Secure Act 2.0 Brings Big Changes to Retirement Planning in 2023 and Beyond by Jonathan Kraes, CPA
Posted on February 07, 2023
by
Jonathan Kraes
Congress closed out 2022 with the passage of a $1.7 trillion spending bill that, among other things, ushers in new rules and regulations intended to help more Americans save for retirement. Following is a brief overview of some of the more significant changes individual taxpayers should prepare for beginning in 2023.
Raises the Age for Required Minimum Distributions
Effective Jan. 1, 2023, owners of tax-advantaged retirement accounts, including 401(k)s, 403(b) and traditional IRAs, must begin taking annual required withdrawals from their plans when they reach age 73, rather than the previous threshold of 72 years old. In 2033, the age at which RMDs must begin increases again to 75.
Individuals who turned 72 in 2022 still need to take their first RMD by April 1, 2023. However, those turning 72 in 2023 can wait until April 1, 2025, to take their first withdrawal and apply it to tax year 2024.
Reduces Penalties for Missing RMDs
Individuals who fail to take an annual RMD currently are subject to a penalty equal to 50 percent of the undistributed amount. This changes in 2023, when the penalty is cut in half to 25 percent, and can be reduced further to 10 percent when reticent taxpayers withdraw the required funds within two years of the original RMD deadline.
Increases Catch-Up Contributions for Older Workers
Beginning in 2024, the standard $1,000 catch-up contribution individuals age 50 and older may make to a traditional IRA will be indexed for inflation, allowing account owners to save more in future years. However, individuals who earned $145,000 or more in 2023 need to make those catch-up contributions with after-tax dollars into a Roth account, meaning they will not receive a tax deduction for their contributions. However, their withdrawals in retirement will be free of income tax liabilities. The annual earning limit is indexed with inflation.
In 2025, catch-up contributions to 401(k) and 403(b) plans, set at $7,500 in 2023, will also increase with inflation for individuals between the age of 60 and 63. The allowable amount is the greater of $10,000, or 50 percent of the account owner’s current catch-up contribution.
Eliminates RMDs for Roth 401(k)s
Employer-sponsored Roth 401(k)s will no longer be subject to RMDs rules during the original account owners’ lives beginning in 2024. Before then, however, individuals with RMD requirements need to continue taking those withdrawals in 2022 and 2023.
Allows Surviving Spouses to Delay RMDs of Inherited Plans
Beginning in 2024, surviving spouses can treat inherited retirement plans as their own for the purpose of determining when they must start taking RMDs. In this sense, surviving spouses need not take RMDs from inherited accounts until they reach age 73 (or age 75 in 2033), regardless of the original account owner’s age or whether they had begun taking RMD before they passed away.
Improves Charitable Options for RMDs
The $100,000 annual limit account owners may donate to charity via a qualified charitable distribution (QCD), which consequently reduces the amount of their RMD each year, will be indexed for inflation beginning in 2024. Account owners may also make a one-time $50,000 charitable distribution in 2023 via a charitable remainder trust, a charitable annuity or charitable gift annuities.
Improves Access, Participation in Employer-Sponsored Retirement Plans
The Secure Act 2.0 requires employers to automatically enroll new employees in their 401(k) and 403(b) plans beginning in 2025 and set each employee’s automatic contribution via salary deferral to a minimum of 3 percent of the employee’s paycheck. Workers who do not wish to participate in those retirement savings plans may opt out.
Additional provisions of the new law include ways for employers to extend a company’s retirement savings plan access to part-time workers and to provide 401(k) matches to employees based on their student-loan repayments.
About the Author: Jonathan Kraes, CPA, is a director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where he provides income, gift and estate tax planning and advisory services to high-net-worth individuals and organizations, including hedge and private equity fund investment managers, corporate executives and technology entrepreneurs. He can be reached at the CPA firm’s New York City office at (646) 213-7600 or info@bpbcpa.com.
← Previous
