Given that our government is concerned about American workers leaving the workforce and retiring without enough savings, they have focused their attention on creating legislation to help fix what some call a retirement crisis.  In 2019, the SECURE Act (Setting Every Community Up for Retirement Enhancement) was passed.  Then, as part of the Consolidated Appropriations Act of 2023, SECURE 2.0 was passed with multiple provisions intended to enhance the retirement savings of American workers.  Secure 2.0 was passed by Congress on December 23, 2022, and signed by the President on December 29, 2022. Below is a brief overview of some of the key highlights that may affect you as an individual.

Required Minimum Distributions (RMD)

The age in which you are required to take a distribution from your retirement accounts has been increased to 73 starting January 1, 2023. Prior to this, the age was 70 ½ and then increased to age 72 with the original Secure Act. This age increase is going to allow money to stay in retirement accounts a little longer. For those of you who are 64 or younger, SECURE 2.0 increases the minimum age to 75 starting in 2033. 

In addition to the increase in age, the penalty that is associated with failing to take an RMD has also changed.  There have always been steep penalties if you miss an RMD or do not withdraw a minimum required amount.  Currently, the 50% excise tax is one of the largest penalties in the tax code.  Therefore, legislators focused on decreasing the penalty.  Starting with the 2023 tax year, the excise tax penalty will decrease to 25% of the RMD amount not taken.  The penalty can be reduced even further (down to 10%) if the account owner takes the required minimum distribution in a timely fashion upon learning of the mistake.

Another nice change to the RMD rules relates to Roth accounts in employer sponsored 401(k) or 403(b) retirement plans.  Starting in 2024, these Roth accounts will be exempt from the RMD requirements thus treating them the same as Roth IRA’s that have no RMD requirements.  This will allow money to stay invested and grow tax free for a longer period of time with the hope that you do not outlive your retirement account balance.

Catch up Contributions

Currently, retirement plan participants who are over 50 can contribute an additional catch up contribution of $7,500/year.  Starting January 1, 2025, any individual ages 60, 61, 62, or 63 will be able to increase their catch-up contributions made to an employer sponsored 401(k)/403(b) plan to $10,000. The catch up amount will be indexed to inflation going forward as well.

Beginning in tax years after 2023, if you are 50 years or older and choose to make a catch up contribution, you will be required to have it withheld on an after-tax basis as a Roth contribution if in the prior calendar year, your FICA wages from your employer exceeded $145,000 (adjusted for inflation).

Lastly, the IRA catch-up contributions for those 50 and older has been a flat dollar amount of $1,000 since catch up contributions were first allowed in 2001.  Beginning in 2024, the limit will be indexed to inflation, meaning the amount could increase every year.

529 College Savings Plans

529 plans allow families to save for educational expenses, but from time to time, the money set aside is not needed for educational expenses. Under current law, any balance remaining in a 529 plan can be taken as a non-qualified distribution, but by doing so you still need to pay tax on the earnings as well as a 10% withdrawal penalty.  Effective for distributions made after 2023, Secure 2.0 will allow rollovers from 529 plans into the Roth IRA account of the beneficiary as long as the account was established at least 15 years ago.  The amount rolled is limited to the Roth IRA contribution limits for the year with a $35,000/beneficiary lifetime limit.   This is a nice benefit for those that had the foresight to save for college while the child was young and luckily accumulated more than what was needed for the child’s education.  This may also benefit children that receive scholarships, as not all of their savings are required. 

Qualified Charitable Distributions (QCDs)

Currently, any individual age 70 ½ or older can request a distribution of up to $100,000 per year from a traditional IRA and make it payable to a qualified 501(c)(3) organization.  This saves income taxes for many charitably inclined taxpayers that do not need to live on all of the monies they are required to pull from their retirement accounts as RMDs.   Effective in 2024, the amount allowed will increase with inflation.

Also, beginning in 2023, individuals will now have a one-time opportunity to use a qualified charitable distribution to fund a Charitable Remainder Trust, Charitable Remainder Annuity Trust, or a Charitable Gift Annuity of  up to $50,000 (indexed for inflation).

As you can see, SECURE 2.0 is going to affect many of the retirement plan rules over the next few years.  These provisions can be complex so be sure to reach out to your financial professionals to learn how you can take advantage of them when thinking through your retirement and/or college savings plans.  If you are a business owner that sponsors a retirement plan, there is a multitude of changes to these plans as well.  It is imperative that you contact your retirement plan advisor to discuss the different provisions and options that you may want to offer within your company’s plan that could help you attract and or retain employees. If you have any questions please contact your tax professional at Dermody, Burke, and Brown, CPAs.

The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.