The SECURE Act 2.0 was passed as part of an omnibus spending bill in December 2022, setting up further changes to your retirement accounts in addition to the original SECURE Act passed in 2019. This was long anticipated, and many iterations were discussed; now that we have clarity, I will summarize the key points that we believe are most relevant to our clients. I would first warn you that nothing in this law seems to simplify anything about managing your finances, and, in fact, the Act has added many complications, new calculations, and additional layers of rules. Nonetheless, the changes are positive, and you can benefit from them if you are able to take advantage of them.
Required Minimum Distributions
The age that RMDs are to begin was once 70 ½ , but in 2019 it was changed to age 72. Beginning in 2023, the new RMD age is 73, and in 2033 the RMD age will jump again to age 75. In addition, the highly punitive penalty for missed RMDs has decreased from 50% to 25%, and, if there is a mistake that is corrected in a timely manner, the penalty drops to 10%. While all these different rules may cause some confusion, there is no downside to any of these changes and you will now have more time to grow your deferred retirement accounts if you haven’t already reached the RMD age.
Qualified Charitable Distributions
The change to the RMD age does NOT change the QCD rules. This benefit allows you to give up to $100,000 annually to charity directly from your IRA if you are over the age of 70 ½ without having to recognize the distribution as income, which makes for a lower Adjusted Gross Income. Minimizing AGI is beneficial for certain tax credits and deductions. However, the new law does change the $100,000 limit that has been in place for 15 years. Beginning in 2024, the limit will be adjusted annually for inflation, boosting the opportunity to take advantage of this strategy as a popular way to support charities.
There has been some concern that the benefits of Roth accounts would be lessened or eliminated, but once again that has not happened. The “backdoor Roth conversion” strategy is still intact, no new limits have been placed on who can use Roth conversions, and some benefits have been expanded. While Roth IRAs have never been subject to RMD for the original owner, Roth 401(k) and 403(b) plans did require an RMD, making it more desirable to roll Roth funds into a Roth IRA upon retirement. Congress has aligned the rules amongst all plans by eliminating the RMD requirements for Roth 401(k) and 403(b) plans.
Flexibility has increased under the new rules for these education savings plans that have grown quite popular. The new law now allows for up to $35,000 of unused 529 plan funds to be rolled over to a Roth IRA. Funds contributed to the 529 plan during the previous five years cannot be transferred and the rollover is treated as a contribution towards the annual Roth IRA contribution limit, which means it would take several years to take full advantage of this new provision. The 529 plan must have been in place for a minimum of 15 years and the Roth IRA receiving the funds must be in the name of the 529 plan beneficiary. This could be a good way to help your children/grandchildren get a jump start on their retirement savings if their 529 was over-funded or they received scholarships. As a reminder, these plans can also be used for K-12 expenses in a limited capacity, per the original SECURE Act passed in 2019.
There are some changes to IRA catch-up contributions. When you turn 50, you have the option to contribute an additional $1,000 to your IRA. For example, in 2023 if you are 50 or older you can contribute up to $6,500 to an IRA, plus the catch-up amount of $1,000. Beginning in 2024, this catch-up amount will be adjusted for inflation in increments of $100. In addition, catch-up contributions to 401(k) and 403(b) plans for participants ages 60-63 are also increased to $10,000 or more beginning in 2025. Once again, these changes add more confusion, but all are positive changes for savers.
Inherited IRA 10-Year Rule
The 10-year rule was actually not part of the SECURE Act 2.0, however, there was clarification on this rule within the IRS proposed regulations of the SECURE Act that was contrary to prior interpretation by almost everyone, so it is worth noting. In the 2019 law, Congress eliminated the benefit of the “Stretch IRA,” which was the ability to use a beneficiary’s life expectancy to minimize RMDs and therefore “stretch” the IRA distributions over the beneficiary’s lifetime. That rule was replaced with the 10-year rule, which was interpreted to mean that the beneficiary must distribute the entire Inherited IRA within 10 years of the death of the IRA owner, but with no RMD in the meantime. The IRS interpreted the 10-year RMD rule differently and determined that annual RMDs are required during the 10 years if the owner was already in RMD status. The IRS acknowledged that thousands of beneficiaries had not been following the rule according to the proposed regulation during 2021 and 2022, therefore there was no penalty in those years for not withdrawing. While final regulations have not been issued, it appears that beginning in 2023 there will be RMDs for beneficiaries of IRAs if the deceased owner was in RMD status.
Unfortunately, the rules continue to get more complicated, and it gets harder to keep up, even for the professionals. My goal here was to provide relevant bits of information for aspects of the law that may apply to you. I assure you that this is not a thorough explanation and there is much more to it, including rules on employee plans, as well as all kinds of exceptions for accessing retirement funds in emergencies and for certain professions. First Business Bank’s Private Wealth professionals will continue to keep you apprised of any additional changes, and we look forward to the year ahead.