The Setting Every Community Up for Retirement Enhancement Act of 2019 (the "Secure Act") made significant changes to the rules governing retirement accounts. "Secure 2.0," which was passed at the end of 2022, made additional changes to this complex area.
Required Minimum Distributions ("RMDs")for the Participant. Before the Secure Act, a taxpayer was required to begin minimum distributions from his/her retirement accounts at age 70½. The Secure Act changed the distribution age to 72. Under Secure 2.0, RMDs do not need to begin until age 73. On January 1, 2033, the age for RMDs will increase to 75.
As of January 1, 2023, the penalty for failing to take RMDs is reduced from 50% to 25%.
RMDs for the Beneficiary. Before the Secure Act, an individual beneficiary of a retirement plan was required to take minimum distributions over his/her life expectancy. For example, if dad died naming his 30 year old daughter as the beneficiary of his IRA, daughter's annual RMD was based on her life expectancy. Under IRS tables, the life expectancy of a 30 year old is approximately 53 years, giving the daughter decades of additional income tax deferral.
Under the Secure Act, distributions to individual beneficiaries who were not minors, disabled, or the participant's spouse, were changed to a maximum period of ten years. The beneficiary did not have to take annual distributions but had to take all assets out of the retirement account by the end of the 10th year.
Secure 2.0 generally kept the 10 year rule, but made some modifications depending on the age of the participant. If the participant died before his required beginning date, the 10 year rule remains unchanged. No annual distributions are required, but all assets must be distributed by the year that includes the 10th anniversary of the participant's death.
If the participant dies after his required beginning date, however, Secure 2.0 made a significant change. In that event, the beneficiary will have to take annual distributions based on her life expectancy, and all funds must be withdrawn by the earlier of the 10th year after the participant's death or the final year of the beneficiary's life expectancy if that is less than 10 years.
Automatic Enrollment in 401(k) plans. Beginning in 2025, most employers will be required to automatically enroll employees in workplace retirement plans unless the employee opts out. There are a few exceptions, including businesses with 10 or fewer workers and companies in business for less than three years.
Rollovers of 529 Plan Funds to Roth IRAs. Under current law, 529 education savings plans amounts not needed for education expenses can be taken as a non-qualified distribution, with the earnings portion of the distribution subject to income tax and a 10% penalty. Beginning in 2024, up to $35,000 of "leftover" funds can be rolled over into a Roth IRA.
The $35,000 threshold is a lifetime limit. The 529 account must have been in place for at least 15 years, and funds must be moved directly from the 529 plan to a Roth IRA for the same person who was the beneficiary of the 529 plan. Any 529 plan contributions made in the previous five years, and any earnings attributed to those contributions, are not eligible to be rolled into a Roth IRA. The amount moved into a Roth IRA in a given year must be within annual IRA contribution limits (currently $6,500 for people under 50 years of age).
Charitable Distributions. Under current law, individuals age 70½ and older give up to $100,000 in distributions per year from a traditional IRA directly to qualified charitable organizations. Effective in 2024, the maximum contribution amount will increase based on the inflation rate. In addition, beginning in 2023, individuals have a one-time opportunity to give up to $50,000 in distributions from an IRA to a charitable remainder unitrust, a charitable remainder annuity trust, or a charitable gift annuity. A charitable gift annuity is a gift to a charity in exchange for an income stream for the remainder of the donor's life. The value of the annuity stream will be less than the value of the gift, with the excess being a donation to the charity. Charities will likely be touting this new option to donors to fund an annuity.
The Secure Act and Secure 2.0 made many other changes to retirement account rules, and you would be well advised to consult your tax professional to take advantage of any new opportunities while also ensuring you do not violate any new requirements.
This article is for informational and educational purposes only and does not constitute legal advice.