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Newly Enacted Retirement Rules and Tax-Smart Strategies

Newly Enacted Retirement Rules and Tax-Smart Strategies

January 27, 2023

In late December 2022, Congress passed a $1.7 trillion spending package, commonly referred to as the SECURE Act 2.0, which was signed into law by President Biden. The new law includes 90 provisions, most of which affect retirement savings rules. Some of these go into effect this year and others will start any time between 2024-2027. I’m highlighting some of the major changes that could affect you over the next two years. Along with these tax law changes come new tax-smart strategies that we may be able to implement for you.

Required Minimum Distribution (RMD) age has now been increased to 73 from 72 for IRAs, 401(k)s, and other retirement plans. Please note, if you turned 72 in 2022, you must still take your first RMD by April 1, 2023. Under the old law, if you did not follow the RMD rules, you could face a 50% excise tax penalty on any distribution you failed to take.

This new law raised the age of RMDs to 73 beginning January 1, 2023, and to 75 beginning January 1, 2033 (in 10 years). Retirees previously required to take RMDs must continue to take distributions annually as they did under the old law.

The penalty (excise tax) for account holders who fail to take their RMDs when required has now been lowered to 25% from 50% starting 2023. This penalty is further reduced to 10% if the failure to take distributions is corrected on a timely basis. This is great news, since it provides major relief to retirees who fail to make timely distributions.

Annually, you need to determine your RMD by dividing the value of your traditional IRA and 401(k) balances as of December 31 of the previous year by your remaining life expectancy, based on the IRS Uniform Lifetime Table. You should always verify the amount of your RMDs with all your retirement plan providers each year.

If you qualify for a later RMD age, you can now take advantage of the delayed required minimum distributions which will allow you to continue growing your retirement funds on a tax-deferred basis for more years. At the same time, this may give you more years between your actual retirement age and your RMD age to do Roth conversions. This may allow you to actually generate lower RMDs during your later years.

This is one of my top tax-smart investment strategies, but of course it depends on your particular facts and circumstances once you are retired.

Catch up 401(k) contributions will be increasing substantially starting in 2025. Under the current law for 2023, you can make “catch up” salary deferrals to your 401(k) plan for up to $7,500 per spouse, if you’re age 50 or older. The new law increases these catch-up contributions to $11,250 per year for those age 60-63, beginning in 2025.

This new law, starting 2024, will also require that all catch-up contributions be made using after-tax funds into a Roth 401(k) account for those earning over $145,000. Although this Roth requirement will eliminate the upfront tax deductibility, it can ultimately provide you with completely tax-free income throughout your retirement years. This is terrific news since you will be able to sock away even more money on a tax-free basis.

Matching 401(k) contributions can be added to Roth accounts. Starting 2023, the new law gives participants the option to have matching employer contributions made on their behalf contributed directly into their Roth 401(k) account. This means these employer contributions will be treated as after-tax contributions, rather than using pre-tax dollars for the first time. Although you must pay taxes on those employer contributions when made, this will add to your tax-free income throughout retirement. This is another amazing opportunity to have more Roth funds available to you in retirement.

Increased tax breaks for new retirement plans – The tax credit for retirement plans started in 2023 has been increased from 50% of the startup cost to 100% for businesses that have 50 or fewer employees.

In addition, a credit is available, equal to a percentage of the amount contributed by the employer, up to a maximum of $1,000 per employee. The percentage is 100% of the business contribution in the first two years, 75% in the third year, 50% in the fourth year, 25% in the fifth year, and none after that. This is a terrific incentive for businesses to implement a plan, since it will cover a significant part of the cost the employer would have had otherwise.

Funds in a 529 educational account can be rolled over tax-free to a Roth IRA account. Beginning in 2024, the new law allows for tax-free rollovers of up to $35,000 (lifetime cap) from a Section 529 College Savings Plan account into a Roth IRA for the named beneficiary who has completed his or her education and no longer needs the funds for that purpose. There are specific criteria to qualify for this, and the 529 Plan will have had to be maintained for a minimum of 15 years before conversion.

Victims of a federally declared disaster can withdraw up to $22,000 from their IRA or workplace retirement plan without paying the 10% IRS penalty on pre-age 59 distributions. These distributions are still subject to tax, which could be paid over 3 years, beginning with the payout year, unless the individual opts into paying the tax in the year of the distribution. Furthermore, any amounts recontributed within the 3-year time period will not be taxable, but instead treated as a tax-free rollover. This tax break applies for all federal disasters that occur after January 25, 2021.

Retirement Savings Accounts “Lost and Found”The SECURE Act has set aside funding for the Department of Labor to create, within the next 2 years, a searchable database to help individuals find retirement benefits from previous employers that they are entitled to and either lost track of or never realized they had. As soon as this database is created, you should utilize it to potentially find some additional retirement funds.

As some of the new provisions from the SECURE Act get closer to their implementation year, I will be sure to provide you with further information on the best tax-smart strategies that you can implement. As you know, I am committed to helping you achieve your own personal financial independence, which goes hand-in-hand with securing and maintaining a financially worry-free retirement.

As always, if you have any questions, please do not hesitate to reach out to me or any one of our comprehensive wealth management team members.

John J. Vento, CPA, MBA, CFP®                                                                                         

Vento Tax & Wealth Management Group