On December 29, 2022, President Biden signed into law what is commonly called The SECURE (Setting Every Community Up for Retirement Enhancement) Act 2.0. This Act builds upon the original SECURE Act that was passed at the end of 2019. Both Acts have created changes to enhance and encourage long-term retirement savings. While the SECURE Act 2.0 has many provisions that are set to become law over the next few years, this discussion will focus on the changes that will affect 2023.
Change to RMD Rules and Excise Tax Rate
The initial SECURE Act raised the Required Minimum Distribution (RMD) Age from 70½ to 72 and now the Secure Act 2.0 is raising it again. Beginning January 1, 2023, the RMD age is now 73, and starting January 1, 2033, it will be 75. For 2023, this is on all qualified plans (Traditional and Roth 401(k)s) and Traditional IRAs. Roth IRAs do not follow the RMD rules and beginning in 2024 Roth 401(k) accounts will no longer have an RMD requirement either.
In addition to the change in age for the RMD, the excise tax that is charged if there is a failure to take an RMD has been reduced from 50% to 25%. This is in effect for tax years beginning after December 29, 2022.
Additional Roth Options Available
Prior to the SECURE Act 2.0, the only option for employer matching and non-elective contributions were for them to be contributed on a pre-tax basis. Now the employee has the option to have the employer match be contributed as a Roth contribution after-tax. If this option is utilized, the employer match or non-elective contributions would result in additional compensation to the employee for the year the match is made.
In the past, SIMPLE and SEP IRAs did not have a Roth option available to them. Beginning in 2023, these types of plans can now be Roths.
Solo 401(k) Establishment Date Extended
Solo 401(k) plans now can be setup for the tax year up until the filing deadline (without extensions) of the tax return. In the past these plans had to be established by December 31st of the first plan year. This did not allow for post year-end tax planning with regards to retirement options for the small business owners for which this type of plan may apply. With the newly established deadline, it allows the small business owners to decide if a solo 401(k) would be beneficial after their year-end books have been closed. This section of the Act is effective for plan years beginning after December 29, 2022.
Penalty-Free Early Withdrawal Exceptions
Generally, to take distributions or withdrawals from a retirement plan, the participant must be at least 59 ½ years old or a 10% penalty is imposed on top of any tax that is calculated. There are a few new penalty-free withdrawal exceptions in the Act, that will become effective over the next few years. In 2023, these exceptions include federally declared disasters, terminal illness, expanded public safety officers, and corrected distributions of excess contributions.
The SECURE Act 2.0 provides permanent relief for early withdrawals that are taken by participants that are effected by federally declared disasters that occurred on or after January 26, 2021. As such, this provision is retroactive. The taxpayer must have their primary home in the declared area and have sustained economic loss as a result of the disaster. The withdrawal must be taken within 180 days of the disaster. The provision allows for distributions of up to $22,000 per participant, per disaster to be taken out without penalty and can be included in taxable income over three years. These amounts can also be recontributed to a tax preferred plan within three years. Another relief provided under this portion of the Act is an increase of the participant loan limit to $100,000, up from $50,000, for those taking out loans because of the federally declared disaster.
An additional penalty-free withdrawal provided by the Act is for terminally ill taxpayers. This is effective for distributions made after December 29, 2022 to participants that are deemed terminally ill. The participant must provide a certification by a physician that indicates the taxpayer has an illness or physical condition that is expected to result in death within 84 months of the certification.
Qualified Charitable Distributions
The 2.0 Act provides that the annual IRA Qualified Charitable Distribution amount, currently limited to $100,000, will be indexed for inflation going forward. In addition, there is now a one-time gift opportunity available to make a qualified charitable distribution to a split-interest entity, such as a Charitable Remainder Unitrust, Charitable Remainder Annuity Trust, or Charitable Gift Annuity in the amount of $50,000.
SECURE Act 2.0 has numerous provisions that affect employees, employers, and plan administrators. Understanding how this Act impacts your specific situation will be beneficial in planning for retirement savings and tax treatment both now and in the future. Please contact your tax advisor and/or your financial advisor with questions on how these changes could affect you.
By Suzanne Miller