The SECURE 2.0 Act was passed in late December 2022, and some provisions have already taken effect. Other changes are delayed for several years.
Below are a handful of critical provisions that will affect our clients now or in the near future.
The required minimum distribution (RMD) age rises to 73. Previously, mandatory distributions from IRAs, 401(k)s, and similar plans began at age 72. And in 10 years, beginning in 2033, the RMD age rises to age 75 for those born in 1960 and later. That means Gen Xers, Millennials, and younger generations will get more years of tax-deferred growth in these plans. For children who have earned income, it’s never too early to start contributing—even if it’s just a few hundred dollars a year (and the contribution can come from the parents; just be sure it’s no more than their earned income).
Qualified charitable distributions (QCDs) are limited to $100,000 in 2023, and thereafter will be indexed yearly for inflation. QCDs are a way for those age 70.5 or older to give to charity directly from an IRA in lieu of taking an RMD; the gift is excluded from AGI, reducing income and potentially lowering Medicare premiums. It’s a way to benefit from charitable gift giving in cases where including these gifts as an itemized deduction would not produce a benefit (due to low deductions).
Beginning in 2024, funds in 529 education accounts can be rolled over tax-free into a Roth IRA. This strategy will help those who have over-contributed to a 529 college savings account. The 529 account beneficiary will be able to fund their own Roth IRA with funds remaining in an IRA by electing a trustee-to-trustee transfer between the 529 plan administrator and the Roth IRA custodian. Roth IRA funds may be used for a first-time home purchase, remain in the account for tax-free withdrawal in retirement, or passed on to an heir.
The 529 rollover strategy has the following limitations:
- The lifetime maximum that can be transferred to a Roth IRA is $35,000
- The 529 account must have been open for at least 15 years
- No contributions or earnings on contributions from the last five years can be transferred
- Transfers are subject to the annual Roth IRA contribution limits (if the 2023 cap remains in 2024, the amount will be $6,500), but there is no upper income constraint
- The 529 beneficiary must have earned income of at least the amount of the rollover
The original SECURE Act was passed in 2019. Two of its most impactful provisions are the elimination of the stretch-IRA and the requirement that non-spouse beneficiaries of an IRA fully distribute the inherited IRA account within 10 years of the original account owner’s death.