The Secure Act of 2019 had some additions signed into law in December 2022, and some of the provisions have a significant impact on your retirement plans.
Required Minimum Distributions (RMD) age has been changed again. Beginning in 2023, the RMD age is now 73. This will increase to age 75 in 2033. In case you miss a required distribution, the penalty has been reduced to 25% and possibly 10%. Although that seems high, keep in mind it was previously 50%!
For those that are beneficiaries of a spouse’s IRA, you may treat the inherited IRA as your own for purposes of the RMD rules. This may offer additional tax planning opportunities for anyone dealing with a spousal-inherited IRA.
IRA accounts are not the only retirement plans affected.
An interesting provision for 401(k) and 403(b) plans will go into effect in 2025. These plans will include automatic enrollment at a 3% contribution level. Additionally, there will be an automatic escalation of 1% per year up to at least 10%. There will be exemptions to this provision. The exemptions will include government plans, church plans, employers with 10 or fewer employees and new businesses not in existence for three years. Simple plans will also be exempt from these provisions.
There are some rather generous taxpayer-funded perks for small businesses starting in 2023.
The cost of starting a plan can be offset by the lesser of the start-up cost or $5,000 in the form of a tax credit. This applies to businesses with 50 or fewer employees. The credit is phased out for employers with between 51 and 100 employees.
One big part of Secure 2.0 is for those making Roth 401k contributions. Previously the employer match was not made to the Roth but went into the tax-deferred part of the plan. Now the match can go into the Roth 401k. This will permit a greater accumulation of tax-free savings. SEP and SIMPLE can now be made on a ROTH Basis as well.
The provision in retirement savings that allow those employees age 50 and older, known as “catch up,” will be changed. Starting in 2024, anyone making over $145,000 will need to make those catch-up contributions to the ROTH 401k. Starting in 2025, individuals aged 60, 61, 62, and 63 will be able to make larger catch-up contributions. SIMPLE plans will also allow for greater catch-up contributions.
Another non-mandatory provision will allow employers to make matching contributions to 401(k), 403(b), or SIMPLE IRA if an employee is making qualified student loan payments.
For those that have funds in a 529 college plan, this provision is interesting: Let’s say your child did not use all of the money in the 529 plan; they’re done with schooling and there are no other relatives to transfer to. Previously you could take the money out and pay taxes on the increased value. Starting in 2024, provided the above applies AND the 529 is 15 years old, you can rollover up to $35,000 to a ROTH. The beneficiary must be the same as the 529. I’m unclear just how this will be tracked. Still, it does present some interesting tax strategies.
Another item I wanted to address is not associated with the Secure Act but does impact those who have had IRA distributions go directly to a charity.
The money that was sent to the qualified charity is NOT taxable. However, your 1099R has no code to indicate that. It is up to you and/or your tax advisor to make these adjustments. (See the QCD adjustment worksheet in IRS publication 590-B). If you have made such a charitable contribution, be sure your tax advisor is aware of it. He/she will not be able to determine this by looking at your 1099R.
As always, if you have any questions on these topics and how they impact your investments, please feel free to contact me if you aren’t currently working with an advisor.