On December 23, 2022, the House of Representatives passed the Consolidated Appropriations Act of 2023 (over 4,000 pages long, mind you), which included a long-awaited retirement bill known as the SECURE Act 2.0. The original bill (Setting Every Community Up for Retirement Enhancement) was passed in December 2019, which brought several changes to the retirement planning world, including eliminating the ‘stretch IRA’ to increasing the age for Required Minimum Distributions (RMDs) to age 72.
Like the SECURE Act 1.0, 2.0 headlines further increase the range for RMDs to age 73 for individuals born between 1951 and 1959 and age 75 for those born in 1960 or later (check out our previous post on SECURE 2.0). The bill also provides some relief in that the penalty for missed RMDs (or distributing too little) is being reduced from 50% to 25% of the shortfall. And, if the mistake is corrected promptly, the penalty is reduced to only 10%
SECURE 2.0 also includes several contribution limit adjustments to encourage increased retirement savings. Most notably, in 2024, IRA catch-up contributions will include a COLA (indexed for inflation) increase to the current $1,000 catch-up contribution limit. The last time the IRA catch-up contribution limit was changed was 15 years ago when Congress set the current $1,000 flat limit in the Pension Protection Act of 2006.
Also, SECURE 2.0 includes several Roth-related changes but no provisions that restrict or eliminate existing Roth strategies (e.g., backdoor Roth conversions or conversion limits). Many of the changes are geared towards employer retirement plan-based Roth accounts.
RMDs are Pushed Back
To not overcomplicate an already over-complicated topic (RMDs) with overly complicated language found in any bill drafted by Congress, the following table summarizes the ages at which RMDs are generally required to begin under SECURE 2.0:
Reduction of Penalty for RMD Shortfall
Beginning in 2023, Section 302 of SECURE 2.0 reduces the current 50% penalty for RMD shortfall (or missed RMD) to 25%. Additionally, a “Correction Window” has been defined to reduce the penalty to 10% if the shortfall is rectified during this period.
In a blog post from Michael Kitces, the “Corrective Window” is defined as beginning on the date the tax penalty is imposed (generally January 1st of the year following the year of the missed RMD) and ends upon the earliest of the following dates:
- When the Notice of Deficiency is mailed to the taxpayer;
- When the tax is assessed by the IRS; or
- The last day of the second year after the tax is imposed
Questions that You May Be Thinking
With all of the changes the SECURE 2.0 brings, I’m certain some of you have initial questions – my hope is that the following Q&A will provide you with some insight:
Q: If I was supposed to begin my RMDs this year, do I still need to?
A: Yes. The changes do not impact anyone turning 72 in 2022, who would have to begin RMDs in 2022.
Q: Does SECURE 2.0 also push back the date when I can begin Qualified Charitable Distributions (QCDs) from an IRA?
A: No. The changes to the RMD ages in SECURE 2.0 DO NOT impact the age at which QCDs can be made, which starts at age 70.5.
Q: Does SECURE 2.0 include any changes to Roth conversions?
A: No. The changes DO NOT impact or restrict your ability to perform Roth conversions. In fact, for some, SECURE 2.0 may provide additional time (calendar years) for you to perform Roth conversions, as your RMD age may be affected and pushed out.
Q: Will catch-up limits increase for 401(k) and 403(b) plans as well?
A: Yes. Section 109 of SECURE 2.0 increases employer retirement plan catch-up contribution limits for certain plan participants. For participants who are ONLY ages, 60,61,62 and 63 will have their plan catch-up contribution limit increase to $10,000 (indexed for inflation) or 150% of the regular catch-up contribution amount, whichever is greater, beginning in 2024.
Q: If I missed an RMD in 2022, will the updated penalties apply to me?
A: No. The reduction of the 50% penalty for an RMD shortfall is effective beginning in 2023 and in future years. That said, if you miss an RMD in 2023, Section 302 of SECURE 2.0 reduces the penalty for an RMD shortfall to 25%
More to Come
The 4,000-page bill contains many changes, but we wanted to highlight some of the most notable changes for you first. SECURE 2.0 includes new rules for accessing retirement funds during times of need (under 59.5), multiple employer-related retirement account changes, annuity-related changes, and much more. As we parse through the detail, we’ll continue highlighting additional changes that could affect you.
Need help navigating the new rules? Schedule a time to chat with an advisor to discuss out to create your unique Retirement Blueprint today.