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By Holly SwanExecutive Director, Advisor Institute

A good retirement plan requires accurate inputs and undergoes regular review as clients' plans and the tax code evolve. The Setting Every Community Up for Retirement Enhancement (SECURE) Act, its related and evolving regulations and the Securing a Strong Retirement (SECURE 2.0) Act of 2022 could impact retirement plans and should be factored into any planning you are doing for clients.

Passed by Congress in December 2019, the primary purpose of the SECURE Act was to make saving for retirement easier for many Americans. A secondary purpose was to change certain rules with respect to distributions from inherited IRAs and 401(k) plans. On December 29, 2022, President Biden signed into law SECURE 2.0 as part of the Consolidated Appropriations Act of 2023, which builds on the provisions of the original SECURE Act.

Here's a quick summary of provisions in both bills you should be aware of when preparing financial plans for your clients.

Delayed Required Minimum Distribution Start Date

SECURE 2.0 pushes back the beginning date for required minimum distributions (RMDs) from qualified plans.

  • Individuals turning age 72 during 2023 or later do not need to start taking RMDs until age 73.
  • Individuals reaching age 74 after December 31, 2032, can delay RMDs until age 75.

These delayed start dates present an opportunity for clients who are able to defer distributions to these later dates to continue to compound earnings for additional time.

Increased Catch-Up Contributions

Individuals over age 50 can currently make catch-up contributions of $7,500 annually to most employer-sponsored retirement plans. For tax years beginning after 2024, employees who are 60 to 63 years old can take advantage of a higher catch-up contribution of the greater of $10,000 or 150% of the age 50 catch-up limit in 2024. These amounts will be adjusted for inflation annually starting in 2026.

The catch-up contribution limit for workers at least 50 years old who participate in a SIMPLE IRA or SIMPLE 401(k) plan is $3,500 for 2023. Beginning in 2024, the catch-up contribution limit for SIMPLE plans will be increased by 10%. In addition, as with other employer-sponsored plans, the SECURE 2.0 creates a new SIMPLE plan catch-up contribution limit for people who are 60 to 63 years old. Starting in 2025, the new limit for that group will be equal to the greater of $5,000 or 150% of the age 50 contribution limit for 2025. This amount will also be adjusted annually for inflation after 2025.

SECURE 2.0 provisions also add an inflation adjustment for IRA catch-up contributions for individuals over age 50. The current catch-up amount is $1,000. This amount will be inflation-adjusted (in $100 increments) in tax years beginning after 2023.

SECURE 2.0 also requires that catch-up contributions to qualified plans are designated as Roth contributions for any plan participant whose wages exceed $145,000, effective for tax years after 2023.

These additional catch-up contribution amounts provide a great opportunity for clients who have not set enough aside in tax-deferred or tax-free retirement accounts and would benefit from the additional compounding these vehicles can provide. As you are planning for clients, consider suggesting they make these additional contributions if they are able to do so.

Predeath RMDs for Roth IRAs

Under current law, owners of Roth IRAs are not required to take RMDs during their lifetimes, while owners of Roth 401(k)s and other employer-sponsored plans are. Secure 2.0 eliminates the predeath RMD for owners of Roth-designated employer 401(k)s and other Roth employer retirement plans. This provision takes effect for taxable years beginning after December 31, 2023.

Proceeds From Inherited IRAs and 401(k) plans

Prior to the initial SECURE Act, most individual beneficiaries were able to "stretch" payouts over their remaining life expectancies. For IRAs and 401(k) plans inherited in tax years after 2019, the SECURE Act ended the ability to stretch payouts and requires that most individual taxpayers withdraw the assets on or before December 31 of the 10th calendar year following the death of the owner (the "10-Year Rule"). Exceptions to the "10-Year Rule" include spouses, minor children, the disabled, chronically ill individuals and beneficiaries who are no more than 10 years younger than the IRA or 401(k) plan owner ("qualified beneficiaries").

Practitioners originally took this to mean that beneficiaries could delay the full distribution of the inherited IRA or 401(k) plan until the 10thcalendar year after the account owner's death, which would have been a material reason to update your clients' retirement plans. Yet, in March 2021, the IRS released guidance in Publication 590-B that suggested annual distributions would be required in years one through nine.  To confuse matters further, this guidance was revised shortly thereafter, clarifying annual distributions would not be required.

In 2022, the IRS issued proposed regulations stating that certain beneficiaries would, in fact, be required to take annual distributions in years one through nine and a complete distribution in year 10. With new regulations not yet finalized, the rules around required distributions in years one through nine for nonqualified beneficiaries are less than clear and appear to directly impact many retirement plans that rely on inherited IRAs or 401(k) plans.

For high-earner clients who expected to delay distribution of an inherited IRA or 401(k) account until after retirement (assuming retirement by year 10), these new distribution rules could have unwanted tax consequences. As you review your clients' retirement plans, consider suggesting a revision that reflects distribution in line with the proposed regulations so they won't be surprised if and when those regulations are finalized.

Bottom line: Ensure that your clients' retirement plans evolve as the tax code evolves by asking clients, "Is your retirement plan SECURE?"