It might be appropriate to say that Christmas came early for retirement advisors and consumers in 2022 when Congress passed, and President Biden signed into law, the $1.7 trillion omnibus spending bill that included Setting Every Community Up for Retirement Enhancement (“SECURE”) Act 2.0 (the “Act”). President Trump enacted the original SECURE Act in December 2019, making radical changes to retirement planning by increasing the age at which a taxpayer could contribute to their Individual Retirement Account (“IRA”), creating a new class of beneficiary called the “Eligible Designated Beneficiary” (“EDB”), and eliminating the lifetime stretch for any beneficiary who is not an EDB and instead implementing the 10-year rule. For those needing a quick refresher, EDBs consist of surviving spouses, children who have not yet reached the age of majority, chronically ill or disabled individuals, and any other individual not more than ten years younger than the participant, or appropriately structured trusts for the benefit of those individuals. EDBs are the only beneficiaries exempt from the 10-year rule, which operated like the 5-year rule from pre-SECURE Act. Thus, under the 10-year rule, a non-EDB need not worry about Required Minimum Distributions (“RMDs”) and only needed to withdraw all funds by December 31st of the year of the tenth anniversary of the participant’s death.
That changed on February 23, when the United States Treasury released much-anticipated proposed regulations updating, among other things, the rules regarding RMDs from IRAs. The proposed regulations backtracked on some of the published guidance by adding the requirement of lifetime distributions to any non-EDB in years 1-9 after the participant’s death if the participant died after his or her Required Beginning Date (“RBD”). Now, any non-EDB needs to take annual distributions based upon the beneficiary’s life expectancy over the nine years following the participant’s death and exhaust the IRA by December 31st of the year of the tenth anniversary of the participant’s death if the participant reached their RBD. Thankfully, the Internal Revenue Service realized that this represented a sharp departure from the advice that many advisors were giving their clients and promulgated Notice 2022-53 that confirmed waiver of any excise taxes resulting from failure to take RMDs in either 2021 or 2022 for those years. A taxpayer who fails to take the required RMD in 2023 will incur liability for the excise tax.
SECURE 2.0 continues to build on this foundation by extending, clarifying, and expanding provisions of the original SECURE Act. First, the Act increases the age at which the participant needs to begin taking RMDs to 73 beginning in 2023 and lasting until 2032, at which time the age increases to 75. Note that there seems to be an overlap for 2032 which likely will be resolved under technical corrections. These provisions affect anyone reaching age 72 after 2022. Individuals aged 50 and over may contribute an additional $1,000 to their IRAs. That amount will be indexed for inflation beginning in 2024. In addition, the Act boosts catch-up contributions for employer plans including 401(k), 403(b), 457(b), SIMPLE IRAs, and SIMPLE 401(k) plans, also indexing them for inflation. These provisions take effect in tax years beginning after December 31, 2024.
Interestingly, taxpayers will be able to use funds from Internal Revenue Code Section 529 Plans (“529 Plans”) for something other than qualified education expenses without income tax consequences. The Act allows taxpayers to convert up to $35,000 from a 529 Plan to an IRA. The Act imposes several restrictions on the 529 Plans allowed to take advantage of this rollover as follows: the Plan must have been maintained for 15 years prior to the rollover, the amount converted for a year cannot exceed the aggregate amount contributed to the 529 Plan in the 5 years prior to the rollover, the amount must move directly from the 529 Plan to the IRA, and the amount, when added to any other IRA contribution cannot exceed the contribution limit in effect for that year. This provision becomes effective for 529 Plan distributions after December 31, 2023.
The Act provided relief to taxpayers by changing the statute of limitations for two excise taxes, the excess contributions tax and the excess accumulations tax on an IRA. Under prior law, the statute for excess contributions or RMD failures started running on the date that the excise tax return was filed. Taxpayers were unaware of the requirement to file Form 5329 leading to an indefinite statute of limitation for the imposition of excise taxes. Under the Act, the new statute of limitations for RMD failures is three years and begins to run when the IRA owner files an income tax return for failure to take the required distributions. The new statute of limitations for excess contributions is six years and begins to run when the IRA owner files an income tax return. These new limitations periods became effective upon enactment of the Act.
As most readers know, owners of ROTH IRAs have no requirement to take distributions during lifetimes; however, participants in any of a ROTH 401(k), ROTH 403(b), or ROTH governmental 457(b) accounts all were required to take lifetime distributions. The Act repealed that requirement for distribution years beginning in 2024. This provides additional planning opportunities for taxpayers considering whether to keep assets in a designated ROTH account or to roll such accounts into their ROTH IRA. Now participants no longer need to consider RMDs during their lifetime and can focus on investment choices, expenses, and asset protection.
The Act allows a surviving spouse to elect to be treated as the deceased employee for purposes of the RMD rules, effective beginning in 2024. A surviving spouse making such an election would begin RMDs no earlier than the date the deceased participant would have reached their RBD. If the surviving spouse made the election and dies prior to their RBD, the RMD rules apply as if the spouse beneficiary was the employee providing an avenue of additional deferral for beneficiaries of the surviving spouse.
Finally, section 337 of the Act allows an IRA owner to create a trust for a disabled or chronically ill beneficiary, which are otherwise EDBs, and name a charity as a remainder beneficiary without disqualifying the trust as an EDB. Now, the trust may pay out to public charity, other than a Donor-Advised Fund, upon the death of the disabled or chronically ill individual without negative impact. This provides additional planning opportunities for clients with disabled beneficiaries.
Of course, the foregoing article only highlights a few of the many changes ushered in with SECURE 2.0. If you would like to read the legislation in its entirety, here’s a link to the final text contained within the omnibus bill: H.R. 2617. These changes provide a great reason to connect with your clients and advisors in the new year and consider how they will affect your clients’ retirement planning.
Tereina Stidd, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128