The Secure 2.0 Act, passed in December, contains more than 90 provisions affecting retirement-savings plans, such as individual retirement accounts and 401(k) workplace plans.
Only some changes are effective this year. Others will take effect in years 2024 through 2027. In 2025, for example, limits on catch-up contributions to 401(k)s and Simple IRAs will be increased. In 2026, ABLE plans, a tax-advantaged plan for disabled people, will raise the age of disability onset to 46 from 26. In 2027, a new program for low-income individuals called Saver’s Match, will offer a match by the Federal government of 50% of contributions to an IRA or 401(k) up to $2,000 a year.
Still other changes won’t apply for as long as a decade.
“There are so many parts to the law, and the effective dates are all over the board,” says Sarah Brenner, director of retirement education at Ed Slott & Co., a tax consulting firm in Rockville Centre, N.Y. “So it’s important to know what you can do right now.”
This year
Here are some of the key changes for 2023:
The age for taking the mandated annual withdrawals known as required minimum distributions, or RMDs, is raised to 73 from 72 (or 70½ before the original Secure Act in 2020). Those who were subject to RMDs under the previous rules must continue to follow their existing schedules. In 2033, the age for taking RMDs will rise to 75 from 73.
The penalty for missed RMDs is reduced from 50% to 25% and even 10% if corrected in a “timely” manner. The window for correction is two years from the end of the year in which the RMD should have been taken. In addition, you can request a waiver of any penalty at all from the Internal Revenue Service by taking the RMD now and filing Form 5329 with a reasonable-cause explanation.
A statute of limitations is now created, limiting the period in which the IRS can impose a penalty: three years for missed RMDs and six years from the tax-filing deadline of the year in which an excess contribution was made. Previously there was no statute of limitations.
Roth (after tax) contributions can be made to SEP and Simple IRAs, which are retirement plans for small businesses. Only employers make contributions with SEPs, while with Simples, both employees and employers make contributions. Until now, contributions to SEP and Simple IRAs had to be pretax.
Employer matching contributions to a Roth account can, at an employee’s option, be made as a Roth. Previously they had to be made on a pretax basis. The employee, however, pays the income tax on this amount.
Additional exceptions now exist to the 10% early distribution penalty for withdrawals from a retirement plan before age 59½. These include terminal illness, net income attributable to excess contributions and distributions in the event of a qualified disaster, up to $22,000.
A one-time-only $50,000 qualified charitable distribution to a charitable gift annuity, a charitable remainder unitrust or a charitable remainder annuity trust is allowed. Previously no benefits were permitted when making a qualified charitable distribution.
Next year
Many more changes are in store for next year. They include:
The $1,000 catch-up contribution to IRAs and 401(k)s for those age 50 and older will be indexed for inflation.
Qualified charitable distributions will also be indexed for inflation.
Beneficiaries of “529” education-savings accounts can roll over up to $35,000 of leftover funds to a Roth IRA in the name of the 529 beneficiary. These rollovers are subject to Roth IRA annual contribution limits, and the 529 must have been in place for at least 15 years.
Roth 401(k) contributions will no longer be subject to RMDs during the owner’s lifetime, since the money has already been taxed when contributed. This will bring Roth workplace plans in line with laws governing Roth IRAs, whereby plan dollars are excluded from RMD calculations.
Employer matching contributions may be made on student-loan payments, just like they are made on 401(k)s. Each payment you make on a student loan can therefore be matched according to the terms of the plan.
Further exceptions to the 10% early distribution penalty: expenses stemming from a financial emergency, up to $1,000 a year, and payments for victims of domestic abuse, up to $10,000 indexed for inflation.
By Leonard Sloane
Dow Jones & Company, Inc.
Advisory services are offered through Asset Strategy Advisors, LLC (ASA). Securities are offered through representatives licensed with either Concorde Investment Services, LLC (CIS), member FINRA/SIPC, or RCX Capital Group, LLC (RCX), member FINRA. Insurance is offered through Asset Strategy Financial Group, Inc. (ASFG). ASFG and ASA are independent of CIS and RCX.
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Maximizing your Social Security Benefits assumes foreknowledge of your date of death. If as an example you wait to claim a higher monthly benefit amount but predecease your average life expectancy, it would have been better to claim your benefits at an earlier age with reduced benefits. The data contained in this material was obtained from third-party sources believed to be reliable; however, ASA, RCX, ASFG, and CIS do not guarantee the accuracy of the information.
