The Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act of 2022 was signed into law on December 29, 2022, and made several modifications to the retirement tax provisions for both businesses and taxpayers. But not all the changes are immediately available; the effective date for some of the tax sections is 2024 and for others it’s later years. Accountants must appreciate the modifications for the current and forthcoming tax years so that taxpayers are eligible to take advantage of them.
Saver’s Match
Internal Revenue Code (IRC) §25B was introduced as part of the Economic Growth and Tax Relief Reconciliation Act of 2001. The intent of introducing the saver’s match was to enhance the ability of low- and middle-income taxpayers to save for retirement by providing a 50%, 20%, or 10% tax credit depending on the taxpayer’s filing status and adjusted gross income (AGI). Section 103 of SECURE 2.0 modifies the saver’s match tax provision by providing a 50% tax credit depending on the taxpayer’s filing status and AGI. The modification, however, doesn’t take effect until 2027.
The matched amount is no longer a tax credit but rather a contribution to the taxpayer’s individual retirement account (IRA) or retirement plan. The benefit is to increase the taxpayer’s retirement savings, but it may no longer enhance the ability of low- and middle-income taxpayers to save for retirement.
Catch-up Contributions
SECURE 2.0 makes two significant changes to the catch-up contribution tax provision. Act §108 introduces indexing to the IRA catch-up contribution provision for taxpayers aged 50 and older beginning in 2024. Although this catch-up provision of $1,000 is significantly lower than the catch-up amounts for SIMPLE (Savings Incentive Match PLan for Employees) and non-SIMPLE retirement plans, it will allow individuals with IRAs to make small additions to their IRAs.
Act §109 introduces a new higher catch-up option for taxpayers who are aged 60 to 63. Beginning in 2025, the higher catch-up contribution is 50% more than the standard catch-up limit for SIMPLE and non-SIMPLE plans. For example, the catch-up limit for a non-SIMPLE plan in 2023 is $7,500 and for the SIMPLE plans it’s $3,500, which means the higher limit for the 60-63 group would have been $11,250 (i.e., 150% of $7,500) and $5,250 (i.e., 150% of $3,500) if this higher limit were available in 2023.
Required Minimum Distributions (RMD)
Previously, under the SECURE Act of 2019, a taxpayer needed to take a minimum distribution from their retirement plans beginning in the year that they reached age 72.
SECURE 2.0 §107 increases the age to 73 beginning with tax year 2023, which means they can delay taking their first RMD until April 1, 2024. But the second RMD must be taken by December 31, 2024; hence, it might be wiser to take the first RMD by December 31, 2023, and avoid two RMDs in 2024. SECURE 2.0 further increases the RMD age to 75 beginning in tax year 2033.
Qualified Longevity Annuity Contract (QLAC)
Under the rules preceding SECURE 2.0, an individual could partition their retirement plan by purchasing a QLAC within the retirement plan. The benefit of this purchase is that the distribution from the QLAC is delayed until the individual reaches age 85 instead of the RMD age. The spreading out of the distribution amount from one’s retirement plan would lower the individual’s taxable income and possibly lower their Medicare Part B premiums. The QLAC is limited to the lesser of $145,000 (indexed for inflation) in 2022 or 25% of the retirement account’s balance.
Act §202 significantly modifies these rules by increasing the limit to $200,000 (indexed for inflation) beginning with the enactment of SECURE 2.0 (December 29, 2022) and repealing the 25% contribution limits. In addition, the QLAC is now permitted to include spousal survival rights.
Exceptions to the Early Distribution Penalty
To discourage individuals from taking distributions from their IRAs and retirement plans, Act §72(t) imposes a 10% early distribution tax on distributions that don’t satisfy one of the exceptions such as being over 59-and-a-half, disabled, and so forth. SECURE 2.0 introduces several new exceptions to this early distribution penalty.
Act §314 allows domestic abuse survivors to withdraw up to the lesser of $10,000 or 50% of their account’s balance after 2023 without incurring the 10% penalty. Yet the individual is still required to include the distribution in taxable income. Even more significant is that the individual can repay the withdrawn amount over three years and recover the taxes paid on the withdrawn money. Treasury, obviously, will need to issue regulations on this exception and its repayment procedure.
Act §326 allows an individual who’s certified by a physician as terminally ill to withdraw their retirement savings after the enactment date (December 29, 2022) without incurring the 10% penalty. The distribution amount, however, is included in taxable income. The term “terminally ill” is defined in IRC §101(g)(4)(A) to mean an illness or physical condition that can reasonably be expected to result in death in 24 months or fewer after the date of the certification. For this provision, 84 months is substituted for 24 months. In addition, the amount distributed may be repaid within three years in the same manner as given in the repayment rules for a qualified birth or adoption (IRC §72(t)(2)(H)(v)(I)).
Act §115 provides an exception to the 10% penalty for a distribution used for emergency expenses. An individual can take only one distribution per year up to $1,000 and can repay the amount within three years. Once an emergency distribution is taken, another one can’t be taken during the three-year repayment period unless the withdrawn amount has been repaid. An individual can take advantage of an emergency distribution beginning in 2024.
Although the expressed intent of the SECURE 2.0 Act is to encourage individuals to save for retirement, several of these modifications seem to encourage individuals to treat their retirement plans as savings accounts for a rainy day and not for their retirement years.
© 2023 A.P. Curatola
September 2023
