The SECURE 2.0 Act of 2022 (SECURE 2.0) expands on the changes made by the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). Enacted in late 2022, SECURE 2.0 can help you save more for retirement, which, in turn, can provide more wealth to share with your loved ones. Let’s take a closer look at the new law’s highlights.

RMD Reprieve

The SECURE Act increased the age at which you must begin taking required minimum distributions (RMDs) from IRAs and employer-sponsored retirement plans — from 70.5 to 72 — for taxpayers who reach age 70.5 in 2020 or later. SECURE 2.0 delays RMDs even further, first to age 73 and later to age 75.

Here’s how it works:

  • If you turned age 72 in 2022 or earlier, then the previous rules apply and you should continue taking RMDs as scheduled.

  • If you turn age 72 after 2022 but before 2033, then you must begin taking RMDs at age 73. If you turn age 72 in 2023, that means your first RMD is due next year, and you’ll have the flexibility to defer until April 1, 2025. Bear in mind that your RMD for 2025 is due by the end of 2025, and there’s no option to defer. Should you decide to hold off on taking the 2024 RMD until the beginning of 2025, be aware that for 2025 you’ll have two RMDs.

  • If you turn age 73 after 2032, then you must begin taking RMDs at age 75. So, if you turn age 73 in 2033, your first RMD will be for 2035, with the option to defer until April 1, 2036, and having to take two distributions — the one that you deferred from 2035 and the one for 2036 — in 2036. (Be aware that an apparent drafting error creates some ambiguity over the timing of the increase to age 75, but Congress has time to make a technical correction to fix the problem.)

Starting RMDs later allows savings to grow tax-free longer, giving your retirement nest egg a welcome boost. Know that having the ability to defer RMDs simply provides an additional amount of flexibility in your retirement. Depending on the circumstances, from a tax perspective, it may be more prudent to withdraw some funds in advance of the time that you’re required to do so. If you turn age 72 in 2023, and you’ve already planned an RMD for this year (previously due by April 1, 2024), consider putting off the distribution for a year.

SECURE 2.0 also reduces the penalty for failure to take an RMD when due, from 50% to 25% of the amount you should’ve withdrawn. And the penalty is reduced further, to 10%, for taxpayers who correct a missed RMD on a timely basis. Finally, the law conforms the treatment of employer-sponsored Roth accounts to that of Roth IRAs, eliminating RMDs from those accounts beginning in 2024.

Catching up and matching up

SECURE 2.0 makes several improvements to catch-up and matching contributions. Currently, if you’re age 50 or older, you can make up for lost time with additional contributions of $1,000 per year to IRAs and $7,500 per year to most employer-sponsored plans (different limits apply to SIMPLE plans). Beginning in 2024, the catch-up amount for IRAs, which has been stuck at $1,000 for years, will be adjusted for inflation.

Tax relief for overfunded 529 plans

Section 529 college savings plans are a remarkable tool for funding college tuition and other educational expenses in a tax-advantaged manner. But there is an element of risk: If you overfund your plan, withdrawals for purposes other than qualified educational expenses are subject to income tax and penalties. Fortunately, the SECURE 2.0 Act provides some relief. It allows you to roll over up to $35,000 (lifetime per beneficiary) from a 529 plan to a Roth IRA for the same beneficiary, tax- and penalty-free.

There are a few limitations: The 529 plan must be at least 15 years old, and any contributions made to the plan within the previous five years (including earnings on those contributions) are ineligible for rollover. Also, you can’t roll over the full $35,000 all at once. Rollovers each year are subject to the usual annual limits on IRA contributions.

Employer-plan participants who are nearing retirement age will be able to turbocharge their catch-up contributions. Beginning in 2025, participants age 60 through 63 will be able to increase their contributions by the greater of $10,000 (adjusted for inflation) or 150% of the regular catch-up amount. Note, however, that highly compensated participants (those who earned more than an inflation-adjusted $145,000 in the previous year), will no longer be permitted to make catch-up contributions on a pretax basis. Starting in 2024, these contributions must be made to a Roth account.

Employer-matching contributions also get some improvements. Starting this year, plans may allow employees to receive matching contributions as after-tax Roth contributions. Also, plans can treat certain student loan payments as contributions for matching purposes.

Qualified charitable contributions expanded

A qualified charitable distribution (QCD) can be one of the most tax-efficient tools for satisfying your philanthropic goals. If you’re age 70.5 or older, a QCD allows you to transfer up to $100,000 per year — tax-free — directly from an IRA to a qualified public charity. There’s no need to itemize, and QCDs bypass the usual income limitations on charitable deductions. What’s more, QCDs count toward your RMDs, generating additional tax savings.

Under SECURE 2.0, you now have an opportunity to make a one-time QCD of up to $50,000 to a charitable gift annuity or charitable remainder trust. You receive the tax benefits of a QCD while, at the same time, creating an income stream for life for yourself or your spouse. The act also provides for the $100,000 and $50,000 limits to be adjusted for inflation in future years.

Consult with your advisor

At more than 300 pages long, SECURE 2.0 is a substantial new law. Many of its provisions will likely affect your retirement and estate plans, so be sure to contact your advisor to determine whether any revisions are required.

© 2023

Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation. All THK blogs are considered advertising material by the Indiana Bar Association.