On December 23, 2022, Congress passed the Consolidated Appropriations Act of 2023. President Biden signed and enacted it on December 29, 2022. Division T of the Act is SECURE 2.0 Act of 2022. (govtrack.us/congress/bills/117/hr2617/text. Division T starts at page 2000 of the PDF.)
The SECURE 2.0 Act is 150 pages of over 4,000 pages in the Act, so I can only cover a very few highlights here. The Act is significant retirement plan legislation. The provisions have many different effective dates, which will result in confusion about what rules apply when.
The item with the broadest impact is the increase in age for the required beginning date (RBD) for mandatory distributions. For 2022, the SECURE Act of 2019 set the age to start mandatory distributions at age 72. The new law increases the RBD age to 73 effective January 1, 2023 and 75 effective January 1, 2033. By postponing taking withdrawals from their retirement accounts, participants will have the possibility of letting the account grow more and last longer, possibly avoiding outliving the account.
The limit for the additional catch-up contributions to IRAs for individuals who have attained age 50 is currently $1,000. Effective for taxable years beginning after December 31, 2023, the limit with be indexed for inflation.
The limit for additional catch-up contributions to defined contribution plans (including 401(k) plans, but not SIMPLE plans) for individuals who have attained ages 60 – 63 (currently $6,500) is increased to the greater of $10,000 or 150% of the amount that would otherwise apply before the change. For SIMPLE plans, the limit is the greater of $5,000 or 150% of the amount that would otherwise apply for 2025 before the change. The increases are effective for taxable years beginning after December 31, 2024. The limits will be indexed for inflation for taxable years beginning after December 31, 2025.
Before the tax law changes, beneficiaries of Section 529 College Savings Plans couldn’t withdraw unused balances in their accounts without having taxable income for account appreciation plus a penalty. Under the new tax law effective for distributions after December 31, 2023, balances in Section 529 accounts that have been open for more than 15 years can be rolled over as a trustee-to-trustee transfer tax-free to the beneficiary’s Roth IRA account. The rollover is subject to to a cumulative lifetime limitation of $35,000 and is subject to the annual Roth IRA contribution limits (including income threshold limits.)
Before the tax law changes, although required minimum distributions (RMDs) didn’t apply before death of the participant to a Roth IRA account, they did apply to Roth designated accounts in an employer retirement plan. Effective for taxable years beginning after December 31, 2023, RMDs before the death of the participant are no longer required for Roth designated accounts in an employer retirement plan, including those for participants who reached the required beginning date before January 1, 2024.
Some plan participants are worried that by taking required minimum distributions (RMDs), they won’t outlive their IRA accounts. In 2014, the Treasury Department published final regulations allowing qualifying longevity annuity contracts (QLACs). QLACs are deferred annuities that begin payment at the end of an individual’s life expectancy. A QLAC is not included in the account balance when computing RMDs. Before the tax law changes, a participant could purchase a QLAC with a premium limited to the lesser of $125,000 or 25% of the account balance. Effective for contracts purchased on or after December 29, 2022, the premium limitation is increased to $200,000, indexed for inflation, and the 25% of account balance limit no longer applies. Retroactively effective for contracts purchased or received in an exchange on or after July 2, 2014, the legislation also includes provisions for joint and survivor annuities with a spouse, including provisions to protect those benefits in the event of a divorce or separation.
These are a few highlights of SECURE 2.0 Act. There are many more provisions, including provisions that apply for employers.
You should consult with your tax advisor and retirement plan administrator about any adjustments that should be made to your retirement plans and your business’s retirement benefits for the SECURE 2.0 Act.