One of the more impactful pieces of the December 2022 Consolidated Appropriations Act that passed into law is the so-called Secure Act 2.0. You may remember the original Secure Act from December 2019 that reshaped some significant aspects of how retirement accounts work. The 2.0 version doesn’t have a lot of major game changers but does have a large number of important sections that cumulatively show the direction Congress is heading with respect to personal savings and retirement.
The various provisions of Secure Act 2.0 will be phased in between 2023 and 2027. In addition, we can broadly divide the changes into those affecting individuals and those affecting businesses. For this blog post, we’re going to focus solely on changes that affect individuals and that take effect in 2023.
Increasing the Age for Your First RMD
This is probably the most widely publicized change enacted by Secure Act 2.0. The increase in age at which you must take your first required minimum distribution from your retirement accounts will be phased in over the next decade.
As a quick reminder: the law states that your very first distribution from a pre-tax retirement account (IRA or 401k typically) must be taken by April 1 of the year after the year you turn a certain age. That “certain age” is called your “required beginning date” and it depends entirely on what your birthdate is. For many, many years that age was 70 1/2. The original 2019 Secure Act bumped it up to age 72. Secure Act 2.0 pushes it out even further.
|RMD age||Date of Birth|
|70 ½||June 30, 1949 or earlier|
|72||July 1, 1949 to December 31, 1950|
|75||1960 or later|
It is very important to note that if you were born in 1950 or earlier, you have already begun your RMDs and you will continue them for the rest of your life. This new law does not change anything for you.
Thanks to the new Secure Act 2.0, if you were born in 1951, your first RMD will now be due April 1, 2025. You will turn age 73 sometime in 2024, and you are required to make a distribution from your retirement account by April 1 of the year after that.
If you were born in 1960, your first required distribution from your retirement account will not be due until April 1, 2035.
Retirement Accounts for Nannies
If you have hired a domestic employee, you can now legally create and fund a SEP-IRA for him or her. SEP-IRAs are pre-tax retirement accounts for an employee that are fully funded by the employer – there are no employee contributions at all. In 2023, the maximum SEP-IRA contribution is $66,000 or 25% of the employee’s compensation, whichever is less. SEP contributions are not considered taxable income to the employee, but are deductible by the employer as a business expense.
Reduced Penalty for Failure to Take RMD
A Required Minimum Distribution from a retirement account is exactly what it says – required, mandated, a “must-do”. A specific, calculated amount must be distributed from the account each year you live beyond age 73 (or 72, or 70 1/2). Taxes are paid on the amount of the distribution. Prior to 2023, if you failed to take the Required amount, the IRS assessed you a whopping 50% penalty of the amount you should have taken (but didn’t). In actual practice, taxpayers would often proactively admit to the IRS that the full RMD had not been taken and would submit a formal request to waive the 50% penalty along with some documentation. The IRS frequently complied and waived the penalty. Secure Act 2.0 reduces the penalty from 50% down to 25%. The penalty can be reduced even further to 10% under certain circumstances and within a certain timeframe. Accordingly, the probability of the IRS granting a full waiver of the penalty is significantly reduced.
Changes to Qualified Charitable Distributions
Our colleague Madison wrote about QCDs in some detail last year, if you need a quick refresher on how they work and why they are an excellent planning opportunity. Since QCDs were introduced into law in 2006 the maximum annual contribution directly from your IRA to charity has been capped at $100,000. Secure Act 2.0 finally allows QCDs to join other tax provisions and be indexed for inflation on an annual basis. The contribution limit during 2023 is still $100,000, but this year’s inflation numbers will determine the 2024 limit.
Additionally, two new options are now “Qualified” for a Qualified Charitable Distribution. Secure Act 2.0 allows IRA owners a one-time (ever, during your lifetime) opportunity to fund a Charitable Gift Annuity or Charitable Remainder Trust with QCD funds. The maximum contribution that can go towards this gift is $50,000. Charitable gift annuities and charitable remainder trusts are both forms of a 1) gift 2) to a charity 3) that provides lifetime income back to the donor 4) and an at-death gift to the charity.
Two More Exceptions to IRA Early Withdrawal Penalties
Taking a withdrawal from a qualified retirement account before your age 59 1/2 normally is penalized 10% in addition to the taxes due from the withdrawal. There are a handful of exceptions to this penalty that have been part of the law for many years. Secure Act 2.0 adds two new exceptions to that list. If you have been diagnosed with a terminal illness, you can now take an IRA or 401k distribution with no penalty. Additionally, you can now withdraw up to $2500 annually to pay the premium for a long term care insurance policy. To be clear, a distribution from a retirement account for either of these purposes is still subject to income taxes – you just won’t have the additional 10% penalty on top.
There aren’t a lot of significant changes due to the new Secure Act 2.0, but it’s still a good idea to understand what is to come over the next few years. That’s why we’re here to help. We’ll make sure you understand all the changes affecting you and your family. For more information, give us a call at 817-550-6750.
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