2024 Retirement Account Changes

Take-Away: Many new IRA contribution and distribution rules will come into effect starting in January, 2024. Some are straightforward, while one in particular needs more guidance from the IRS to be fully understood.

Background: The SECURE Act 2.0 made many changes to retirement plan contributions and distribution rules, while also it encouraged more people to contribute to enhance their own retirement security. Many of the Act’s changes become effective in about 90 days, starting January 1, 2024. A short list of some of those changes follows.

Surviving Spouse Beneficiary Option: This SECURE Act 2.0 change is perhaps the one that may cause the most confusion (or harm) and needs further explanation by the IRS in Temporary Regulations. The Act includes a confusing provision that changes the existing payment options that are available to a surviving spouse who inherits a retirement account, e.g., an IRA. In the past when a spouse died naming their survivor as the designated beneficiary of the IRA, the surviving had, practically speaking, two options.

One option was to remain as the IRA’s designated beneficiary. With this option, the survivor was able to delay taking required minimum distributions (RMDs) until the year in which the deceased IRA owner would have reached his/her required beginning date (RBD -age 73). Once those RMDs started, the survivor would use the IRS Single Life Table to calculate his/her RMD for the year which leads to a more rapid depletion of the inherited IRA, and thus higher RMD amounts.

The other option was for the survivor to do a rollover of the deceased spouse’s IRA to the survivor’s own IRA. With this choice the RMDs would not be required to be taken until the survivor attained his/her RBD (age 73). With this option the survivor’s RMD would be calculated using the IRS’s Uniform Lifetime Table, which results in a smaller annual RMD.

Starting in 2024, the survivor who inherited an IRA in 2023 must now make a formal election in order to delay taking RMDs until the deceased spouse would have reached his/her RBD (the first option.) If the survivor makes that election, he/she will be entitled to used the Uniform Lifetime Table to calculate their RMD for the year (a good thing), but with that election the survivor will have to use their deceased spouse’s age had he/she lived to calculate the RMD for the year. This option will benefit a survivor who inherits from a younger IRA owner, but not a survivor who inherits from an older IRA owner. If the survivor fails to make this election must start taking RMDs in the year that follows the year that the IRA owner dies, just like any other non-spouse designated beneficiary.

This change desperately needs IRS guidance to discern the implications of making an election, or not making a timely election by the surviving spouse.

QCDs: The $100,000 per year limit on qualified charitable distributions from a traditional IRA will begin to be subject to cost-of-living adjustments. A QCD allows the IRA owner to avoid the ‘stealth’ taxes based on their reported adjusted gross income (AGI) for the year, such as the 3.8% surtax on net investment income and the Medicare surcharge for higher income individuals, since the direct distribution from the IRA to the charity is not included in the IRA owner’s taxable income for the year.

IRA Catch-Up Contribution: The catch-up contribution limit for IRA contributions (for those age 50 and older) of $1,000 will be subject to cost-of-living adjustments.

Mandatory Roth Catch-Up Contribution: This surprising change which will require a higher-income ($145,000 and up wage-earner) participant in a qualified plan who makes a catch-up contribution to be made as a Roth contribution (with after-tax dollars) was delayed by the IRS (not Congress) from January 1, 2024 to January 1, 2026. [IRS Notice 2023-62.]

Roth 401(k) RMDs: Starting in 2024, an older plan participant’s Roth 401(k) account will not be subject to annual required minimum distributions (RMDs.) However, Roth 401(k) beneficiaries, like Roth IRA beneficiaries, will be still be required to take RMDs from those inherited Roth accounts under the SECURE Act.

529 Account to Roth Conversion: This new rule permits the rollover of unused IRC 529 higher education funds to a Roth IRA. It, too, starts in 2024. There are several restrictions, though. The IRC 529 account must have been in existence for at least 15 years. The maximum amount that can be rolled over to a traditional IRA is $35,000. In addition, the amount that can be rolled over from the 529 account in a year is limited to the maximum amount that can be directly contributed by a wage earner to their Roth IRA; thus, the rollover of unused 529 funds will probably have to be spread over several years. Lastly, the Roth IRA must be in the name of the 529 account beneficiary, not the 529 owner if they are different.

Penalty Relief: Congress has provided some relief from the 10% penalty for an early distribution from a retirement account if the account owner is under the age of 59 ½. This relief from the penalty starts in 2024. The SECURE Act 2.0 created an exclusion from the penalty for emergency expenses and victims of domestic violence.

The domestic violence victim’s exception is up to a maximum of $10,000 but no more than 50% of the victim’s account balance. That distribution can be repaid back to the retirement account over the following three years.

The emergency exception is for expenses that are incurred and necessary due to “unforeseeable or immediate financial needs relating to person or family emergencies.” The maximum amount that can be withdrawn penalty-free is $1,000, and further it is limited to only one withdrawal per calendar year, nor can another withdrawal be taken under this exclusion in the following three years, or until the withdrawn amount is repaid or subsequent contributions to the retirement account are made at least equal to the amount that was first taken as an emergency withdrawal.

While the early distribution penalty will not be assessed for these victim of domestic violence and emergency withdrawals, the withdrawals will still be subject to income taxation. The subsequent repayments (if any) will also require the IRA owner or plan participant to file amended income tax returns for the tax refunds, which requirement may cause most individuals to skip the repayment option. A qualified plan is not required to add this exclusion-from-penalty feature.

Pension-Linked Emergency Savings Side-Fund: This is yet another new provision that is geared towards lower-paid qualified plan participants (not to be confused with the emergency expense penalty relief just described.) It authorizes the creation of a segregated account inside a 401(k) plan, specifically designated for emergencies. This separate emergency fund is intended to be accessed without touching the participant’s retirement savings. Contributions to this ‘side-fund’ are limited to a maximum of $2,500, and the contribution must be made with after-tax dollars, akin to a Roth contribution. A withdrawal from this side-fund will be exempt from the 10% early distribution penalty. Once again, a qualified plan is not required to add this feature.

Conclusion: These are just some of the provisions that come from the SECURE Act 2.0. Preparing to work with, or around, these new rules should be a priority. Hopefully before this calendar year comes to a close the IRS will have provided Temporary Regulations that will help us to better understand these rules and the implications from not following the rules.