The SECURE Act 2.0 of 2022 brought many retirement plan provisions aiming to increase savings and simplify rules for 2023 and beyond. This is what you need to know for 2024.
Since January 1, 2023, the required age for which distributions need to be taken from retirement plans increased from 72 to 73. Taxpayers who turned 73 in 2023 had the ability to defer their first distribution until April 1, 2024. If this was done, they must take their distribution by the end of 2024. This needs to be considered for tax planning as the additional distribution within the same calendar year could make these individuals subject to a higher tax rate.
SECURE Act 2.0: Distribution Exceptions
There are two new exceptions to the 10% early withdrawal penalty effective for distributions made after December 31, 2023.
Emergency Personal Expenses
Distributions up to $1,000 are allowed to pay for “unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses.” No subsequent withdrawals are allowed from the same plan within a three-year period unless:
- the distribution is repaid to the plan; or
- new contributions exceed the amount of the emergency withdrawal.
Domestic Abuse Victims
This change allows retirement plan participants who self-certify they’ve experienced domestic abuse to make withdrawals without being subject to the 10% early withdrawal penalty. These individuals can withdraw the lesser of $10,000, indexed for inflation, or 50% of their vested account balance. Participants can choose to repay withdrawals over a three-year period. Funds repaid within the allowable period can be used to claim a refund for any income taxes paid on the amounts previously taxed upon withdrawal.
SECURE Act 2.0: Additional Considerations
The SECURE Act 2.0 also provides additional relief to the following groups:
Beneficiaries of 529 College Savings Accounts
Beneficiaries will be permitted to make direct trustee-to-trustee rollovers into a Roth IRA tax-free. This will provide an option for those who have a remaining balance in their 529 account after the beneficiary’s education is complete. The account must have been open and in the beneficiary’s name for more than 15 years. The eligible rollover amount must have been in the 529 account for at least five years. Rollovers are subject to annual maximum Roth contribution limits, but are not limited based off the taxpayer’s adjusted gross income.
Widows/Widowers
Effective January 1, 2024, the surviving spouse of an employee who dies before the required minimum distributions have begun under their employer-provided qualified retirement plan may be able to be treated as the employee for purposes of the required minimum distributions (RMD). The surviving spouse must be the sole beneficiary of the account owner. Once they elect in, the surviving spouse will be treated as the employee for RMD rules of Code Sec. 401(a)(9).
Required minimum distributions will not need to begin before the date the deceased employee would have attained the applicable age. If the surviving spouse dies before the distributions begin, the surviving spouse is then treated as the employee to determine the distribution period.
SECURE Act 2.0: Roth Limitations
The catch-up limit on IRA contributions is now indexed for inflation. Under prior legislation, the limit on IRA contributions increased by $1,000, not indexed for inflation, for individuals who have reached age 50.
Important changes are coming into effect to Roth plan distribution rules. Prior to the passing of the SECURE Act 2.0, required minimum distributions were not required to begin before the death of a Roth IRA’s owner. However, pre-death distributions were required for Roth designated employer plans such as a Roth 401(k). This requirement has been eliminated.
Questions?
If you have any questions regarding estates, gifts, or any topics in this area, give us a call at (401) 921-2000 or contact us here.