Secure Act & Secure Act 2.0 and Other Changes to the Tax Laws
Hello All – on December 23, 2023 the 117th Congress made a number of changes to the tax law – these changes were primarily aimed at improving retirement savings (increasing access to those types of accounts, incentivizing employers to provide retirement benefits, and incentivizing individuals to save for retirement). There were also some changes made in order to fund these incentives. Please read on to see what has changed.
A general note: There are some drafting errors in this bill which will likely be corrected in the future – furthermore, accountants and tax preparers are waiting for the IRS to provide additional guidance for many of these changes. A number of the changes from “Secure Act 2.0” will actually be effective starting in 2024 or later – we will be revising this post as we receive additional details/clarity on the issues.
The required age for RMDs was raised from 72 to 73 for individuals born between 1951 and 1959 and age 75 for those born in 1960 or later. The penalty for missed or insufficient RMDs has decreased from 50% to 25% of the shortfall – if the mistake is connected in a timely manner, the penalty is reduced to 10%.
Qualified Charitable Distributions – can still be made starting at age 70 ½.
Tax Planning for Older Taxpayers: Later RMDs allow time to delay RMDs – this can help to reduce Medicare Part B/D premiums and allows for further Roth conversions.
“Rothification” the federal push to encourage taxable conversions in the near future. This is a consistent theme that is emerging from Secure Act 2.0.
There is an elimination of RMDs for Plan (company-sponsored) Roth accounts (starting 2024) – Roth 401K plans, Roth 403(b), governmental Roth 457(b) plans and the Roth component of the Federal Thrift Savings Plan (compared to non-plan Roth IRAs, which have no mandated RMD schedule)
If you are already taking RMDs (not by your own choice) from Plan Roth IRAs, you can discontinue in 2024.
Creation of SIMPLE Roth IRAs and SEP Roth IRAs – additional time and procedures will need to be implemented before such contributions can be made.
Additional Employer Contribution Eligible for Roth Treatment – Employers will be permitted to deposit matching and/or non-elective contribution to employees designated Roth accounts (e.g. Roth accounts in 401(k) and 403(b) plans). Such amounts will be included in the employee’s income in the year of contribution and must be non-forfeitable.
High Wage Earners Required to Use Roth Option for Catch Up Contributions starting in 2024, catch up contributions for certain high income taxpayers will have to be made via the Roth route (for 401K, 403b and 457b plans but not for traditional IRAs or Simple IRAs ) – Planning Point: as drafted this allows self-employed individuals (sole-proprietor + partners) would continue to have the opportunity to make pre-tax catch-up contributions even if their income from self-employment is higher than $145,000.
LIMITED 529 to Roth IRA transfers allowed after 15 years
Beginning in 2024, some individuals can move plan balances from 529 directly into Roth IRA, There are strings attached:
-The Roth IRA receiving the funds must be in the name of beneficiary of the Plan 529 plan.
-The 529 plan must have been maintained for 15 years or longer.
-Any contributions to the 529plan with the last 5 years (and the earnings on those contributions) are ineligible to be moved from 529 plan to a Roth IRA.
-The annual limit for how much can be moved from 529 plan to a Roth IRA is the IRA contribution limit for the year, less any “Regular” traditional IRA or Roth Ira contributions that area made for the year (the idea being no doubling up with funds from outside the 529 plan).
-The maximum amount that can be moved, must have earned income / compensation ($ 35K worth?) from a 529 plan to Roth IRA during an individual’s lifetime is $35,000 (if you really want to game this, start the 529 right away and then convert at the 15 years mark, then allow growth / compounding for max wealth generation).
Unknown / ambiguous matters: if you change plan beneficiaries does that trigger a new “seasoning” period? Can a parent start a 529 for a child, then not use it for a child, them change beneficiary to themselves and then transfer the $35k to their own Roth? We need to see if further legislative text is provided.
Important planning advantage: Direct Roth contributions are limited by MAGI (Modified adjusted gross income ) but no such limitation exists for 529 plans – this is a (comparatively) easier way to fund a Roth (vs back-door Roth): these transfers (529 to Roth) are likewise not income-limited.
Death Option For Surviving Spouse Beneficiaries of Retirement Accounts
Existing Law: Surviving spouse can (upon inheritance of IRA)
(1) roll the decedents IRA into their own IRA.
(2) Elect to treat the decedent’s IRA as their own, and remaining a beneficiary of the decedent’s IRA but with special treatment).
In 2024, there will be an additional option: elect to v=be treated as the deceased spouse. Several benefits to explore
RMDs for surviving spouse would be delayed until the deceased spouse would have reached the age at which RMDs begin.
Once RMDs are necessary (the year the decedent would have reached RMD age, had they lived), the surviving spouse will calculate RMDs using Single Lifetime Table that applies to beneficiaries.
If the surviving spouse dies before RMDs begin, the surviving spouses beneficiaries will be treated as though they were the original beneficiaries of the account which would allow any Eligible Designated Beneficiaries to stretch distributions over their life expectancy instead of being stuck with 10-year rule that would otherwise apply (Most advantageous for surviving spouses who inherit retirement accounts from a younger spouse).
IRA Catch-Up Contributions To be Indexed for Inflation – in Increments of $100.
Increased Plan Catch-Up Contributions For Participants in their Early 60s – For 2025 forward increase employer retirement plan catch-up contributions for certain plan participants. Ages 60, 61, 62, 63 will have their catch-up contribution limit increased to the greater of $10,000 or 150% of the regular catch-up contribution amount. SIMPLE Plan participants of same age can have catch-up contributions of $15,000 or 150% of the regular SIMPLE catch-up contribution amount for 2025.
New Rules for Qualified Charitable Distributions
Max annual contribution was previously $100,000 – in 2024 this amount will be indexed to inflation.
One time opportunity to use QCD to fund a split interest – equity: Use it to fund CRUT, CRAT or Charitable Gift Annuity à Max $50K/taxpayer. Must be newly established trust. Income beneficiaries of these trusts must be taxpayer plus spouse. This is relatively expensive proposition.
New Rules for Accessing Retirement Funds During Times of Need – additional exceptions to the 10% early withdrawal penalty.
Age 50 Exception Expanded to Include:
-Private Sector Firefighters
-State and Local Connections Officers
-Qualifying Workers with 25 or more years services with Employer
-Permanent Reinstatement of Smaller Qualified Disaster Distributions ($22k limit)
-Creation of Exceptions for Individual with Terminal Illness, Victims of Domestic Abuse
Creation of New Emergency Withdrawal Exception – Exempt from 10% penalty and may be taken by any tax payer who experiences unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses.
Important limits: 1 x yearly and $1,000 cap.
No subsequent emergency withdrawals until (1) Prior distributions have been fully repaid. (2) Regular deferrals and other employee contributions made to the plan since the Emergency withdrawal total at least as much as the amount of the distribution (3) 3 years have passed since the previously taken Emergency withdrawal.
Creation of New Exception for Qualified Long Term Care Distributions – For 2026 forward – retirement owners can take penalty free “Qualified Long Term Care Distributions” of up to the lesser of 10% of their vested balance or $2,500 (adjusted for inflation) annually to pay for long term care insurance.
Relaxation of Certain 72(t) rules – can do partial transfers of plan balances to other investments. Expanded Access to Plan Loans for Plan Participants in Disaster Areas – up to 10% of their vested balance, up to a max of $100,000.
Effective 2024 Creation of Linked Emergency Savings Accounts – A new type of account – must be linked to an existing employer retirement plan with individual balances. These are limitations to who can contribute (must not be highly compensated) – and max contribution $2,500 (Roth-type / treatment).
Access to ABLE Accounts Expanded to Individual Disabled at Older Ages – Effective 2026, ABLE accounts will be to be established for individuals who become disabled prior to 46.
Disabled First Responders Eligible to Continue to Exclude Certain Payments from Income After Reaching Retirement Age – Law Enforcement / Firefighters / Paramedics / EMTS who have services connected disability and retirement pensions.
Retroactive First-Year Solo 401(k) Plan Deferrals allowed for Sole-Proprietors Statute of Limitations for Missed RMDs and (Most) Excess Contributions to be tied to Form 1040.
Expansion of the Employer Plan Compliance Resolution System (EPCRS) to Address IRA-related Issues.
ANNUITY RELATED CHANGES
Qualified Longevity Annuity Contracts – Repeal of the 25% of account balance limitation for such contracts and increase the max amount that can be used to purchase such products to $ 200,000 (up from $145K in 2022 and $155K in 2023).
OTHER CHANGES
Allows employer matches for amounts paid by participants towards student debt
Auto enrollment in 401K/403b beginning in 2025
Retirement plan start up credit up to 100% (employees with 50 or fewer employees)
Additional contributions to Simple plans (lesser of 10% of compensation or $5,000)
SEP IRA plan for household employees
New type of retirement plan “Starter 401K”
CITs may be included in 403(b) plans
OTHER MISC PROVISIONS
In 2027, “Savers Credit” replaced with “Savers Match”
In 2028, certain S- Corp owners who sell their shares to ESOP can defer up to 10% of their gain, if timely reinvested in Qualified Replacement Property (Currently only available to certain C- Corp)
WHAT IS NOT IN THE BILL?
No Provisions that limit the use of Back-Door Roth or Mega-Back-Door Roth Contributions
No New Limitations on who can make ROTH conversions
No provisions which mandate RMDs based on account balances
No changes to the age at which QCDS can be made
No new restrictions on QSBS
No changes to eligible investments that can be made with IRA money
No corrections or clarifications to the manner in which the 10-year rule created by the Original SECURE Act should be implemented for Non-Eligible Designated Beneficiaries.
As I mentioned earlier, we will be making revisions to this post as time goes on – we are missing important implementation guidance and certain details are yet to be provided by Congress and the IRS.