Highlights of Changes Affecting Your Retirement Accounts and Charitable Distributions

January 13, 2023 - SECURE 2.0 builds on the SECURE Act of 2019. This new law includes myriad changes that will impact most people’s financial plan now or in the future. Let’s dive into the most prominent items.

How the SECURE 2.0 Act Will Affect Required Minimum Distributions (RMDs) Beginning in 2023

• Current law requires owners of certain retirement accounts to take RMDs each year once they reach age 72. This means you must take a distribution from your account and pay income tax on that distribution.

• For those who already take RMDs or who turned 72 before January 1, 2023, there is no change to your RMDs.

• For anyone who turns 72 between the years 2023 and 2032, RMDs are pushed back one year, to age 73.

• Beginning in 2033, RMDs will be pushed back to age 75.

• Effective for 2023 and future years, the 50% penalty for an RMD shortfall is reduced to 25%, and it is further reduced to 10% if it is corrected within a specified time period.

Changes to Tax Rules for Qualified Charitable Distributions (QCDs)

• If you qualify, a QCD allows you to distribute money from your IRA directly to a 501c3 charity up to $100,000 per year. This can be an exceptionally tax efficient way to donate money. Read more about it here: How the Government Can Subsidize Your Charitable Giving

• Despite the change in RMD ages, the age to qualify for QCDs remains 70.5.

• The maximum annual QCD amount will be linked to inflation beginning in 2024. For 2023, the maximum amount remains $100,000.

• Beginning in 2023, taxpayers are allowed a one-time opportunity to use a QCD to fund a charitable trust or charitable gift annuity.

SECURE 2.0 Act Roth Retirement Account Tax Rule Changes

Roth retirement accounts tax the money you contribute; then the account grows tax-free, and distributions in retirement are tax-free if certain requirements are met.

• Beginning in 2024, RMDs will no longer be required for Roth accounts in qualified employer plans (i.e., Roth 401(k) plans, Roth 403(b) plans, Roth 457(b) plans, etc.).

• Starting in 2023, taxpayers may now create and contribute to Roth SIMPLE and SEP IRA accounts. For small business owners and those who are self-employed, this will be something to consider going forward. It will take some time for the IRS to issue guidance and for custodians to update documents and procedures before taxpayers will effectively be able to do this.

• Effective immediately, employers may now make matching and/or non-elective contributions to employees’ designated Roth accounts. This will also require time for employers and plan administrators to make changes before it can effectively take place.

• Beginning in 2024, certain high-income taxpayers who make catch-up contributions to their 401(k), 403(b), or 457(b) accounts will be required to make those contributions Roth contributions. There are multiple nuances to this rule that appear to have unintended consequences, so watch for additional guidance.

• Beginning in 2024, there will be an option to transfer some money from a 529 plan directly to a Roth IRA. This must meet specific requirements and is limited to an individual lifetime maximum of $35,000. More guidance is needed for specific aspects of this, but this option will open up new planning opportunities that could allow for significant Roth IRA growth, particularly for the next generation.

SECURE 2.0 Act’s Increases to Catch-Up Contributions for IRAs, Roth Accounts, and Employer Retirement Accounts 

• Under current law, how much you are allowed to contribute to a retirement account is limited to a certain dollar amount, but if you are age 50 or older, you are allowed to make an additional contribution called a catch-up contribution.

• Catch-up contribution limits for IRA accounts, currently $1,000, will now be indexed to inflation starting in 2024. These inflation adjustments will be in increments of $100.

• Beginning in 2025, employer retirement plan catch-up contribution limits will be increased for those ages 60–63 to the greater of $10,000 or 150% of the regular limit. This same increase applies to participants in a SIMPLE Plan, except it will be $5,000 or 150% of the regular SIMPLE catch-up contribution limit.

SECURE 2.0 is complex legislation that includes many changes in addition to those outlined here. Please consult your financial planner and tax advisor when assessing the impact to your situation.