Do You Feel More SECURE (2.0)?
As they often seem to do, our employees in Washington, DC passed a huge spending bill in the waning days of last year. Signed into law on December 29th, the Consolidated Appropriations Act, 2023 provides 1.7 trillion ($1,700,000,000,000) dollars’ worth of spending divided into 39 Divisions (sections), spread over 1653 pages.
I haven’t read it all yet, but I’d be willing to bet that very few of our 536 elected staff members have either. Absent one of you readers asking me to read all of it, I’m going to focus on Division T: The SECURE 2.0 Act of 2022. This is a more digestible 130 pages of regulations featuring 92 new provisions generally concerning retirement accounts. As is common in this sort of omnibus bill, some of these take effect immediately; others are phased-in over the next four years.
Let’s begin with a couple of key elements related to Required Minimum Distributions from Individual Retirement Arrangements (IRAs). Beginning this year, the age at which RMDs must be taken rises to 73. If you turned 72 (the previous trigger) in 2022, you must take your first RMD by this coming April 1st.If you have already begun taking RMDs, there’s no change. At this point, the next increase in RMD age is scheduled for 2033 when it will rise to 75.
The R in RMD stands for Required and the IRS takes them seriously. Those who failed to take the proper amount at the proper time faced a penalty of 50% of the deficient amount (although we successfully appealed the penalty for someone who had a forgotten account). The new rules are somewhat different. The initial penalty itself is halved to 25% and the penalty drops to 10% for inadvertent violations. Even this 10% penalty can be waived when excess contributions and their associated earnings are acknowledged and taken in a corrective distribution. One process improvement: previously, the IRS basically had unlimited time to audit RMD issues but it now has a three-year statute of limitations. Considering the chronic lack of funding/staffing which the IRS faces, this may bring some peace of mind to those who have failed to correct their RMD errors.
Many other topics were addressed, including these:
- A change related to charitable giving is that the $100,000 cap on RMDs donated to charities will now be indexed for inflation which will be helpful for those who have rolled-over a 401(k) or otherwise have very large IRAs.
- Student loan debt continues to be in the headlines with the average student owing around $40,000 and total student loan debt continuing to increase. While it has long been possible for employers to pay for continuing work-related education for employees, this legislation also provides employers a way to encourage student loan repayment. Beginning in 2024, employers can choose to match retirement contributions to employee student loan payments. This change from the original SECURE Act provides a way to encourage workers to pay off student debt without hurting their retirement savings. As with the new RMD rules, those who have already dealt with their student loans receive no benefit from this change.
- There are several changes related to defined contribution retirement plans like 401(k)s which may be of more interest employers (plan sponsors) than employees but one of possible interest is that employees can now be auto enrolled, in hopes of encouraging more people to save for their own retirements.
- Also, what’s known as a Simplified Employee Pension (SEP), which is traditionally used by smaller employers due to its simplicity, can now be established by an individual (not necessarily someone engaged in a trade or business) for the benefit of domestic employees, ie nannies or other household help. Considering the current difficulty in finding childcare, this may provide a hiring edge for those who prefer to have in-home assistance.
- Finally, those 529 plans which allow parents, grandparents, and others to put money aside for tuition and educational expenses of beneficiaries on a tax favored basis have a new option. You know there is no tax dues on withdrawals when used for most educational expenses. Previously, funds not used for educational expenses were subject to regular tax as well as a 10% penalty. Beginning in 2024, the SECURE 2.0 hopes to encourage 529 savings by permitting leftover funds of to be rolled over to a Roth IRA on a tax- and penalty-free basis (up to a lifetime limit of $35,000). The 529 plan must have been in existence for at least 15 years and normal Roth IRA contribution limits will apply.