SECURE Act 2.0: What You Need To Know
Every year on April 15th (or October 15th for those who file extensions) we pay our biggest bill to our least favorite Uncle Sam.
Every year, as we earn more, so does Uncle Sam’s cut of our earnings.
While you cannot avoid Uncle Sam finding his way into your pocketbook, you can plan around minimizing how much he takes.
One way to do that is to stay on top of new tax legislation and to use the tax code to your advantage.
On December 23rd, 2022, The US House of Representatives passed the Consolidated Appropriations Act of 2023 coined the SECURE Act 2.0 from its predecessor Consolidated Appropriations Act of 2020 which outlined the original SECURE Act.
The bill is a whopping 1,653 pages of which, the major retirement and financial planning applicable tax planning changes begin on page 817, Division T - SECURE 2.0 Act of 2022.
Let’s dive in!
Required Minimum Distribution Age (RMD) Pushed Back
Headline change is Required Minimum Distribution Age (RMD) is being pushed back from 72 to 75 - which is graded based on birth year:
This means for those who are turning 72 this year you are not required to take your RMD.
CM Planning Note – this means that there will be fewer years of forced distribution from retirement accounts which would increase the total tax due. While you could potentially have a lower tax bill for longer due to RMDs being pushed back, the reduced time to get this money out of your account will further place more value on Roth conversions in the years prior to ensure that your total lifetime tax liability is as low as possible. Further, because the SECURE Act of 2019 removed the stretch IRA (ability to take RMDs based on your lifespan opposed to the decedent) your non-eligible designation beneficiaries will have 10 years to pull this money out which would increase their tax liability.
The penalty for missing an RMD was previously 50% of the RMD (you definitely didn’t want to make this mistake) but now this legislation reduces the penalty to 25%. Further, this penalty can be reduced to 10% if fixed during the “correction window” which is defined as:
When the Notice of Deficiency is mailed to the taxpayer
When the tax is assessed by the IRS
The last day of the second tax year after the tax is imposed.
So, it appears that (per the last bullet point) this would allow for a multi-year process to reduce the missed RMD penalty down from 25% to 10%.
Qualified Charitable Distributions (QCDs) are an exception to the rule and are hard coded in the tax code at age 70.5 and are not changed based on RMD age.
One change with QCDs is that the total amount allowed to be distributed increased from $100,000 to $200,000 and there will be a cost-of-living adjustment added in 2024.
Roth Provisions
This legislation made a fair amount of changes to Roth related provisions.
Why?
If there’s one thing, I’m certain of, it’s that the IRS like’s money NOW - which makes the Roth contributions one of the few provisions in the tax code where both taxpayers and congress are happy.
Congress gets paid today = happy
Taxpayer gets tax free growth = happy
I digress - back to the legislation!
RMDs from employer sponsored plans (401k, 403b, TSP) have previously been required whereas within a Roth IRA, that hasn’t been the case.
This legislation changes that and now allows for Roth contributions to employer sponsored plans to avoid having to take RMDs starting in 2024.
Generally, when you start RMDs you cannot stop - if you have an employer sponsored plan where you are taking RMDs, you will be allowed to stop taking them in 2024.
Roth SEP and SIMPLE IRAs are available in 2023 - this is HUGE!
Historically, SEPs and SIMPLEs have been only pre-tax contributions. Having a Roth contribution option was one of the reasons why it made sense to switch into a 401k.
CM Planning Note – unrelated to the SECURE Act 2.0 but applicable nonetheless, you cannot recharacterize your Roth contributions to Traditional once you’ve made the election. You CAN recharacterize Roth to Traditional contributions in an IRA. Choosing your election should be made wisely.
Employer Roth contributions can also be made to ONLY matching and nonelective contributions (NOTE: this does not count profit sharing).
Section 604 in the legislation mentions:
This appears to suggest that amounts of employer matching contributions will be included in the gross income of the employee in the year of the contribution and will be nonforfeitable (meaning, not subject to a vesting schedule).
CM Planning Note – this makes sense because if the Roth contribution wasn’t included in the employee’s gross income, I don’t see many (if any) employers matching Roth matching contributions because they wouldn’t be able to write that contribution off.
Effective in 2024, individuals who make more than $145,000 in wages from their employer CANNOT make pre-tax catch-up contributions to their (non-SIMPLE IRA) plan.
While catch up contributions are eligible for those 50+ and are in addition to their employee elective deferral, this puts a wrinkle to those who earn high wages to be able to store away $7,500 pre-tax.
CM Planning Note – at first glance this is frustrating because you’re reducing the flexibility of employee and forcing their hand into paying tax today (Roth) verse paying later (Traditional). At the end of the day, this only for the catch up, which many employees don’t save enough to take advantage of in the first place. For those high-income earners who can take advantage of this, this is still better than a taxable account where interest, dividends, and capital gains are taxable each year.
529-To-Roth IRA Transfers
Effective 2024, your 529 plan will be eligible to be transferred to the stated beneficiaries Roth IRA.
The 529 plan must be moved directly to a Roth IRA and MUST have be the Roth IRA of the 529 plan beneficiary.
The maximum lifetime transfer to each beneficiary is $35,000.
This lifetime transfer amount is subject to the IRA contribution limits minus any regular Traditional or Roth contributions, annually (Roth IRA income limits do not apply).
The 529 plan must exist for 15 years before they could roll over the 529 plan.
CM Planning Note – similarly to how we would contribute $1 to a Roth IRA to start the 5-year clock, we could do the same thing with clients to contribute $1 to a 529 to start the 15-year clock so that later down the road this account grows tax deferred (& out of the estate of the owner) which can eventually be passed to the named beneficiary (which would also be changed). The only caveat here is that you CANNOT transfer contributions (and earnings attributable) made in the last 5 years → this means the conversion is two-pronged: must satisfy 15-year clock & assets being transferred must be in the account longer than 5 years.
New Post Death option for Surviving Spouse Beneficiaries
Effective 2024, the surviving spouse can elect to be treated as the decedent for RMD purposes.
There’s also one subtle change that spouse beneficiaries will be able to calculate their RMD from the Uniform Lifetime Table relative to the Single Life Annuity tables. This reduces the RMD amount required from the surviving beneficiary and will extend the lifespan of the account.
Catch-Up Contributions
Effective 2024, IRA catch-up contribution limits will be indexed by inflation (in $100 increments).
Retirement plan catch up contributions for individuals age 60, 61, 62, and 63 are increased to whichever is greater:
$10,000
150% of the regular catch-up amount for 2024
Note – this is separate from the $145,000 Roth mandatory contribution election, this is strictly referring to how much catch-up contributions are allowed.
Accessing Your Retirement Plan
Age 50 exception for public safety workers has been expanded to include private-sector firefighters, state and local correction officers, and plan participants who separate from service after 25+ years of service.
Penalty free Qualified Disaster Recovery Distributions are allowed up to $22,000 that must be paid back within 3 years. Provided it’s a Federally Declared Disaster Area and your primary residence is located within the stated area, the distribution must be made within 180 days.
Terminal illness which was previously defined as 2-years until your passing has been expanded until 7 years. Meaning if your doctor has certified you will pass within 7 years, you can access your retirement plans penalty free.
Victims of domestic abuse can access a maximum distribution of the lessor of:
$10,000
50% of vested balance
Distributions are made repayable for up to 3 years.
Effective in 2024, if you have an emergency expense, you can take a penalty free $1,000 distribution that must be repaid within 3 years.
For a long-term care need, effective beginning 2026, you can take the lessor of:
$2,500
10% of vested account balance
This legislation also eliminated the penalty on the distribution of earnings on excess contributions. Previously, if you had excess contributions you made to an employer sponsored plan, you had to remove the contribution plus earnings and the earnings were subject to a 10% penalty. While there will not be a 10% penalty, the excess contribution is still taxable.
CM Planning Note – your IRA accounts allowed for a penalty-free correction of your excess prior to tax filing. Employer sponsored plans corrections were more costly - I’m glad to see the rule becomes more relaxed here.
Effective in 2024, if you have an account from which you are making 72(t) distributions from, you can rollover a portion to another account as long as the total payments for purposes of satisfying the 72(t) distribution are satisfied.
Effective 2024, emergency savings accounts (ESAs) must be attached to an employer-plan account. Those who are highly compensated (income > $150,000 in 2023). Account balance may not exceed $2,500 attributable to contributions.
If you operate as a sole proprietor, you are now able to make retroactive salary deferrals for prior years. Previously, your salary deferrals into your 401k were only able to be made before the year ended. This means in 2023 you can make prior year contributions in 2024 until April 15th.
SIMPLE IRA just became the COMPLEX IRA (JK but things just got complicated quickly):
Beginning 2024, additional non-elective contributions to SIMPLE IRAs, up to 10% of comp or $5k (whichever is less) this means there would effectively be a mandatory profit-sharing component to adopting SIMPLE IRAs… But there’s more:
This only changes the contributions for SOME not ALL plans, employers with 25 or less employees would have a deferral and catch-up limits increased by 10% while employers with 25 of more employees would have regular limits UNLESS they increase their match to 4% or their nonelective regular contributions to 3%...
So effectively, 2 people with identical incomes and identical SIMPLE plans would have two different contribution limits because of the number of employees (phew!).
Employers can match payments made from plan participants to their student loans.
If you’re someone who has a large student loan burden, you can make payments to your student loans and your employer will ACT as though you made contributions to your retirement plan and will match those contributions.
CM Planning Note – this is better than having your employer make payments to the loan balance. If you’re on an income driven repayment plan the employer contribution would just calculated separately from your contribution which decreases its effectiveness towards decreasing your loan balance.
Starting in 2027, the Saver’s credit, previously paid in cash as a part of a tax refund, is now deposited into a saver’s retirement account. The match is 50% of the first $2,000 of taxpayer contribution to a retirement plan. This is subject to income phaseouts.
For employers who start a small business with up to 50 employees, this credit increases from 50% of expenses to 100% of expenses. There is an additional start up credit for employer matching contributions. This phase out is limited to $1,000 of contributions per employee and is not eligible for employees with income greater than $100,000. The applicable percentage falls by 25% starting at 100% over 4 years.
Starting in 2025, mandatory auto-enrollment will be required for employer plans. Initial default rate must be at least 3% and no greater than 10% and must auto-escalate by 1% annually until at least 10% (but not greater than 15%). Exempt plans include: plans that exist prior to 2025, governmental/church plans, employers with less than 10 employees, employers who have existed for less than 3 years, and SIMPLE IRA plans.
In 2024, there will be a starter 401k plan offered which is effectively only employee contributions - no employer contributions. Only downside is that instead of getting $22,500, you are limited to the IRA contribution limits.
There you have it!