As 2022 came to a close, Congress passed an omnibus spending bill, the $1.7 trillion Consolidated Appropriations Act of 2023, and it was signed by President Joe Biden on December 29. Contained within this bill is the SECURE 2.0 Act of 2022, designed to strengthen the country’s retirement system and better prepare Americans for retirement.
SECURE 2.0 is an extensive act, composed of 90 provisions that affect retirement planning. Not all of the new provisions affect everyone, but some of the retirement plan and tax changes contained in the act are widely applicable and worth highlighting. We’ve mentioned here some of the most interesting provisions.
Secure 2.0 Affects RMDs: The act affects how and at what age you must take required minimum distributions, also known as RMDs, from your tax-favored retirement accounts.
- For those turning 72 in 2023 or later, the age at which you must begin taking RMDs will rise to age 73 instead of the current age of 72. Starting in 2033, the age will rise again to age 75.
- The act also eliminates lifetime RMDs for Roth accounts in employer plans (like a 401(k) plan) beginning in 2024. Roth IRAs have long had no lifetime RMDs, so this provision eliminates a significant difference between the Roth IRA and the Roth employer plan. Beneficiaries of such accounts must still take RMDs after the original owner’s death.
- The penalty for a failure to take an RMD in any year is reduced to 25% (from 50%), and further to 10% if the failure is corrected in a timely manner.
Spousal Planning Subject to Election: Another provision changes the treatment of surviving spouses who are beneficiaries, effective in 2024.
- A surviving spouse must now make an election to obtain certain favorable treatment in calculating RMDs after the first spouse’s death (namely deferring the start of their RMDs to when the deceased spouse would have started, and use of the more favorable Uniform Lifetime Table). Previously, such treatment was available automatically with many marital planning options.
- This election does, however, provide for more favorable RMD calculations when using a ‘conduit’ trust for a surviving spouse (used often in second marriages to preserve assets for the original owner’s own beneficiaries after the spouse’s death). This new election makes the conduit trust more comparable, from a tax perspective, to naming the spouse directly as an individual beneficiary.
- The surviving spouse should consult with advisors after the first spouse’s death to ensure that, if necessary, the proper election is made. After some of the kinks in the legislative language are worked out, spouses may also reconsider the use of trusts with retirement accounts, in the right situations.
529 Plan Rollovers are Now Available: Starting in 2024, beneficiaries of a 529 Plan can roll the funds to a Roth IRA in certain circumstances. Previously, if the 529 Plan had funds remaining after the beneficiary had exhausted eligible educational expenses, the only options were to 1) roll the 529 Plan over to another beneficiary who still had eligible educational expenses or 2) withdraw the account and incur the income tax and 10% penalty. Allowing for the rollover to the Roth provides the beneficiary with an early opportunity to start a nest egg that can grow tax free for decades to come. Items to note about these rollovers:
- The 529 Plan must have been open for at least 15 years.
- To keep people from contributing funds to the 529 Plan just before the rollover to a Roth, the beneficiary can’t rollover amounts contributed to the 529 Plan within five years of the rollover.
- The provision only allows a total of $35,000 in rollovers during the beneficiary’s lifetime, and the annual limit is the Roth IRA contribution limit ($6,500 in 2023).
- The transfer must be made directly from the 529 Plan to the Roth IRA custodian.
- The income limitation for direct Roth contributions (currently $153,000 for a single taxpayer) does not apply to these rollovers.
Qualified Charitable Distributions are Expanded: Qualified Charitable Distributions (QCDs) are distributions made directly from your IRA to a charity. QCDs are excluded entirely from your gross income and can be applied toward your RMD for that year.
- Historically, QCDs must go directly to a charity. A provision of the new act allows donors to make a one-time QCD of $50,000 to a split-interest charitable entity, such as a charitable remainder trust or charitable gift annuity. A “split interest” entity has both charitable and individual beneficiaries. In other words, you can benefit both family members and charities with a one-time QCD of $50,000.
- The annual $100,000 QCD limit is now indexed to inflation, meaning that the QCD limit will increase each year with inflation.
Special Needs Planning has New Options: SECURE 2.0 provides additional clarity and flexibility when planning for disabled or chronically ill beneficiaries.
- ABLE (Achieving a Better Life Experience) accounts are tax-advantaged savings accounts that do not impact asset-tested government benefits received by special needs beneficiaries. These accounts can now be opened for those whose disability occurred before age 46, instead of the current age limit of 26.
- For a special needs trust that is a beneficiary of a retirement account, the act also specifies that the special needs trust can have a charitable beneficiary that receives the trust funds after the disabled or chronically ill beneficiary’s death, and that adding this charitable beneficiary will not compromise a special needs beneficiary’s ability to use the life expectancy time frame for payout of the retirement account and payment of the taxes.
- Before this new provision, adding a charitable beneficiary would likely subject the retirement account to a much shorter payout period after your death, often five years.
- Clients with special needs beneficiaries often wish to provide for charities who have helped the beneficiary along the way, and this provision makes it easier for the client to pay it forward down the road.
Retirement Savings Options Have Expanded: Currently, there is a limit to the amount of pre-tax money you can shelter in a retirement account per year, but a few provisions expanded those amounts.
- In 2023, those over age 50 can make annual “catch up” contributions of up to $7,500, in addition to the standard $22,500 deferral, to certain retirement plans such as 401(k)s to help increase their nest egg. Starting in 2025, this catch-up contribution limit increases to $10,000 for individuals who are age 60 through 63.
- One caveat to this: If your income in the previous year exceeded $145,000, these catch-up contributions are subject to mandatory Roth treatment, which means that they cannot be made as pre-tax contributions. You would not receive a tax deduction up front, but the funds would grow tax-free in the Roth account.
- IRA owners over age 50 can currently contribute an additional $1,000 in “catch-up contributions” each year. The Act provides that the $1,000 catch-up limit is indexed for inflation, beginning in 2024.
- Certain annuity options have also been expanded, including the limits on Qualified Longevity Annuity Contracts. SECURE 2.0 also eliminates the current penalty for IRAs and other pre-tax retirement accounts that are partially annuitized (meaning that the account also holds an annuity). Under the new rules, an individual can choose to aggregate the distributions from both the annuity and non-annuity portions of the account – which could result in lower RMDs in some cases.
SECURE 2.0 will definitely change the retirement savings landscape for many Americans. If you have questions about how SECURE 2.0 will affect you and your retirement savings plan, contact your Warner estate planning attorney or Sara Nicholson at firstname.lastname@example.org or at 269.276.8131.