In a further attempt to expand and promote retirement savings, Congress passed SECURE Act 2.0 as part of an overall spending bill, the 2023 Consolidations and Appropriations Act. President Biden signed the bill into law on December 29, 2022.
The SECURE Act 2.0 is a follow-up bill to the original SECURE Act passed in late 2019. Although the SECURE Act 2.0 does not contain any changes as drastic to retirement planning as the original SECURE Act, it does include a comprehensive set of provisions that are intended to help a large swath of Americans and employers with retirement saving. While there are over 90 provisions in the act, many are geared towards changes to employer sponsored retirement plans. Many of the key provisions are effective between 2024 and 2025 but some, such as the increase in RMD age to 73, are effective in 2023.
REQUIRED MINIMUM DISTRIBUTION CHANGES
INCREASED REQUIRED MINIMUM DISTRIBUTION (RMD) AGE
SECURE Act 2.0 seeks to extend the savings time frame before RMDs are required. Individuals that turn 72 in 2023 and beyond, can delay taking RMDs from their IRA until the year they turn 73. The RMD start age will move to age 75 in 2033. While the vast majority of Americans take distributions from retirement accounts before RMD age, the increase in RMD age allows some people to continue with tax deferral on their qualified accounts. This also provides an expanded time frame for strategic Roth conversions.
REDUCED PENALTY FOR MISSED RMD
If an RMD is not satisfied for the current year, a 50% penalty can be assessed on the amount not withdrawn. The SECURE Act 2.0 decreases that penalty to 25% on the amount not withdrawn. If the missed RMD is taken within a “correction window” the penalty is reduced to 10%. The reduction is effective immediately and is a welcome relief for what was previously a very high penalty.
QUALIFIED CHARITABLE DISTRIBUTION RULE CHANGES
Qualified Charitable Distributions (QCD) are a very valuable tool for those 70 ½ and older to carry out their charitable intentions. When executed correctly, up to $100,000 can be transferred from the individual’s IRA directly to a qualified charity and the distribution is excluded from Adjusted Gross Income (AGI). There is no charitable deduction, but since the distribution is excluded from AGI, the full tax benefit of the charitable gift is achieved. This is beneficial as most retirees do not itemize their deductions. In addition, for those of RMD age, the distribution can be applied towards the annual RMD withdrawal.