Written by Alan Cox, Director of Estate/Trust Planning and Estate Settlement, and Mike Bleck, Senior Estate Planning Specialist
On Friday, December 23, 2022, Congress passed a $1.7 trillion spending bill known as the Consolidated Appropriations Act of 2023 (Bill). You may wonder what impact this Bill could have on you. While the Bill itself does not include any major tax provisions or extensions, part of the embedded spending bill does include the Securing a Strong Retirement Act of 2022 (SECURE Act 2.0), which many financial companies have anticipated and most have generally applauded. As you may recall, SECURE Act 2.0 was originally passed by the House on March 29, 2022 and enacts many provisions that impact retirement planning. Some of these provisions are highlighted below.
- Required Minimum Distributions (RMD). The original SECURE Act of 2019 increased the RMD age to age 72. The newly passed SECURE Act 2.0 increases the RMD age to 73 on January 1, 2023, with the age increasing to 75 on January 1, 2033. Since the age change is effective January 1, 2023, if a taxpayer turns age 72 by December 31, 2022, they are still required to take an RMD for 2022.
- Withdrawals for Disaster Relief. The SECURE Act 2.0 makes permanent the ability for taxpayers to make an early withdrawal from a qualified retirement account without penalty if they reside in a federally declared disaster area and have sustained an economic loss. This provision has a retroactive effect and may apply to distributions received in early 2021, in certain circumstances.
- Withdrawal for Domestic Abuse. The SECURE Act 2.0 also allows a taxpayer who is the victim of domestic abuse to make a penalty-free retirement account withdrawal of up to the lesser of $10,000 or 50% of the account balance. These changes are effective for distributions after December 31, 2023.
- Withdrawal for Terminal Illness. The SECURE Act 2.0 allows a taxpayer to make a penalty-free withdrawal within a period of 84 months after a certified diagnosis. This provision is effective for a distribution after the date of the act’s enactment.
- Reduction in Penalty for Failure to Take RMD. Under current tax law, if a taxpayer fails to take his or her RMD, a 50% penalty is assessed on the RMD not taken. Under the SECURE Act 2.0, this penalty is reduced to 25% and can be further reduced to 10% if certain conditions are met. This provision is effective in tax years beginning after the enactment of the act.
Increasing Retirement Plan Savings and Participation
- Catch-up Limits on Contributions. Generally, employees who have reached age 50 can make annual contributions of $7,500 in 2023 for most retirement plans ($3,500 for SIMPLE plans), in addition to the normal deferral limit. The SECURE Act 2.0 will also allow for a “second” catch-up limitation of the greater of (1) $10,000 (indexed by inflation) or (2) 150% of the regular catch-up limit (indexed by inflation) for most retirement plans ($5,000 for SIMPLE plans) for those age 60-63. In other words, taxpayers could contribute an additional $2,500 to most retirement plans from age 60 to 63 to reach the $10,000 contribution limit versus the current $7,500. These changes are effective for tax years beginning after December 31, 2024.
- Catch-up Contributions Only After-tax. Under current law, taxpayers can make catch-up contributions to a qualified retirement plan on a pre- or after-tax basis. However, after December 31, 2023, under the SECURE Act 2.0, taxpayers will only be able to make catch-up contributions on an after-tax basis (i.e., Roth contribution) unless their compensation is $145,000 or less. For example, in 2023, a taxpayer age 51 can contribute $30,000 pre-tax ($22,500 limit plus $7,500 catch-up contribution) to his or her 401(k) plan. However, assuming the same limits in 2024, the same taxpayer would only be able to contribute $22,500 pre-tax to his or her 401(k) and make a catch-up contribution of $7,500 after-tax (assuming compensation is over $145,000). The effect of this provision is that the catch-up contribution is subject to income tax starting in 2024.
- Treatment of Student Loan Payments as Elective Deferrals for Purposes of Matching. The SECURE Act 2.0 allows employers to make matching contributions to retirement plans in the amount of an employee’s qualified student loan payments. This provision is effective for contributions made toward plan years beginning after December 31, 2023.
- Automatic Enrollment and Annual Increase. For plan years beginning after 2023, the new act requires employers to automatically enroll employees in their retirement plan. The deferral amount can range from 3-10% and is subject to an annual increase of 1% after the initial enrollment. The employee has the option to opt out of automatic enrollment.
- Small Employers and Retirement Plans. The original SECURE Act allowed small employers certain credits for establishing an eligible plan. Generally, for the first three years the employer could claim a credit of 50% of the start-up costs with certain limitations. Under the SECURE Act 2.0 for tax years beginning after 2022, the credit is extended to five years for employers with less than 100 employees. The credit is further increased to 100% of start-up costs for employers with fewer than 50 employees and phases out for employers with 51 to 100 employees. However, such credit cannot exceed $1,000 per employee and is phased out over the five-year period.
Other Retirement Provisions
- Rollover from 529 Plan to IRA. The SECURE Act 2.0 allows the beneficiary of a 529 plan to make tax- and penalty-free rollovers of up to $35,000 over their lifetime from a 529 education savings plan into a Roth IRA. Such rollovers are subject to the annual Roth IRA contribution limitations and the 529 plan must have been opened for 15 years. The effective date of this provision is any distribution after December 31, 2023.
- Qualified Charitable Distribution (QCD) to Charitable Remainder Trust or Charitable Gift Annuity. The new act includes a provision that allows for a one-time, tax-free transfer of up to $50,000 to a newly created charitable remainder trust (CRT) or charitable gift annuity (CGA). This provision applies to any distribution after the date of enactment.
- Qualified Charitable Distribution (QCD) Limitation Indexed for Inflation. Currently, a qualified charitable distribution (QCD) from an IRA to a public charity is limited to $100,000. The SECURE Act 2.0 indexes this amount for inflation for tax years ending after the date of enactment.
Conservation Easement Limitation
One area of concern for the Internal Revenue Service has been the abuse of a taxpayer taking a charitable deduction for conservation easements. Because of the significant abuse, the SECURE Act 2.0 includes a prohibition on partnerships treating a contribution as a charitable conservation easement if the value of the easement exceeds two and one-half times the total basis allocable to the property for which the easement applies.
Please talk to your Ronald Blue Trust advisor to discuss your specific situation and strategy. If you don’t have a Ronald Blue Trust advisor but would still like to speak with us, please contact us at 800.987.2987 or email [email protected].