In what is, unfortunately, becoming all too common an occurrence with our lawmakers, Congress passed a law in the final days of the year with numerous changes impacting tax and retirement planning. Tucked into the massive 4,155-page Omnibus Spending Bill passed on December 23, 2022, is the Secure Act 2.0, the sequel to the Secure Act 1.0, originally passed in December 2019. Much like a movie series, the sequel is rarely as impactful as the first iteration, and this Act is no different. The Secure Act 2.0 does not have the magnitude of the changes from the original Secure Act, but it does make up for that in volume with a few impactful changes and many, many minor changes.
We certainly will not detail all these changes as most apply only to specific situations or special circumstances impacting very few. But it is our role to sift through these changes, distill down, communicate, and apply the most important and impactful aspects of this bill. Our goal is to always provide the most up-to-date counsel so we can quickly pivot and adapt our cash flow, tax, investment, and even estate planning strategies to optimize the wealth plan and avoid pitfalls.
Key Provisions to Know
Listed in the order of most impactful to least, below is a summary of the key provisions we view as most applicable. Please be advised that for many of these changes, the devil is in the details as there are nuances or “gotchas” that could upend or disrupt a wealth plan if not followed correctly. In addition, the dates for many changes are varied as some impact 2023, 2024, 2025, and even well beyond.
1. RMD (Required Minimum Distribution) Starting Age Pushed Out: Effective 2023
It appears Congress is realizing more people are working later in life. To help alleviate the burden of having to take RMDs while working, the age these distributions must begin is increasing to age 73 (from 72) for those turning 73 between 2023 and 2032. So, if someone turns 72 this year (2023), they do NOT need to take their first RMD until next year (2024). (Please note: If someone turned 72 in 2022, they had to take their first RMD by 4/1/2023 under the prior law and these folks still need to take RMDs as already scheduled). Even further out, those born in 1960 and later will now have to take their first RMD the year they turn 75.
We believe this is the most impactful change from a planning perspective as it effectively opens the “golden window for tax planning” even wider to execute on targeted & tax efficient Roth conversions. Feel free to check out our blog for more details.
2. RMD Changes for Surviving Spouse Beneficiaries: Effective 2024
- The surviving spouse now has the option to elect to be treated as the decedent for RMD purposes. This primarily benefits a person who was older than their deceased spouse. In short, RMDs can now be delayed until the deceased spouse would have had to take RMDs. In addition, once RMDs are necessary, the sole spouse beneficiary will calculate RMDs using the Uniform Lifetime Table instead of the Single Lifetime Table, which effectively means lower calculated RMD factors and potentially lower taxable income.
- If the surviving spouse passes away (the second death of the couple) BEFORE RMDs begin, the surviving spouse’s beneficiaries (usually their kids) are considered Eligible Designated Beneficiaries and can “stretch” their distributions of their life expectancy instead of the Secure Act 1.0 10-year rule.
- One interesting note is that once this election is made by the surviving spouse, it is an irrevocable decision so the person making this election needs to be very careful and ensure the choice is optimal for the personal financial situation.
3. “Rothification” of Many Policies:
A common theme across many provisions of this new law is “rothification,” meaning new Roth options for many different aspects of retirement savings and distribution planning. These have varying implementation dates and are detailed below:
- Effective 2023:
- Employer Contributions (matching and non-elective) are now eligible for Roth. This cannot be used for profit sharing contributions and must be used for “nonforfeitable” (i.e. not subject to vesting schedule) contributions.
- Roth options are now available for SIMPLE and SEP Accounts.
- Effective 2024:
- RMDs are no longer required for Roth 401(k) accounts, which puts them on a level playing field with the same provision that already applies to Roth IRAs.
- For High Wage Earners, Roth Option is Required for Employer Contributions: This applies to employees making over $145,000 in prior year wages.
4. IRA Catch-up Contribution of $1,000 Limits Higher: Effective 2024
For those age 50 and higher, the extra $1,000 catch up contributions available for IRAs will increase each year in $100 increments to keep pace with inflation.
5. Limited 529 To Roth Account Transfers: Effective 2024
Utilizing unused or “trapped” 529 money to transfer to a Roth IRA sounds like a great tax planning loophole, especially for high earners, to save more to a Roth. However, Congress is aware and has significantly limited this transfer with the following restrictions:
- The lifetime maximum to be transferred to a beneficiary is only $35,000.
- The annual amount to be transferred is subject to IRA contribution limits (i.e., $6,500 / year under age 50) and the beneficiary must have wage income. So, if a taxpayer contributes $2,000 to a Roth during the year, they can only transfer $4,500 from the 529 to the Roth ($6,500 - $2,000 = $4,500).
- The Roth IRA receiving the funds must be in the same name as the 529 beneficiary and the 529 must have been maintained for a minimum of 15 years.
- Any funds contributed to the 529 funds in the last 5 years are not eligible to be transferred.
6. QCD Maximums to Be Indexed for Inflation: Effective 2024
QCDs are valuable tax planning tools for charitable taxpayers subject to RMDs as this amount is a “top line” reduction of income that can reduce taxability of Social Security, lower Medicare premiums, and provide other benefits. The current annual limit is unchanged at $100,000, but effective 2024, this amount will be indexed to inflation. Perhaps more importantly, the eligible age to utilize QCDs remains 70 ½ and did not increase with the other RMD ages provisions.
7. Employer Plan Catch-Up Contributions Limits Increased for Some Participants: Effective 2025
For participants ages 60, 61, 62, or 63, the catch-up contribution is limited to the greater of $10,000 OR an amount equal to 150% of the standard catch up amount each year. For 2023, the standard catch-up amount is $7,500 so this means starting in 2025, participants at these unique ages could contribute up to $11,250 (150% x $7,500).
What is NOT in the Law
Conspicuous by its absence are many potentially punitive provisions rumored in prior years, mostly with respect to limiting the benefits of Roth accounts. We often hear concerns from our clients utilizing Roth accounts that the long-term benefits they expect (in exchange for the near-term pain of tax liability) will be pulled back if the government were to change the rules. Certainly, law changes to that effect would be punitive. But the good news is the various provisions on limiting Roths (or lack thereof) would indicate the tax advantages of Roths are well intact. Notably, there was no change to:
- Limiting Back-Door Roth or Mega-Back-Door Roth
- Limitations on who can contribute to the Roth
- RMDs for Roths (there was talk of requiring high-dollar accounts to take RMDs regardless of age)
- QCD limitations
For Uncle Sam, it appears the near-term benefit of income tax revenue from Roths more than outweighs the potential loss of tax revenue down the road from taxable distributions.
Bottom Line
As indicated by yet another end-of-year law change, wealth planning is a dynamic process that requires consistent maintenance, adaptability, and in-depth knowledge of how laws can affect the plan. A family’s wealth strategy is a living, breathing entity that is far from a onetime set-it-and-forget-it “plan.” Our mission is to provide clients with peace of mind knowing their wealth planner is not only staying up to date on the latest law changes but more importantly, adapting and applying these concepts to best serve their very personal family wealth plan.
Disclaimer: Johnson Investment Counsel does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.