SECURE Act 2.0: New Rules Impacting RMDs and Retirement
In the final days of 2022, Secure Act 2.0 was signed into law impacting millions of Americans and their retirement accounts. This sweeping legislation has dozens of provisions, so I have highlighted some of the most significant below:
New Distribution Rules
RMD age is now 73 or 75.
By far, one of the most critical changes was increasing the age at which owners of retirement accounts must begin taking required minimum distributions (RMDs):
- If you were born in 1950 or earlier you will need to continue to take RMDs as scheduled.
- If you were born between 1951 and 1959 your RMD requirement won't start until the year you turn 73.
- If you were born in 1960 or later, you don't need to start RMDs until the year you turn 75.
Reduced penalty for missed RMDs.
Starting in 2023, if you miss an RMD the penalty drops to 25% from 50%. If you fix the mistake before the IRS notifies you or within two years (whichever comes first), the penalty has the potential to drop to 10%.
Expanded Qualified Charitable Donations (QCD) provisions.
Individuals aged 70.5 or older have the ability to make up to $100,000 in donations directly from an IRA to a qualified charity through a QCD. Such donations generally count toward RMD requirements without recognizing taxable income. This $100,000 QCD donation limit will be adjusted for inflation moving forward.
- A new provision allows a one-time QCD up to $50,000 from an IRA to fund a charitable remainder annuity trust (CRAT), charitable remainder unitrust (CRUT), or a charitable gift annuity (CGA) that benefits the participant or their spouse. This one-time QCD counts toward the individual's RMD and allows them to receive income over their lifetime with the remainder going to charity after death. Income from these trusts will be treated as ordinary income.
Greater access to retirement funds.
Plan participants can use retirement funds in an emergency without penalty or fees. For example, starting in 2024, an employee can withdraw up to $1,000 from a retirement account for personal or family emergencies. Other emergency provisions exist for disaster relief (up to $22,000), long-term care insurance premiums (up to $2,500 per year), terminal illness and survivors of domestic abuse (up to $10,000).
New Accumulation Rules
Enhancements for 401(k) and other employer-sponsored plans.
The 2023 "catch up" contribution for people 50 and older is $7,500.
- Starting January 1, 2025, participants aged 60 through 63 can make annual catch up contributions of $10,000 or 150% of the regular catch up limit (whichever is greater) to workplace retirement plans. This $10,000 amount will be indexed to inflation.
- Catch up contributions for participants 50+ earning more than $145,000 annually (indexed for inflation) must be made to a Roth account beginning in 2024.
Catch up contributions are indexed to inflation for traditional and Roth IRAs.
2023 IRA and Roth IRA contribution limits are $6,500 with a $1,000 catch up contribution for those 50 and older. Starting in 2024, this $1,000 catch up contribution will be indexed to inflation on an annual basis.
Automatic enrollment for new plans.
For many new 401(k) and 403(b) plans that start in 2025, the new rules require employers with more than 10 employees to enroll newly eligible employees into workplace plans automatically. However, employees can choose to opt-out.
Student Loan Matching.
Effective 2024, companies will have the ability to match employee student loan payments with retirement contributions. The rule change offers workers the possibility of saving for retirement while paying off student loans.
Revised Roth Rules
529 to Roth transfers.
Starting in 2024, pending certain conditions, individuals can roll over up to $35,000 over their lifetimes from a 529 education savings plan into a Roth IRA tax and penalty free. This new rule adds flexibility for beneficiaries with 529s that are overfunded. Limitations include:
- Rollovers are subject to annual Roth IRA contribution limits (currently $6,500 or 2023 or $7,500 for ages 50 and up).
- Contributions to 529s within the last 5-years (and associated earnings) cannot be rolled over into a Roth IRA.
- The 529 plan must be in existence for at least 15 years.
- The Roth IRA must be owned by the beneficiary of the 529 plan.
- Rollovers are subject to annual Roth IRA contribution limits (currently $6,500 or 2023 or $7,500 for ages 50 and up).
Employer Roth Contributions.
Employees can now choose to have retirement contributions made by their employers deposited into their sponsored Roth accounts. Previously, employer matches were required to go into pre-tax accounts.
401(k), 403(b) and 457 Roth Accounts.
Beginning in 2024, the legislation no longer requires minimum distributions from Roth Accounts in employer retirement plans during the participants lifetime.
Simple IRAs and SEP IRAs.
Roth accounts are now allowed in simple IRAs and SEP IRAs.
If you are currently a client, I am building these changes into your strategic financial plan and our investment approach. If you are not a client, reach out through the button below for assistance navigating Secure Act 2.0.
This article summarizes only specific portions of Secure Act 2.0 and is intended to provide a brief overview of this legislation. It is for educational purposes only. Make sure to consult with your financial and tax advisors prior to taking any action.
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Sources:
Congress.gov - https://www.congress.gov/bill/117th-congress/house-bill/2954/text
Michael Kices & Jeffrey Levine - https://www.kitces.com/blog/secure-act-2-omnibus-2022-hr-2954-rmd-75-529-roth-rollover-increase-qcd-student-loan-match/
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