down to 10%. I guess the IRS has a compassionate side.
529 Plan to Roth Transfers After 15 Years:
This is a great provision and allows amounts that have been maintained in a College Savings 529 plan for at least 15 years to be rolled, tax-free to a Roth IRA for the beneficiary of the 529 plan. There is a lifetime limit of $35,000, but this can be a big deal for excess funds in a 529 plan, due to scholarships or the beneficiary not attending college. You would need to do a bit of planning, though, as any contributions (and earnings thereon) within the last 5 years are not eligible to move to the Roth. Also, the child will need to have compensation from employment just like anyone else opening an IRA would require, so the transfers would be made over a number of years. Still, this can be a huge planning opportunity for some and a great alternative if college funds are not needed.
New Rules For Accessing Retirement Funds During Times of Need Before Age 59 ½:
As you know, if you take a distribution from a qualified retirement account (besides inherited accounts) before reaching age 59 ½, there is a 10% penalty on top of the income taxes incurred. There are certain exemptions to this such as higher education, certain medical expenses or disability. SECURE 2.0 adds some additional flexibility on when you can access retirement accounts without penalty prior to reaching age 59 ½. This now includes:
- Exception for individuals with a terminal illness
- Victims of Domestic Abuse
- Starting in 2026 exceptions to pay for Qualified Long-Term Care insurance
- Age 50 exceptions for private-sector firefighters and state and local corrections officers
- “Emergency Withdrawals” of $1,000 per calendar year and no more than 1 such distribution per year. The definition is broad and just says “Such distributions will be exempt from the 10% penalty and can be taken by any taxpayer who experiences unforeseeable or immediate financial needs relating to necessary or personal or family emergency expenses. This is a very broad definition, so this can be interpreted liberally, but an “emergency” trip to Vegas to play poker probably won’t qualify.
SECURE 2.0 also created Emergency Savings Accounts linked to qualified employer plans such as 401(k) and 403(b), but not IRAs. If your income is under $145,000 and you do not own more than a 5% interest in the business. The goal is to help people save for emergencies since so many people do not have cash set aside for unplanned expenses. The balance in these accounts gets capped at $2,500, so it cannot really cover larger emergencies, but is better than nothing.
IRA Catch-Up Contributions to be Indexed for Inflation:
20 years ago, tax reform in 2001 allowed individuals over 50 years of age to make additional contributions to “catch-up” on shortfalls for retirement savings. The original “catch-up” then was $500 a year and was increased in 2006 to $1,000 additional where it has remained until this day. Starting in 2024, IRA “catch-up” contributions will finally be indexed to inflation and adjustments will be made annually in $100 increments.
Increased “Catch-Up” Contributions for Plan Participants in Their Early 60’s:
Starting in 2025 and going forward participants of employer retirement plans (401(k), 403(b) etc. who are age 60 to 63 (too bad if you are 64) will be able to make additional “catch-up” contributions of the greater of $10,000 (up from the current $7,500) or 150% of the regular “catch-up” amount. They will need to adjust the language in this a bit, because 150% of the current $7,500 “catch-up” is already $11,250, so we will probably see a tweak (Why can’t they just make this simple?). But those attaining these ages will have the ability to make some additional contributions. However, there are requirements that “high earners” (Above $145,000) will have to make these additional contributions to Roth accounts.
Participants in SIMPLE IRA and 401k plans also get some benefit as they will see their “catch-up” for these ages increase from $3,500 to $5,000. Income limitations will also apply so that the additional amount will have to go to the Roth portion of these accounts.
Retirement Savings “Lost and Found”:
Within the next two years the Department of Labor will create a searchable database to help people find “lost” retirement accounts from old employers, etc. that they have lost track of over the years and throughout job changes. Many people who have changed jobs a couple of time, lose track of some of their company sponsored retirement plans and it is not always easy to remember where they are located. This will make it easy for someone to do a quick search and see if they have any orphaned retirement plans out there.
I just touched on some of the main points of interest that may have the largest impact for most of our clients and readers. There are many more provisions in SECURE 2.0 that are beyond the scope of this article. If you have a bad case of insomnia and want to review the entire text of this act, make sure you are well caffeinated and go here. You can also go here for a detailed explanation of all the key provisions.