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Wendy Z. Cox, J.D., CTFA Director of Personal Trust, Chief Fiduciary Officer

March 7, 2023

Secure Act 2.0 – More Changes to the Rules

On December 29, 2022, President Biden signed the Consolidated Appropriations Act, 2023. The legislation contains significant retirement provisions in what is called the SECURE 2.0 Act of 2022 (“the Act”). The new Act contains a number of provisions that are aimed at encouraging retirement savings and charitable giving. Some provisions become applicable immediately and some in 2024 and beyond.

Contributions to Retirement Plans

In 2023, those over age 50 can make annual “catch up” contributions of up to $7,500, in addition to the standard $22,500 deferral, to 401(k), 403(b) and 457(b) retirement plans to help increase their retirement savings. Starting in 2025, this catch-up contribution limit increases to $10,000 for individuals who are age 60 through 63.

Beginning in 2024, catch-up contribution to retirement plans for employees whose wages exceed $145,000 (as indexed) must be made on a Roth basis. This is mandatory for any plan that makes catch-up contributions available. This provision does not apply to SIMPLE IRAs or SEP IRAs.

IRA owners over age 50 can currently contribute an additional $1,000 in “catch-up contributions” each year. Beginning in 2024, the Act provides that the $1,000 catch-up limit is indexed for inflation.

Required Minimum Distributions (“RMD”)

The Act affects how and at what age you must take required minimum distributions, also known as RMDs, from your tax-favored retirement accounts.

In 2023 or later, the age at which you must begin taking RMDs will rise to age 73 instead of the current age of 72. Starting in 2033, the age will rise again to age 75. The Act also reduced the penalty for a failure to take an RMD in any year to 25% (from 50%), and further to 10% if the failure is corrected in a timely manner.

We also have final clarification on the 10-year rule for Inherited IRAs. If the account owner was past the required beginning date for taking RMD, the beneficiaries must take RMD each year and the account must be fully distributed by the end of the 10 years following death of the account owner. If the individual dies in 2023, the individual or the individual’s beneficiaries take the individual’s 2023 RMD. Beginning in 2024, the beneficiaries must take an RMD and do so every year thereafter with final distribution in 2033.

If the account owner was before the required beginning date, then the inherited IRA beneficiary does not have an RMD but the account must still be fully distributed by the end of 10 years following the death of the account owner. The beneficiaries may take distributions from the time they inherit the account, but they are not required. The account must be fully distributed by 2033.

One of the exceptions to the 10-year rule is where a qualified retirement account is paid to or for disabled or chronically ill beneficiaries. The new ACT provides additional clarity and flexibility when planning for disabled or chronically ill beneficiaries.

  • ABLE (Achieving a Better Life Experience) accounts are tax-advantaged savings accounts that do not impact asset-tested government benefits received by special needs beneficiaries.
  • The ACT increases the ability to open an account for those whose disability occurred before age 46, instead of the current age limit of 26.
  • For a special needs trust that is a beneficiary of a retirement account, the Act also specifies that the special needs trust can have a charitable beneficiary that receives the trust funds after the disabled or chronically-ill beneficiary’s death. Moreover, adding a charitable beneficiary will not compromise a special needs beneficiary’s ability to use life expectancy time for payout of the retirement account and payment of the taxes.
  • Prior to this provision, adding a charitable beneficiary would have subjected the retirement account to a much shorter payout period after the account owner’s death, often five years.
  • Clients with special needs beneficiaries often wish to provide for charities who have helped the beneficiary along the way and this provision makes it easier for the client to give back to those charities.

Qualified Charitable Distributions are Expanded

Qualified Charitable Distributions (“QCDs”) are distributions made directly from your IRA to a charity. QCDs are excluded entirely from your gross income and can be applied toward your RMD for that year. The annual $100,000 QCD limit is now indexed to inflation, meaning that the QCD limit will increase each year with inflation.

Historically, QCDs must go directly to a charity. A provision of the new act allows donors to make a one-time QCD of $50,000 to a split-interest charitable entity, such as a charitable remainder trust or charitable gift annuity. A “split interest” entity has both charitable and individual beneficiaries permitting Grantors to benefit both family members and charities with a one-time QCD of $50,000.

529 Plan Rollovers are Now Available

Starting in 2024, beneficiaries of a 529 Plan can roll the funds to a Roth IRA in certain circumstances. Previously, if the 529 Plan had funds remaining after the beneficiary had exhausted eligible educational expenses, the only options were to 1) roll the 529 Plan over to another beneficiary who still had eligible educational expenses or 2) withdraw the account and incur the income tax and 10% penalty. Allowing for the rollover to the Roth provides the beneficiary with an opportunity to start a nest egg that can grow tax free for decades to come. Unused 529 funds may be rolled over directly to a Roth IRA, subject to the following conditions:

  • The 529 account must have been open for at least 15 years.
  • Any contributions made within the previous five years are ineligible for rollover.
  • The transfer must be made directly from the 529 Plan to the Roth IRA custodian and into an account with the same name as the 529 beneficiary.
  • The eligible rollover amount is limited to the annual IRA contribution limit, less any other IRA contributions made for the same year. The annual limit for Roth IRA contributions is $6,500 in 2023.
  • The income limitation for direct Roth contributions (currently $153,000 for a single taxpayer) does not apply to these rollovers.
  • The maximum allowable rollover amount is $35,000 during the beneficiary’s lifetime.

To make certain that your planning optimizes your goals, we recommend that you consult with your estate planning counsel, your accountant and your team at Greenleaf Trust and Greenleaf Trust Delaware.