The law may affect how you can capitalize on retirement accounts to shape your financial future and legacy.
The SECURE 2.0 Act was passed into law in December 2022, providing an array of benefits to retirement savers. The Act includes additions and reforms to the first SECURE Act (or the Setting Every Community Up for Retirement Enhancement Act), passed in 2019. Here are some key provisions.
Contributions and Transfers
Higher IRA Contribution Limits for 2023 and Beyond
The annual individual retirement account (IRA) contribution limit for 2023 is now $6,500 ($7,500 for age 50 or older), an increase from last year’s $6,000 cap ($7,000 for age 50 or older). Although the $1,000 catch-up amount for older taxpayers is not indexed for inflation this year, it will be indexed starting in 2024, consistent with the treatment of standard annual contributions.
New Rules Affecting Employer and ‘Catch-Up’ Contributions
For 2023, employee 401(k) contributions are limited to $22,500, plus $7,500 for those age 50 and older. Under the new law, beginning in 2025, the catch-up contribution limit will increase to at least $10,0001 for those age 60 – 63.
Historically, employers could only make contributions to employees’ 401(k) accounts on a pre-tax basis. With SECURE 2.0, employers have the ability to offer such contributions on an after-tax (Roth) basis, assuming the employee agrees. Note that the contributions are considered current taxable income to the employee, and that only vested contributions are afforded Roth treatment.
In the past, it was also possible for employees to make catch-up contributions to a retirement plan on either a pre-tax or after-tax basis. Starting in 2024, those who earn more than $145,000 per year (indexed for inflation) will be required to make catch-up contributions on an after-tax Roth basis. If an employer does not have a 401(k) plan with a Roth option, such higher wage earners will not be able to make catch-up contributions.
Owners of 529 college savings accounts sometimes find that they have a leftover balance once educational needs have been met. Starting in 2024, SECURE 2.0 allows those funds to be rolled over into a Roth IRA for the designated beneficiary on the account, subject to the annual earned income and Roth contribution limits, as well as a $35,000 lifetime limit. The beneficiary must have earned income, and only 529 accounts in existence for 15 years or more are eligible to be moved to a Roth IRA.2 As of yet, there has been no guidance on whether the same beneficiary needs to have been in place over that 15-year period.
Withdrawals and Distributions
Pre-Tax Retirement Accounts: RMDs Start Later
Starting this year, SECURE 2.0 raises the beginning age for required minimum distributions (RMDs) from 72 to 73 for those born from 1951 to 1959,3 and to 75 for those born in 1960 or later.
Note that, under IRS rules, you can choose to delay taking your first RMD until April 1 of the year following the year when you reach RMD age. Thereafter, you must take annual RMDs by December 31 of each year. For example, if you turn 73 in 2023, you can begin taking RMDs this year or delay taking them until April 1, 2024. If you take the latter approach, you must take two RMDs in 2024—one for 2023 and one for 2024.
Roth 401(k)s: No More RMDs
Historically, you could avoid taking RMDs from Roth IRAs but not Roth 401(k)s. This circumstance often forced retirement plan participants who had reached RMD age and owned a Roth 401(k) account to roll it over into a Roth IRA to avoid taking distributions. With the new law, beginning in 2024, Roth 401(k)s (and accounts in similar plans) are no longer subject to RMDs, bringing them into parity with Roth IRAs.
Lower Penalty for Missed RMDs
The tax penalty for failing to take an annual RMD has decreased from 50% to 25%. The IRS may reduce the penalty to 10% if you take actions to correct the missed RMD within certain timeframes. The IRS may also consider waiving the penalty if the failure to take an RMD was due to a reasonable error based on your individual circumstances and you’ve taken steps to correct the mistake.
Inherited IRAs: Withdrawal Rules Await Clarity
The 2019 SECURE Act changed rules with respect to inherited IRAs, requiring that most non-spouse beneficiaries fully withdraw the IRA assets within 10 years, rather than based on life expectancy.4 Later, the Treasury proposed regulations with additional requirements as to those distributions. Assuming no further changes, “designated beneficiaries” who inherited IRA assets after 2019 will be required to begin taking RMDs in 2023, as follows:
- If the owner of the IRA died after their required beginning date, beneficiaries must generally take a distribution based on their own life expectancy in years one through nine, and distribute the remaining balance in the tenth year.
- If the owner of the IRA was not yet required to take RMDs before death, then beneficiaries have 10 years to fully deplete the inherited IRA, taking distributions at any time within that period.
Note that, at the end of 2022, the IRS provided penalty relief for designated beneficiaries who had not taken RMDs under the proposed regulations for 2021 and 2022. To date, no similar guidance has been provided in the event the rules are not finalized this year.
Retirement Accounts: New Spousal Option
Previously, if your spouse passed away, you could either take ownership of their IRA and begin taking RMDs when your age required, or turn the account into an inherited IRA with different, more onerous, distribution rules. Beginning in 2024, all surviving spouses have the option of stepping into their deceased spouse’s shoes in determining when RMDs may begin. This may be beneficial if your spouse was younger, thus delaying the timing of the distributions and allowing for the potential growth of IRA assets and deferral of the taxes due.
Expanded Qualified Charitable Donations (QCD)
If you are an IRA owner age 70½ or older, you have the ability to make distributions of up to $100,000 that are excluded from taxable income if given directly from the IRA to a qualified charitable organization. Under SECURE 2.0, this distribution can include a onetime QCD of up to $50,000 to a “split-interest entity” (e.g., Charitable Remainder Trust or Charitable Gift Annuity) for the benefit of you or your spouse. What’s left of the year’s permitted QCD amount can be donated directly to qualified charities, although such distributions cannot be made to Donor Advised Funds or Private Foundations. Beginning in 2024, the QCD amount will be indexed for inflation.
This year, we expect the IRS and other federal agencies to announce an array of new requirements and guidance in connection with SECURE 2.0. Together with the first SECURE Act, the law significantly affects how you can seek to capitalize on retirement account tax benefits to shape your financial legacy and charitable giving plans. IRA owners can continue to leave IRA assets to their children, but most adult children will be required to follow the 10-year rule for distribution.
We will continue to watch these developments closely. If you have questions or need additional information on these or other changes, please reach out to your NB Private Wealth team.
1$10,000 or 150% of the regular catch-up amount, whichever is greater.
2In addition, contributions made to the 529 account within the last five years cannot be moved to the Roth IRA.
3The legislation contains a drafting error giving those born in 1959 two potential RMD starting ages. Our text assumes a correction expected by many commentators.
4“Eligible designated beneficiaries” who are not subject to the 10-year rule include surviving spouses, chronically ill and disabled individuals, and children of the original account owner (until they reach majority). Other examples include those who are not more than more than 10 years younger than the decedent, including partners, parents, siblings and friends.
This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. This material is general in nature and is not directed to any category of investors and should not be regarded as individualized, a recommendation, investment advice or a suggestion to engage in or refrain from any investment-related or course of action. Before acting on any information furnished in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek legal, tax or other professional advice. Neither Neuberger Berman nor its employees provide tax or legal advice. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm or the firm as a whole. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.
Tax planning and trust and estate administration services are offered by Neuberger Berman Trust Company. “Neuberger Berman Trust Company” is a trade name used by Neuberger Berman Trust Company N.A. and Neuberger Berman Trust Company of Delaware N.A., which are affiliates of Neuberger Berman Group LLC. Hypothetical growth examples are for informational and educational purposes only.
Neuberger Berman Investment Advisers LLC is a registered investment adviser. The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC.