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 Significant changes in retirement planning were made in the last days of 2022 with the enactment of the 4,155-page Consolidated Appropriations Act (CCA).
Most of the CCA appropriates an estimated $1.7 trillion to various government departments.
But Division T of the CCA is the SECURE Act 2.0, a 358-page compilation of more than 100 provisions related to retirement and financial security. This law is a follow-up to the Setting Every Community Up for Retirement Enhancement (SECURE) Act, enacted in late 2019.
The SECURE Act 2.0 doesn't create the urgent planning need that followed the original SECURE Act, because 2.0 doesn't have a provision comparable to the immediate repeal of the Stretch IRA. But the SECURE Act 2.0 provisions collectively will have a greater impact over the course of retirement.
Required minimum distributions (RMDs).
Original owners of traditional IRAs, 401(k)s and other defined contribution retirement plans have to take RMDs. In the new law, the beginning age for RMDs is increased again. It became 73 effective January 1, 2023 and will jump to 75 effective January 1, 2033.
If you turned 72 during or before 2022, you continue to follow the rules in place at the start of 2022. Those who turned 72 in 2022 must take their first RMD no later than April 1, 2023, and their second RMD by December 31, 2023, unless one of the exceptions applies.
There's a one-year delay for those who turn 72 in 2023. Your first RMD will be for 2024 (the year you turn 73) and can be delayed until April 1, 2025.
For those who turn 73 in 2023 through 2032, the starting age for RMDs is 73 and the first RMD must be taken no later than April 1 of the year following the year they turn 73. The beginning age for RMDs is 75 for those who turn 74 after December 31, 2032.
Longtime readers know that I believe raising the RMD age is a trap for many of my readers. I'll discuss that in more detail again in an upcoming issue.
The bottom line is that the longer you leave money in a traditional IRA and let it compound, the higher the tax bill will be when the money eventually is distributed.
In another RMD provision, the SECURE Act 2.0 reduces the penalty for missed RMDs. The penalty declines from the current 50% of the amount that should have been withdrawn to 25%. In addition, the penalty is only 10% if the mistake is corrected in a timely manner.
This generally means you must distribute the RMD amount before the IRS sends you a notice of deficiency or before the last day of the second taxable year that begins after the year in which the RMD should have been taken, whichever is earlier.
Catch-up contributions.
Several important changes were made to the catch-up contributions available to IRA and 401(k) account owners ages 50 and older.
For IRAs, the maximum annual catch-up contribution finally will be indexed for inflation beginning in 2024. The amount has been fixed at $1,000 for years.
The limit for catch-up contributions to 401(k) plans will be increased for those who are ages 60, 61, 62 or 63, beginning in 2025. For the year in which a 401(k) owner is one of those ages, the catch-up contribution limit will be $10,000, but it will be indexed for inflation.
It's estimated the catch-up contribution limit for that age group will be $11,250 or higher in 2025 after the indexing. For SIMPLE plans, the catch-up contribution limit in that age group is increased to $5,000, indexed for inflation.
Another important change is that catch-up contributions to employer plans, such as 401(k)s, will be treated as Roth contributions after 2023 when made by an employee whose wages from that employer the previous year exceeded $145,000. The amount is indexed for inflation.
This means those catch-up contributions will be included in the employee's gross income for the year.
That change applies only to employer plans, not to IRAs. In addition, it applies only if the plan allows all participants to choose whether catch-up contributions and other elective deferrals will be treated as either traditional contributions or Roth contributions.
These rules apply to years after 2023.
Employer-matching contributions.
An earlier version of the SECURE Act 2.0 would have treated all employer-matching contributions as Roth type contributions included in gross income of employees. The final version is more flexible.
SECURE Act 2.0 allows employer plans to provide an election in which plan participants can choose whether to have matching contributions treated as Roth or traditional plan contributions. The employer doesn't have to offer this option but is allowed to do so.
An employer can amend its 401(k) plan to allow this choice to apply to any contributions made after the effective date of the CCA.
QLACs expanded.
In a qualified longevity annuity contract (QLAC), a portion of a traditional IRA is deposited with an insurer. The insurer promises to pay the IRA owner a fixed amount for life, beginning on a date specified by the IRA owner when the deposit was made.
The amount that's deposited in a QLAC isn't included as part of the IRA balance when calculating RMDs. So, the QLAC is a way to defer RMDs and the taxes on them.
Under previous law, the total amount deposited in QLACs couldn't exceed the lower of 25% of the owner's traditional IRA balances or $125,000.
The SECURE Act 2.0 eliminates the percentage limit. It also increases the maximum deposit to $200,000 and indexes that limit for inflation annually.
The date the law is enacted is the effective date of these QLAC provisions. Since the IRS created QLACs in 2014 regulations, it is directed to amend the regulations within 18 months. | |  There's a brand-new way to shield your retirement from inflation and recession -- and be able to do it for the rest of your life.
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Under previous law, original owners of Roth 401(k) and Roth 403(b) accounts had to take RMDs during their lifetimes. This was a major difference between Roth IRAs and employer-sponsored Roth accounts.
After 2023, the RMD requirement for original owners is eliminated for employer-sponsored Roth accounts. They'll be on par with Roth IRAs.
Beneficiaries who inherit Roth IRAs or employer-sponsored Roth accounts still will have to take RMDs.
Charitable giving through retirement accounts.
The new law expands the options for making charitable gifts through IRAs. Until the SECURE Act 2.0, the only tax-advantaged way to make charitable gifts through IRAs was the qualified charitable distribution (QCD) from IRAs.
Now, you also can move up to $50,000 from an IRA to a "split interest" charitable-giving arrangement. Charitable gift annuities and charitable remainder trusts are the approved split interest charitable-giving arrangements.
There's no charitable contribution deduction for the gift, but the amount you move from the retirement account to the charitable arrangement isn't included in gross income at the time.
In addition, the transfer can count as all or part of your RMD for the year.
You must be over age 70½ to take advantage of this strategy, and such a withdrawal can be done only once during your lifetime, even if you don't use the full $50,000 limit. These transactions can be done starting January 1, 2023. There are detailed requirements, which I'll discuss in a future issue, and I'm sure the IRS will issue more detailed guidance.
In a related change, previous law limited the annual payout from a charitable gift annuity to $100,000. That limit is indexed for inflation in the future.
Retirement plans and long-term care premiums.
Retirement plan distributions will be able to be used to pay for long-term care insurance (LTCI) premiums penalty-free. Up to $2,500 per year (or up to 10% of the account balance) can be distributed from a plan to pay for the premiums of certain LTCI contracts.
The distributions will be exempt from the 10% tax on early distributions but included in gross income for income tax purposes.
Only premiums on LTCI meeting a definition of "high-quality coverage" will avoid the penalty.
The provision applies to traditional stand-alone LTCI, as well as annuities and life insurance with LTC benefits.
The provision is effective three years after the law was enacted.
529s transferred to Roth IRAs.
Under certain conditions, after 2023 families that overfunded 529 tuition savings plan will be able to roll over the excess money to a Roth IRA penalty- and income-tax free.
Up to $35,000 can be rolled over this way during the individual's lifetime.
The 529 plan account and the Roth IRA must be in the name of the same beneficiary. That means if the parent is the account owner and the child is the beneficiary, the money must be rolled over to the child's Roth IRA.
The 529 account must have been opened for more than 15 years at the time of the transfer. The language of the law isn't clear, but the 15 years might start over if the 529 account's beneficiary is changed.
Also, contributions made in the previous five years and earnings on those contributions can't be rolled over tax free.
Another major restriction is the rollover is subject to the annual Roth IRA contribution limit, which is $6,500 in 2023. | | To a better retirement,
Bob Carlson
Editor, Retirement Watch Weekly | | | Editor's Note: Most people understand the Roth IRA to be a good way to establish tax-free cash flow. Whether or not to convert your traditional IRA to a Roth IRA continues to be one of the questions I get the most. That's why I've created The Retirement Watch IRA Conversion Calculator. It estimates the effects of converting a traditional IRA to a Roth IRA and compares them to the effects of continuing with the traditional IRA. Click here now to get yours. | | | SPONSORED  Have you ever heard if you are having issues in your trading, it could be that it's not you - it really is the market?
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"Recently Retired" writes: What are the IRS income tax filing requirements for retirees this tax season? My income dropped way down when I retired in 2022, so I'm wondering if I need to even file a tax return this year. Click here to find out the answer. | | About Bob Carlson:
 Robert C. Carlson is the author of the books The New Rules of Retirement and Retirement Tax Guide, editor and investment director of the popular retirement newsletter, Retirement Watch, and editor of the free weekly e-letter, Retirement Watch Weekly. Bob is a frequent speaker at investment conferences around the country, and you can also hear Bob as a featured guest on nationally-syndicated radio shows, such as The Retirement Hour, Dateline Washington, Family News in Focus, The Michael Reagan Show, Money Matters and The Stock Doctor. | | | | | |
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