Below is a list of the salient changes made by the new Secure Act 2.0 relating to retirement accounts. We can send out a client bulletin regarding this, and mention that if clients have questions about any of these changes, or how they might impact the clients’ estate planning documents, they should contact a member of our T&E Department.
Effective now (2023):
1. Required Beginning Date. The Required Beginning Date for when Required Minimum Distributions (RMDs) begin is now 73 (increasing to 75 in 2033).
2. Qualified Charitable Distributions. Individuals are permitted to take nontaxable distributions of up to $100,000 each year from their IRAs for the purpose of contributing to a charitable organization (qualified charitable distributions). The new law indexes this $100,000 amount for inflation, and allows individuals to make a one-time election for qualified charitable distributions of up to $50,000 (also indexed for inflation) to be made to certain organizations that would not otherwise be considered charitable organizations under the provision: charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts.
3. Matching or Non-Elective Contributions. Employers can permit participants in 401(k), 403(b) and governmental 457(b) plans to elect that matching or non-elective contributions are made as Roth (after-tax) contributions. Prior to this change, employers had to make matching and non-elective contributions on a pre-tax basis. Any such contributions must be fully vested.
4. Reduction in Required Minimum Distribution (RMD) Penalty. Currently, individuals owe an excise tax of 50% on any amount that is required to be, but is not, distributed as an RMD each year. Individuals can request relief from this penalty by requesting a reasonable cause exception, or employers can request relief on behalf of plan participants and beneficiaries through a Voluntary Correction Program (VCP) submission. Secure Act 2.0 reduces this excise tax from 50% to 25%. In addition, the excise tax may be reduced even further, to 10% if an individual corrects the failure within a 2-year correction period.
5. SIMPLE and SEP Roth IRAs. Currently, SIMPLE IRAs and SEPs are not allowed to permit contributions on a Roth (after-tax) basis. Secure Act 2.0 provides that sponsors of SEPs and SIMPLE IRAs may offer employees the ability to designate contributions as Roth contributions.
Effective in 2024:
Roth Catch-Up Contributions. Currently, “catch-up” contributions can be made on a pre-tax or Roth basis to qualified retirement plans for individuals who are age 50 or older in the calendar year. Effective for tax years commencing in 2024, the legislation requires employees whose compensation equals or exceeds $145,000 (indexed) to make catch-up contributions on a Roth basis only. This provision does not apply to SIMPLE IRAs or SEPs.
Required Minimum Distributions for Roth Accounts. Currently, Required Minimum Distributions (RMDs) are required during the account owner’s lifetime for Roth accounts in employer retirement plans but not Roth IRAs. Secure Act 2.0 eliminates the pre-death distribution requirement for Roth accounts in employer plans..
Beneficiaries of “long-term” 529 accounts will be allowed to roll over up to $35,000 of an “overfunded” 529 account to a Roth IRA tax- and penalty-free. The 529 account must have been open for at least 15 years and rollovers will be subject to the annual Roth contribution limit (currently $6,500 for those under age 50). This change likely means that rollovers would take place over several years.
Relief for employees making student loan payments. Employees that are not able to make 401(k) contributions often lose out on not only the compounding of investment returns over time, but also on any employer matching contributions. Beginning in 2024, employers are allowed to count employee student loan payments as if they were employee 401(k) contributions for the purposes of calculating the employer match, so employers may make matching contributions to 401(k) accounts of employees who have not made 401(k) contributions, where such employees have instead made payments on qualifying student loan debt.
Effective partially in 2023 and partially in 2024:
Additional Early Withdrawal Exceptions. Secure Act 2.0 amends Section 72(t)(2) of the Code to allow new exceptions to the 10% additional tax for early withdrawals from eligible retirement plans, including IRAs, for (1) distributions to domestic abuse victims, and (2) certain emergency personal expense distributions. These provisions apply to distributions made in 2024. There is also a new exception for terminally ill participants, effective immediately (in 2023).
Effective in 2025:
Employees ages 60–63 will have a higher “catch-up” contribution limit for 401(k), 403(b) and similar plans. The limit, now $7,500, will increase to around $11,250. If the worker earns more than $145,000 in wages, all of this catch-up amount would be treated as a Roth contribution.
Importantly, Secure Act 2.0 does NOT require that retirement account beneficiaries subject to the new “10-Year Rule” (including some trusts) must withdraw calculated amounts annually. Apparently this might happen sometime later in 2023 however so clients should check back with us in a few months.