What you need to know and when you need to act as you plan and save for retirement

 

One of the main goals of the Secure 2.0 Act is to get people to save more for retirement – and to improve the rules around that. It contains a variety of provisions to IRAs and retirement plans. Here are a few that might affect you.

Effective in 2023

Increase in the Age for Beginning Required Minimum Distributions (RMDs)

Under the previous rules, IRA owners and retirement plan participants were generally required to begin taking RMDs at age 72. Under the current law, the age increased to 73 on Jan. 1, 2023, and will increase again to 75 on Jan. 1, 2033. These provisions also apply to spouse beneficiaries of retirement plans. Note these changes only apply to those who are not already in RMD status at the effective dates. 

 

Withdrawals for Terminal Illness

Previously, a 10% “penalty” tax usually applied to early distributions made from a retirement plan or IRA. The law now provides an exception for distributions made to a terminally ill individual on or after the date a physician has certified the individual as having a terminal illness.

 

Additional Flexibility for Qualified Charitable Contributions

Under the previous rules, a qualified charitable contribution (QCD) of up to $100,000 per year could be made from an IRA after the owner reaches age 70 ½. Now, an IRA owner can make a one-time $50,000 distribution to a charitable gift annuity or charitable remainder trust. Also, the $100,000 limit is now indexed for inflation.

 

Reduction in Excise Tax on Failure to Take an RMD

Secure 2.0 reduces the excise tax on the failure to take an RMD from 50% to 25%. In addition, the penalty is further reduced to 10% if the required distribution is made within a specified period. Missed RMD is reported on Form 5329, and this form is typically filed along with your individual income tax return.

 

Elimination of Additional Tax on Correction of Excess Contributions

If you contribute more than allowable limits to an IRA, you must remove that excess by the due date of your income tax return for that year. In addition to removing the excess contribution, you must also remove the net income that is attributable to the excess contribution. The previous law subjects the net income taken from the IRA to the 10% “penalty” tax. Now, the net income removed is no longer subject to the 10% tax. This provision is effective for tax returns filed on or after Dec. 29, 2022, even if the removal of the excess contribution occurred prior to that date.

 

Statute of Limitations for Tax on Failure to Take RMDs or Making Excess Contributions

As noted above, an excise tax applies to excess contributions and failures to take RMDs. Many taxpayers do not realize that the statute of limitations (i.e., the time limit the IRS has for assessing such tax) does not begin to run until Form 5329 is filed.  If this form is not filed, the IRS can assess tax, penalties and interest indefinitely.

 

The law now provides that the statute of limitations for failures to take RMDs and making excess contributions begins to run when a taxpayer files their individual income tax return (Form 1040). In this case, the limitation period is three years for failure to take RMDs, and six years for excess contributions. Once the limitation period has passed, the IRS should not assess tax for the error.

 

Special Needs Trusts May Have a Charity as a Beneficiary

The Secure Act provided that an IRA left to a special needs trust could stretch the payout of the IRA over the life of the disabled beneficiary. Under the previous law, all the beneficiaries of the trust had to be individuals. The law now allows such trusts to have a charity as a remainder beneficiary.

 

SEPs and SIMPLEs May Now Accept Roth Contributions

Under the previous law, SEP and SIMPLE plans could only accept pre-tax contributions. The law now allows for SIMPLE plans to accept Roth employee contributions, and SEP plans to accept Roth employer and employee contributions.

Effective in 2024

Increased IRA Catch-up Contributions

Under current law, IRA owners 50 years old and over can make an additional $1,000 deductible contribution to their IRA. Beginning in 2024, this amount is indexed for inflation.

 

Withdrawals for Certain Emergency Expenses

Beginning in 2024, the new law adds an additional exception to the 10% early distribution penalty for an emergency personal expense distribution up to $1,000, defined as any distribution for the purpose of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. The distribution may be repaid within three years, and the participant cannot take another emergency personal expense distribution within three years unless the initial distribution has been repaid.

 

Distributions from 529 Plans to Roth IRAs

Currently, assets of Section 529 plans can only be used for qualifying educational expenses. Beginning in 2024, the law allows beneficiaries of 529 plans to roll up to $35,000 to their Roth IRA, subject to certain conditions. This will allow families that have saved for college in 529 plans to move that money to retirement savings after the beneficiaries have completed their education.

Effective in 2025

Increased Retirement Plan Catch-up Contributions

For retirement plans, current law allows retirement plan participants aged 50 and over to contribute an additional $6,500 ($3,000 for SIMPLE plans) each year. Beginning in 2025, the additional contribution amount is increased for those between the ages of 60 and 63 to the greater of 1) $10,000 ($5,000 for SIMPLE plans), or 2) 150% of the regular catch-up amount. The increase is indexed for inflation after 2025.

 

This information does not represent authoritative guidance regarding tax or legal advice. Consult your attorney or tax advisor for guidance that meets your specific tax and financial situation.