There are some major changes rolling out in the next few years related to many types of retirement accounts, courtesy of what is known as the SECURE Act 2.0. The first of the legislation will roll-out in fiscal year 2023, although the full impact may not be felt until 2033 when the last of these changes goes into effect. The SECURE Act 2.0 will be a game-changer that will affect employer and employee plans, as well as individual retirement account (IRA) owners and beneficiaries.
For individuals who have non-Roth retirement plans, the Required Minimum Distribution (RMD) is getting a slight overhaul. The current law had forced participants to begin taking RMDs at the age of 72. With the changes brought by SECURE 2.0, the age where RMDs will be required increases gradually over the next ten years. For those who turn 72 after 2022 and turn age 73 before 2033, the new requirement to start RMDs will be age 73. For those who turn 74 after 2032, their RMDs will begin at age 75.
One tax efficient way to fulfill an individual’s RMD is by making a Qualified Charitable Distribution (QCD). The QCD must be a direct transfer from your IRA and may be counted towards satisfying up to $100,000 of the RMD requirement for the year. The $100,000 will be indexed for inflation going forward. The recipient charity must also be a qualified charity, and the benefit is that the QCD is excluded from your taxable income, versus regular withdrawals which will be taxable even if the funds were used in a charitable donation after the fact. SECURE Act 2.0 has expanded the definition of a qualified charity for this purpose.
The formerly steep penalties for taxpayers failing to take their RMDs are decreasing from 50 percent to 25 percent beginning in 2023. These penalties are further reduced to 10% if the IRA owner(s) withdraw the amount not taken and file a timely corrected tax return.
There are also new permanent changes to the penalty-free distribution rules for IRAs. Effective immediately, a terminally ill person (certified within the past 84 months by a physician) may also elect a penalty-free withdrawal. For plan years after 2023, it is now permissible for a victim of domestic violence to withdraw up to the lesser of $10,000 or 50 percent of the present value of the accounts. Also effective after plan year 2023, a personal financial emergency will qualify you to withdraw up to $1,000 penalty-free. These special distributions are allowed once per year with the option to repay within three years.
A new limitation is in place for distributions made due to the birth or adoption of a child; previously, no limit existed as to the period of required repayment. SECURE 2.0 now requires the amount to be repaid within three years, for distributions after the date of enactment.
Contribution catch-up has always been a popular topic, especially for those age 50 and over. The current IRA catch-up limit for those age 50 and over is $1,000. SECURE 2.0 makes it so this limit gets adjusted annually for inflation for tax years beginning after 2023.For further information on contribution catch-ups and the changes the new legislation will have on workplace retirement plans, plus some of the new tax incentives and provisions enacted, make sure to come back for part two of our SECURE Act 2.0 blog series.