The Consolidated Appropriations Act of 2023 signed into law late last year contains the long-awaited provisions commonly referred to as SECURE 2.0. As we progress through 2023, many individuals are concerned about how SECURE 2.0 may impact them. Some provisions are effective beginning in 2023 while others are delayed to future years. Final guidance on many of the provisions will be forthcoming in the coming months or longer.
Below are some key summary points of the updated legislation.
Required Minimum Distributions (RMD) Are Pushed Back
Congress moved the Required Minimum Distribution (RMD) age to 72 from 70 ½ in 2020 under the original SECURE Act. Three short years later, SECURE 2.0 increases the RMD age once again from 72 to 73 for individuals born between 1951 and 1959. Beginning in 2033, the RMD age will increase again to 75 for individuals born 1960 or later.
Individuals that turned 72 in 2022 are still required to take their first RMD by April 1, 2023.
Beginning in the 2023 tax year, SECURE 2.0 reduces the 50% penalty assessment for RMD shortfall to 25%. The 25% is further reduced to 10% if the RMD failure is corrected within the “Correction Window.” This change does not preclude an individual from seeking penalty abatement from the IRS.
The changes to the RMD age do not impact when Qualified Charitable Distributions (QCD) can be made. Individuals can still make QCDs starting at age 70 ½.
Effective in 2024, SECURE 2.0 eliminates RMDs for qualified employer-sponsored Roth accounts. Individuals who are already taking RMDs from employer-sponsored Roth accounts can opt out of these beginning in 2024.
Limited Tax-Free Rollovers from Section 529 Education Savings Accounts to Roth IRAs
In a surprising twist, SECURE 2.0 includes a provision allowing unused funds in a Section 529 education savings account to be rolled over into a Roth IRA. Beginning in 2024 and subject to certain conditions, unused 529 funds can be transferred to a Roth IRA account without any modified adjusted gross income (AGI) limitations. The following conditions must be met for the transfer to be valid:
- The Roth IRA beneficiary must be the same as the 529 plan beneficiary;
- The 529 plan must have been in existence for 15 or more years;
- Any 529 contributions (and related earnings) made within the last 5 years are ineligible for Roth IRA transfer;
- The beneficiary must have sufficient earned income. The annual 529 to Roth IRA transfer is limited to the annual IRA contribution limit (for 2023: $6,500) less any regular traditional or Roth IRA contributions made; and
- An individual’s lifetime maximum that can be transferred is $35,000.
Enhanced Catch-up Contributions
Under current rules, employees who are 50 or older are eligible to contribute an additional $7,500 in 2023 to their employer sponsored plan. Starting in 2025, employees that are in their early 60s (defined by the IRS as ages 60-63) will have their catch-up contribution limit increased to the greater of $10,000 or 150% of the catch-up amount (indexed for inflation).
Unfortunately, it is not all good news. Congress added a provision that requires ‘Rothification’ of the catch-up contribution for highly compensated employees. For this provision, a highly compensated employee is defined as an individual whose wages from the employer sponsoring the plan exceed $145,000 in the preceding calendar year (indexed for inflation). This new rule only applies to catch-up contributions for 401(k), 403(b), and governmental 457(b) plans. Catch-up contributions for IRA accounts are not impacted by this rule.
Student Loan Repayment
Starting in 2024, SECURE 2.0 allows an employer to make matching contributions based on an employee’s qualified student loan repayments even if the employee does not directly contribute to the retirement fund.
Accessing Retirement Funds During Hardship
In general, the IRS imposes a 10% penalty for retirement account distributions before age 59 ½. Under the original SECURE ACT, Congress allowed penalty-free distributions in certain situations. SECURE 2.0 expanded the existing listing of 10% penalty free distributions. Some of the additions are listed below-
- An individual who is deemed terminally ill (expected death within 84 months) by a physical can withdraw funds without the 10% early distribution penalty. Distribution may be repaid within 3 years.
- Effective in 2024, victims of domestic abuse can withdraw up to the lesser of $10,000 (indexed for inflation) or 50% of the vested balance without penalty. Distribution must occur within 1 year period after an individual becomes a victim. Distribution may be repaid within 3 years. Effective in 2026, distribution of up to $2,500 per year can be made to pay premiums on certain types of long-term care contracts.
Other Key Provisions
- First-year individual 401k (aka solo 401k) accounts can now be opened and funded for the prior tax year up until April 15th (not October 15th, even if the taxpayer is on an extension).
- Effective in 2024, a surviving spouse can elect to be treated as the deceased spouse for RMD calculation purposes. The election cannot be revoked without IRS consent – see more details here.
- Effective in 2024, the Act eliminated RMDs for qualified employer-sponsored Roth accounts. For individuals who are already taking RMDs from employer-sponsored Roth accounts, they can simply stop taking them beginning in 2024.
- Effective in 2023, SECURE 2.0 authorizes the creation of SIMPLE Roth and SEP Roth IRA accounts.
Overall, SECURE 2.0 is aimed at providing increased access to retirement plans, providing incentives to employers to provide this access, expanding the ways to obtain these funds from accounts, and ease of administration. For more information regarding SECURE 2.0, visit https://www.finance.senate.gov.
Disclosures
The material has been gathered from sources believed to be reliable, however BWA cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. To determine which investments or planning strategies may be appropriate for you, consult your financial advisor or other industry professional prior to investing or implementing a planning strategy. This article is not intended to provide tax or legal advice, and nothing contained in these materials should be taken as such. To determine which tax planning strategies may be appropriate for you, consult your tax advisor. Investment Advisory services are offered through Bordeaux Wealth Advisors, LLC. Advisory services are only offered where Bordeaux and its representatives are properly licensed or exempt from licensure. No advice may be rendered unless a client agreement is in place.
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