As we approach the final quarter of 2023, we want to address some year-end planning issues related to retirement plan distributions and upcoming open enrollment elections. There have been many changes to retirement planning, but most are minor or occur in later years.
The SECURE Act 2.0 (“Secure 2.0” or the “Act”), signed in December 2022, was intended to enhance retirement savings options and individual options for long-term retirement security. Provisions include automatic 401(k) enrollment, increased age for taking RMDs, significant tax benefits for employers, and more. A few of the Act’s over 100 provisions became effective January 1, 2023; others are scheduled to take effect over the next several years.
Here is what we are following and what you need to know for individual planning purposes.
Changes to RMDs
Secure 2.0 increased the age at which retirees are required to start taking minimum distributions from their accounts (currently age 72) in the following stages:
- Age 73 for individuals born in the years 1951-1959
- Age 75 for individuals born in 1960 or later
Anyone who turned 72 in 2022 had to take their first RMD no later than April 1, 2023. No changes apply to anyone already taking RMDs as of 2022 or for beneficiaries with inherited IRAs. Secure 2.0 also reduced the penalty for missing RMDs (at all eligibility levels) from 50% to 25%, 10% if timely corrected.
We track RMDs for assets held at Schwab. As in previous years, we will start processing distributions for clients with remaining RMDs beginning mid-November.
Roth Catch-Up Requirement Delayed to 2026
Catch-up contributions are salary reduction contributions typically made by participants in retirement plans (e.g., 401(k), 403(b), or 457(b) plans) who are age 50 or older. For 2023, the maximum amount is $7,500 over the $22,500 limit for employee contributions. A new Secure 2.0 rule requires all catch-up contributions to be Roth (after-tax) contributions for participants over a certain income level.
Notably, the IRS just delayed the effective date of its rule from 2024 to 2026 (Notice 2023-62).
We encourage everyone to take advantage of maximum contributions to retirement plans to the best of their ability to do so. For most people, particularly in higher income brackets, making pre-tax contributions versus Roth contributions may be more beneficial.
CGA-Charitable Gift Annuity
Notwithstanding changes to RMDs, individuals can make charitable contributions directly from their IRAs once they reach age 70 ½. There were no changes to this provision, which is beneficial to most taxpayers over 70 ½ due to the current large standard deductions. (Annual limit: $100,000 per individual).
However, Secure 2.0 added a provision to allow a distribution to a Charitable Gift Annuity (CGA) (maximum lifetime gift: $50,000). The interesting twist here is a CGA will pay a lifetime income to the donor. That income will be taxable, and the charitable institution will receive any remaining annuity value. CGAs are sponsored by charitable organizations and tend to be offered by larger institutions such as colleges, universities and larger arts organizations. The payouts are lower than typical annuities, but this planning technique is attractive for those uncomfortable with making a more significant gift.
Upcoming Changes – 2024
Notwithstanding the IRS’ recent implementation delay of the Roth catch-up rule, many of Secure 2.0’s provisions go into effect in 2024:
- 529 Education Fund Enhancement
Individuals will be able to transfer unused funds from 529 education savings accounts to Roth IRAs without taxes or penalties. Subject to certain limitations (such as a lifetime maximum transfer of $35,000), this is an excellent option for unused 529 funds.
- Student Loan Payment Match
An employer will be able to “match” an employee’s qualified student loan repayment into the employee’s retirement plan account, allowing employees to balance saving for retirement while repaying student loans. Employers wishing to take advantage of this provision must amend company plans to adopt a student loan match.
- Increased Eligibility for Part-Time Workers
As an expansion of prior rules, long-term part-time employees who complete at least 500 hours of service in each of two consecutive 12-month periods will be eligible to make elective deferrals.
- Solo 401(k) Plans
This is a great retirement planning technique for anyone with self-employment income, whether part-time or full-time. Individuals can now set up a plan before the due date of the tax return. Previously, the plans had to be set up by the end of the calendar year. Using the higher limits to shelter income is a powerful tax planning tool in addition to enhancing retirement security.
Looking Ahead
Some of the new rules may seem confusing, so please get in touch with us if you have any questions. We can help optimize decisions based on your tax situation and needs, including helping with open enrollment decisions. Many more employers are also adopting Health Savings Accounts (HSAs). While those rules have not changed, their benefit can be significant.
Several other Secure 2.0 provisions will take effect in future years. The caveat is the looming expiration of the 2017 Tax Cuts and Jobs Act (TCJA) at the end of 2025. In our last communication, we included a graph of the expanding fiscal deficit. It is too early to tell, but there will likely be significant changes to the current tax law. In the meantime, let’s take advantage of what is in place now.