On December 29, 2022, President Biden signed the Securing a Strong Retirement Act of 2022 into law. The Act, commonly referred to as SECURE 2.0, makes changes to tax and other laws related to retirement accounts. SECURE 2.0 follows an overhaul of retirement account laws made by its predecessor act, the Setting Every Community Up for Retirement Enhancement (the Secure Act).
Both SECURE 2.0 and the original SECURE Act made significant changes to how inherited retirement accounts are distributed to beneficiaries. Trusts created before the SECURE Act that were also named as beneficiaries to retirement accounts may not be SECURE Act compliant. If your trust is not SECURE Act compliant, your retirement assets may fall into probate, which can be a lengthy and expensive process for your trustees or administrator of your estate.
If your trust or will was created prior to 2020 or when the original SECURE Act was enacted, or even shortly thereafter, and you have your trust named as a beneficiary to your retirement accounts, you should speak with a TuckerAllen attorney to ensure your will or trust is SECURE Act compliant. Whether you are an existing TuckerAllen client or whether you drafted a trust or will with another firm, TuckerAllen would be happy to review your documents to assess whether you need a SECURE Act update.
The following are some notable provisions of SECURE 2.0:
Retirement Accounts
Increase In Age of Required Beginning Date for Mandatory Distributions: Currently, participants must begin taking distributions from their retirement plans at age 72. SECURE 2.0 increases the age to 73 starting January 1, 2023. Starting January 1, 2033, the required minimum distribution age increases to age 75.
Higher Catch-Up Limits. Under current law, employees who are at least age 50 may make catch-up contributions in excess of the otherwise applicable annual contribution limits. SECURE 2.0 raises the catch-up contribution limit by $1,000 to $7,500 for 2023. SECURE 2.0 also allows for even larger catch-up contributions for those employees aged 60 to 63 beginning in 2025.
Retirement Account “Lost and Found”. SECURE 2.0 mandates the creation of a searchable online database of retirement accounts to be managed by the Department of Labor. This database will allow an individual to search for plans and contact information of the administrator for any plan in which they are a participant or a beneficiary. This will be not only helpful to individuals who may have changed jobs and neglected to consolidate their retirement accounts, but may also be a useful tool in searching for assets of a decedent during the trust or estate administration process.
Reduction in penalty for failure to take RMDs. Traditionally, if a participant failed to take a required minimum distribution BY December 31, the participant would be subject to an excise tax that was equal to 50% of the missed distribution. SECURE 2.0 reduces this penalty to 25% and allows for a further reduction to 10% if the participant corrects the failed RMD in a timely manner.
Student Loans and Education Accounts
Student Loan Payments Treated as Elective Deferrals. SECURE 2.0 allows employers to regard student loan payments as elective deferrals when making matching contributions. If an employer elects to offer such matching, employers may now make contributions to an employee’s retirement account that are equal to payments made by the employee towards student loans (subject to the applicable annual contribution limit). This provides a mechanism for employees to receive matching contributions even though they may be unable to contribute to a retirement plan because they are paying off student loan debt.
Tax & Penalty Free Rollovers from 529 Plans to Roth IRAs. SECURE 2.0 amends the tax code to provide that beginning in 2024, beneficiaries of 529 college savings accounts may rollover up to $35,000 over the course of their lifetime from a 529 plan to a Roth IRA. However, any such rollovers are subject to Roth IRA annual contribution limits and the 529 plan must have been open for more than 15 years prior to a rollover. This provision may alleviate some concerns people have about over-funding 529 plans, which previously could only be used to pay for certain education related expenses.
Other Notable Provisions
Changes to Limits on Charitable Distributions from IRAs. Currently, anyone age 70.5 or older can contribute up to $100,000 per year from their IRA directly to a charitable organization and avoid paying income taxes on the distribution. Beginning in 2024, the $100,000 qualified charitable distribution limit will be adjusted for inflation. Additionally, individuals can now make one-time distributions from IRAs of up to $50,000 to a charitable gift annuity, charitable remainder unitrust, or charitable remainder annuity trust without paying income tax on the distribution.
Charitable Contributions for Inherited IRAs Payable to Supplemental Needs Trusts. Under the SECURE Act, disabled beneficiaries are exempted from the 10-year distribution rule, and it allows disabled beneficiaries to take life expectancy-based distributions. Under SECURE 2.0, in the case of a Supplemental Needs Trust established for a disabled beneficiary, the trust may designate a charitable organization as a remainder beneficiary without causing the trust to fail.
Increased Age for Qualifying Disability for ABLE accounts. ABLE accounts are tax-advantaged savings accounts for certain individuals with disabilities. Under prior law, an individual must have a qualifying disability prior to turning age 26 in order to qualify for such an account. SECURE 2.0 raises the age to 46 (in 2026), making more people eligible to have such accounts.