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Revised Retirement Rules in the SECURE Act 2.0

New law includes significant changes to the rules for individual retirement accounts and employer plans.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 was signed into law on Dec. 26, 2022, as part of the Consolidated Appropriations Act, 2023. Advisors must familiarize themselves with these changes to help clients who can benefit.

The SECURE Act of 2019, Pub. L. 116–94 (SECURE Act) was signed into law on Dec. 20, 2019.  Now, just over three years later, President Joe Biden signed the Consolidated Appropriations Act, 2023, Pub. L. 117-164, which includes SECURE Act 2.0.  SECURE Act 2.0 made significant changes to the rules for individual retirement accounts and employer plans.  Here’s an overview of select provisions.

Increase in First Distribution Year

The SECURE Act increased the first required minimum distribution (RMD) year from the year the employee or IRA owner (participant) reaches age 70½ to the year the participant reaches age 72.  Section 107 of SECURE Act 2.0 increases the first distribution year to age 73 for participants attaining age 73 from 2023 to 2032 and age 75 for participants attaining 74 in 2033 or later. 

Note: There’s an overlap for 2032. We anticipate that this will be resolved under technical corrections.

Participants in employer plans are still able to defer RMDs past these ages until retirement if permitted under the plan. The option to defer RMDs past these ages still isn’t available to any participant who’s a 5% owner.

This new age for beginning RMDs benefits participants who don't need the money for current living expenses, as it allows for longer tax-deferral of the amounts.

Many taxpayers do Roth conversions between retirement and age 72 when they’re in lower tax brackets. This change will give those participants additional years to do Roth conversions during their lower tax bracket years before they must begin RMDs. 

This provision applies to participants who will reach age 72 after 2022.

Indexing of IRA Catch-Up Amount

Under Section 108, individuals ages 50 or over at the end of the year may contribute an additional $1,000 to their IRAs. This amount will be indexed for inflation beginning in tax year 2024.

Increase in Catch-Up Contributions to Employer Plans

Section 109 of SECURE Act 2.0 provides that the age-50-plus catch-up contribution limit for individuals ages 50 or over is $3,500 for SIMPLE IRAs and $3,500 and $7,500 for salary deferral plans other than SIMPLEs in 2023. 

SECURE Act 2.0 boosts catchup contributions for plan participants ages 60 to 63. These amounts are:

For 401(k), 403(b) and governmental 457(b) plans, the adjusted dollar limit is the greater of $10,000, or an amount equal to 150% of the regular catchup contribution limit in effect for 2024.

For SIMPLE IRAs and SIMPLE 401(k) plans, the adjusted dollar amount is the greater of $5,000 or an amount equal to 150% of the regular catch-up contribution limit in effect for 2025.

These amounts will be adjusted for cost-of-living increases in the year beginning after Dec. 31, 2025, and the base period will be the calendar quarter beginning July 1, 2024.

This provision takes effect in taxable years beginning after Dec. 31, 2024.

Conversions From 529 Plans to Roth IRAs

To help prevent IRC Section 529 plan (529 plan) balances that aren’t used to cover qualified education expenses from being subject to income tax and the 10% early distribution penalty, Section 126 of SECURE Act 2.0 allows up to $35,000 to be converted from a 529 plan to a Roth IRA.  This $35,000 is a lifetime limit and is subject to several restrictions, including:

  • The 529 plan must have been maintained for the 15-year period ending on the date the amount is distributed from the 529 plan.
  • The amount converted for a year can’t exceed the aggregate amount contributed to the 529 plan (plus earnings attributable) before the five-year period ending on the date of the distribution,
  • The amount must be moved directly from the 529 plan to the Roth IRA (trustee to trustee), and
  • The amount, when added to any eligible regular traditional and Roth IRA contribution made for the 529 plan's beneficiary for the year, can’t exceed the IRA contribution limit in effect for the year.

Once these amounts are converted to a Roth IRA, they become subject to the same treatment that applies to amounts converted from traditional IRAs to Roth IRAs.

This provision affects distributions from the 529 plan after Dec. 31, 2023.

Increase in QLAC Amount 

Under Section 202, profit-sharing plans may allow qualified longevity annuity contracts (QLACs), and IRA owners may purchase QLACs. 

A QLAC is an annuity in which the payments begin at a later date, up to age 85.  By deferring payments, an IRA owner may obtain larger monthly payments.  This allows an IRA owner to protect against living a very long time and running out of money without having to commit a large amount of money to the annuity.  It also allows IRA owners to more freely spend their other money, knowing that they’ll receive payments from the QLAC if they live a long time. 

The limit was the lesser of 25% of the value of the account or $145,000.  SECURE Act 2.0 eliminates the 25% limit and increases the amount that can be put into a QLAC to $200,000 (indexed).

Statute of Limitations on Penalties

Before SECURE Act 2.0, the statute of limitations on the excise taxes for excess contributions and failure to take required distributions didn’t begin until the taxpayer filed Form 5329. 

This created a hardship for IRA owners who weren’t aware of this deadline and believed that the statute of limitations for these penalties was three years from when they filed their income tax returns. 

Under SECURE Act 2.0, the statute of limitations for excess contributions is six years from when the IRA owner files an income tax return and three years from when the IRA owner files an income tax return for failure to take required distributions.  However, this change doesn’t apply in the case of an excess contribution where an IRA acquires property for less than fair market value.

This provision took effect on the date of the law’s enactment.  

Clarifying No Aggregation of IRAs for Prohibited Transactions

Under IRC Section 408(e)(2), if an IRA engages in a prohibited transaction, it ceases to be treated as an IRA and is treated as having distributed all of its assets.

This is far more severe than the penalty for an employer plan or exempt organization engaging in a prohibited transaction.

Some practitioners believed that if there was a risk that an investment could be a prohibited transaction, if the IRA owner segregated it in a separate IRA, only that IRA would cease to be treated as an IRA if it were determined to be a prohibited transaction.  That would avoid tainting the IRA owner’s other IRAs.

Section 322 of the SECURE Act 2.0 clarifies that this is the case. An IRA owner concerned that an investment may be a prohibited transaction may safely segregate that investment in a separate IRA, thus protecting his or her other IRAs.

This provision takes effect for taxable years beginning after the date of enactment.

No RMDs for Roth 401(k) Account Owners

Roth IRA owners aren’t required to take distributions during their lifetime.  However, participants are subject to RMDs from designated Roth accounts (Roth 401(k), Roth 403(b) and Roth governmental 457(b) accounts).

Section 325 of SECURE Act 2.0 repeals the RMD requirement for designated Roth account participants.

As a result, beginning in 2024, employees may decide between keeping their assets in a designated Roth account or rolling them over to a Roth IRA without having to consider RMDs during their lifetime.  Key factors in making this decision will be the availability of desired investment choices, investment expenses and asset protection.   

This provision affects distribution years 2024 and after (except for distributions otherwise required with respect to 2023).

Surviving Spouse May Elect to Be Treated as Deceased Employee

Section 327 of SECURE Act 2.0 provides that a surviving spouse may elect to be treated as the deceased employee for purposes of the RMD rules, effective beginning in 2024. A surviving spouse who makes this election would begin RMDs no earlier than the date the deceased participant would have reached RMD age. Further, if a spouse beneficiary who makes this election dies before they’re required to start RMDs, the RMD rules would apply as if the spouse beneficiary is the employee.

Trusts That May Have Charity as Remainder Beneficiary

Under the SECURE Act, a trust for a disabled or chronically ill beneficiary is eligible for the life expectancy stretch as long as all of the current beneficiaries are disabled or chronically ill and the remainder beneficiaries are individuals or trusts for the benefit of individuals.  Thereafter, the 10-year rule applies. 

However, in many cases, an IRA owner leaving IRA benefits to a trust for a disabled child wants charity to receive some or all of the remainder of the trust on the disabled child’s benefit.  In some cases, a charity provides assistance for the disabled beneficiary.  In other cases, the IRA owner doesn’t have any other children or has other children but otherwise provides for them.

Section 337 of SECURE Act 2.0 provides that in the case of a trust for a disabled or chronically ill beneficiary, a charity that may receive qualified charitable distributions (a public charity other than a donor-advised fund) that’s a remainder beneficiary will be treated as a designated beneficiary.

This allows an IRA owner to create a trust for a disabled or chronically ill beneficiary and name a charity as a remainder beneficiary and still qualify for the life expectancy stretch.

Catch-Up Contributions to 401(k) Plan

Under current tax law, plan participants may choose whether to make catch-up contributions to a designated Roth account (if permitted under the plan) or a pretax account or to split them between both accounts.

Under Section 603 of SECURE Act 2.0, catch-up contributions to 401(k) plans must be designated Roth contributions if the employee’s compensation from that employer was more than $145,000 (indexed).

This makes catch-up contributions less attractive for employees who otherwise wouldn’t contribute to designated Roth accounts.  Many employees prefer to make elective deferrals (contributions) to traditional accounts because they expect to be in a lower tax bracket after they retire.  Beginning in 2024, they’ll have to decide whether the benefit of making catch-up contributions outweighs the higher tax bracket that may apply to designated Roth contributions.

This provision takes effect for taxable years beginning after Dec. 31, 2023.

Action Plan for Advisors

This article covers only some of the changes made by SECURE Act 2.0.  Advisors should create a simple list of the changes, including effective dates and determine which ones affect clients.  This list can be used to help identify which clients should be contacted regarding changes.

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