With the holidays in full swing, many missed the headline that SECURE Act 2.0 was passed by Congress on December 23, 2022 as a part of the Consolidated Appropriations Act of 2023. President Biden signed the Act into law on December 29, 2022, as a part of the government’s year-end spending bill. SECURE stands for Setting Every Community Up for Retirement Enhancement. The first part of the Act was passed in 2019 – also during the last weeks of the year. While the ability to get anything passed in Congress is an accomplishment these days, passing new legislation in the last weeks of the year gives us very little time to plan for the changes. Complaints aside, here are some highlights of the new law that may be of interest to financial consumers.
RMD Age Pushed Back
Required Minimum Distributions (RMDs), or mandatory distributions from your IRA and employer sponsored retirement accounts (if not working), used to be triggered when retirees reached age70 ½. Under the SECURE Act of 2019, the RMD age was pushed back to age 72. Now, as a part of the SECURE Act 2.0, the RMD age has moved from 72 to 73 for anyone that reaches age 72 in 2023 or thereafter. Further, anyone who reaches age 74 after December 31, 2032 will be deferred to taking RMDs at age 75. Anyone already taking RMDs is grandfathered under the old rules – in other words, they are unaffected.
It is important you do not forget to take your RMD because the penalty for failing to take your RMD is pretty steep. Under the old rules, a missed RMD was imposed the stiffest penalty levied by the IRS at 50% of the RMD amount that should have been distributed, but was neglected. Under the new rules, the penalty for a missed RMD has been reduced to 25% of the forgone distribution. Further, the penalty can be reduced to 10% if the retiree catches and corrects the missed RMD before the next tax return is due or before the IRS sends a demand letter.
Retirement Plan Expansions
SECURE Act 2.0 also included a variety of expanded offerings related to retirement plans. Now in addition to Roth 401Ks, employers can also offer Roth SIMPLE IRAs and Roth SEP IRA plans. Prior, these retirement plans were only available in a traditional pre-tax format. Additionally, employers will be allowed to deposit after-tax matching contributions to the Roth accounts, which are included in the employee’s taxable income in the year of contribution.
People who have unused College 529 savings plans can now repurpose those unused savings for a jumpstart on their retirement savings. Unused 529 plan funds can be transferred directly into a Roth IRA, up to a maximum of $35,000. The account holder of the Roth IRA must match the beneficiary name of the 529 plan, and the 529 savings plan must have existed for at least 15 years prior to the Roth IRA transfer to qualify for the tax-free rollover.
Finally, the catch-up contribution will soon be adjusted for inflation! A catch-up contribution is an extra retirement savings allowance for employee’s age 50 years or older. Under this provision, an employee can make an annual IRA contribution of up to $6,500 in 2023, plus an extra $1,000 savings for those age 50+ for a total 2023 IRA contribution of $7,500. The annual catch-up contribution limit has been slow to increase historically. However, starting in 2024, the catch-up contribution limit will be indexed annually for inflation in increments of $100, allowing retirees to save more for their retirement.
Also, catch-up contributions in work sponsored 401K plans will also get an increase. Starting in 2025, 401K plan participants age 60-63 will be eligible for a $10,000 catch-up contribution, compared to the current $7,500 limit.
Interestingly, SECURE Act 2.0 did not eliminate or change several items anticipated to be addressed in the bill. For one, the new law did not eliminate the back-door Roth IRA contribution. A back-door Roth IRA contribution is a legal way for households, whose incomes exceed the limit for a direct Roth IRA contribution, to complete a two-step process that circumvents the restriction and achieves the intended after-tax savings contribution. Unaddressed, this leaves the back-door Roth IRA as a viable savings opportunity still available to high-income earners.
Further, the lifetime gift tax exemption was not reduced as rumored. Indexed annually for inflation, in 2023, the federal estate tax exemption remains high at $12,920,000 per person, or nearly $26 million for a couple. This was expected to be reduced to $5 million per person or $10 million per couple (also indexed for inflation). However, despite the estate tax exclusion reduction being excluded from SECURE Act 2.0, the high gift tax exemption limit of the Trump era will sunset or expire in 2025.
Tax law changes can present new opportunities for you to save money or save taxes. Reach out to your Certified Financial Planner™ or CPA to find out if there are opportunities available to you in the new year!
Bob Veres: Inside Information