Congress was busy leading up to the end of the year and managed to pass the Secure Act 2.0 as a part of the $1.7 trillion Consolidated Appropriations Act of 2023.
Required Minimum Distributions (RMD) Start at 73
Required Minimum Distribution age has been pushed out one year to age 73. If you are turning 72 in 2023, you don’t have to take an RMD until 2024. The age will be increased to 75 in 2033.
No RMD from Roth 401(k) Accounts
The legislation eliminates the requirement for savers to take minimum distributions from their work-based plan Roth accounts. This change brings work-based plans in line with Roth IRAs.
529 Plan Rollovers
Many savers have been concerned about overfunding 529 Plans when saving for education. Congress now allows for a 529 Plan rollover to a Roth IRA for the same beneficiary beginning in 2024. The rollover limit is $35,000 and the 529 Plan needs to be held for 15 years.
Catch-up Contributions Expanded and Indexed
The $1,000 IRA catch-up contribution limit will be indexed annually for inflation. Individuals ages 50 or over at the end of the year are entitled to use the catch-up contribution when funding their IRA. Beginning in 2025, individuals aged 60 to 63 will be able to contribute an additional maximum of $10,000 for 401(k) Plans and $5,000 for SIMPLE plans.
We’ve recently shared charitable planning strategies and the use of QCDs. You can read more about them here. We are now able to make a one-time, $50,000 qualified charitable distribution (QCD) to a charitable gift annuity, a charitable remainder unit trust (CRUT), or a charitable remainder annuity trust (CRAT). In addition, the $100,000 QCD limit will be indexed for inflation beginning in 2024.
50% Penalty Reduction
The penalty for missed RMDs has been heavy at 50% of the required amount. The penalty is now 25% and is further reduced to 10% if you correct the missed RMD in a timely manner. The relaxation of the penalty provision may be in response to the RMD changes made in the Secure Act 2.0 and the new 10-year distribution rule.
Self-Correction Program for IRAs
Retirement Plan Sponsors can use the IRS Employee Plans Compliance Resolution System (EPCRS) to fix mistakes and avoid the consequences of plan disqualification. The program is expanded to include Individual Retirement Accounts when the account holder makes an error.
10% Penalty Exceptions Expanded
The law introduces some additional exceptions to the 10% early withdrawal penalty. Generally, the penalty applies when distributions are taken before the age of 59 ½ unless you meet one of the exceptions. The new exceptions are emergency personal expense, terminal illness, domestic abuse, to pay long-term care insurance premiums, and to recover from a federally declared disaster. There are additional rules around amounts and effective dates for each of the circumstances.
The provisions outlined above are a sample of the changes brought about by the Secure Act 2.0. We will be providing more detail, analysis, and strategies over the weeks to come. If you have any questions about the application of these changes to your personal circumstance, please contact our office at (585) 935-5300.