By Anthony Grant, CPA, Tax Senior
ASL Family Wealth & Individual Tax Group
Imagine it’s your last day at work. You enter a crowded breakroom and share a giant cake with your friends and colleagues as you celebrate your retirement together. You pack up your things and step out the door one last time, the building you spent so many hours in, behind you. As you look out on the horizon you start to imagine what your golden years will look like. Perhaps you dream of that trip you’ve put off for so long, or spending more time with your kids and grandchildren, or staying up-to-date on the latest changes to retirement legislation… OK, maybe not that last one. Not to worry, we are here to help!
The end of 2022 brought with it changes to retirement legislation known as SECURE 2.0. Here are some things you need to know about the new legislation as you look forward to retirement.
Catch-Up Contributions
Different retirement plans are allowed catch-up contributions for taxpayers of a certain age. For IRAs, the catch-up amount for people 50 and over is $1,000. A taxpayer can make a total 2024 contribution of $7,000.
For a qualified participant in a 401K plan, the catch up amount is unchanged at $7,500, for a total contribution allowable at $30,500.
A small change made by SECURE 2.0 is that this number will now be indexed for inflation, so we should expect to see this number go up in the future. However, this amount doesn’t appear to have been increased for 2024. For guidance on catch-up contributions specific to your retirement plan, please discuss with your tax advisor.
Changes to Required Minimum Distribution (RMD) Age
Under the old SECURE Act, individuals were required to start taking their RMDs at the age of 72. Under SECURE 2.0, this changed by creating a tiered structure for the RMD age, because simplicity is overrated.
- If an individual reaches the age of 72 after December 31, 2022 and the age 73 before January 1, 2030, the RMD age is 73.
- If an individual reaches the age of 73 after December 31, 2029 and the age 74 before January 1, 2033, the RMD age is 74.
- If an individual reaches the age of 74 after December 31, 2032, the RMD age is 75.
Missed RMDs
Of course, requiring an individual to take a distribution is only effective if there is some consequence for failing to do so. Missed RMDs carry a substantial excise tax. Under the original SECURE Act, this tax was 50% of the RMD shortfall (the amount of the RMD you failed to take).
SECURE 2.0 reduced this tax to 25%, further reduced to 10% if the shortfall is remedied by the “correction window”. The correction window begins on the date the tax is imposed (the beginning of the taxable year following the missed RMD) and ends on the earliest of the following dates.
- The date a notice of deficiency is mailed to the taxpayer
- The date on which the tax imposed is assessed by the IRS, or
- The last day of the second taxable year following the missed RMD
However, if you miss your RMD, always consult your tax advisor first, as they can usually get the excise tax waived altogether. The key takeaway here is to remedy the missed RMD as soon as possible and communicate this to your tax advisor.
Inherited IRAs
What if you are the beneficiary of an IRA belonging to someone who is recently deceased? There are specific rules on when the funds must be distributed depending on your relationship to the decedent. Each type of beneficiary is subject to different distribution rules. It’s important to note that the IRS recently delayed the final rules governing inherited IRA RMD to 2024. This means some beneficiaries of inherited IRAs have more time to adapt to distribution requirements.
There are three types of beneficiaries of inherited IRAs – Nondesignated beneficiaries, designated beneficiaries (DBs), and eligible designated beneficiaries (EDB). A nondesignated beneficiary is simply defined as a beneficiary that is not a designated beneficiary or an eligible designated beneficiary.
A designated beneficiary is a named beneficiary of the IRA. The general rule is that a designated beneficiary and a nondesignated beneficiary must liquidate the retirement account by the end of the 10th year following the death of the decedent. RMDs may be required in years 1-9 if the decedent had already started taking RMDs.
There is a special set of rules for eligible designated beneficiaries. Here is a quick reference of the different types of eligible designated beneficiaries and the distribution rules for each.
- Surviving spouse – A surviving spouse has the most flexibility in deciding how to distribute an inherited IRA. They are the only beneficiary that may roll the decedent’s IRA into their own and take distributions based on their life expectancy. Conversely, they can leave the funds in the decedent’s IRA and continue to take their RMDs. Generally, if the surviving spouse is younger than the decedent, it is more beneficial to roll the IRA into their own so that the RMD will be based on a longer life expectancy and thus be lower.
- Minor child of the decedent under the age of 21 – The minor child may take distributions based on their life expectancy until they reach the age of 21, at which point, they must distribute the remainder of the account by the end of the 10th calendar year from the date they turned 21.
- A person not more than 10 years younger than the decedent – If the decedent had already started taking RMDs, then the RMD is based on the decedent’s life expectancy. If not, it’s based on the life expectancy of the beneficiary.
- A person who is disabled – the beneficiary may take distributions based on their life expectancy.
- A person who is chronically ill – the beneficiary may take distributions based on their life expectancy.
The rules for inherited IRA’s are complex, so it’s best to discuss with your tax advisor and make sure everything is ready in advance to ensure a smooth transition.
Qualified Charitable Distributions (QCDs)
A planning opportunity arises with respect to RMDs with Qualified Charitable Distributions (QCDs). With the increase in the standard deduction to $24,000 (indexed for inflation), and the deduction for state and local taxes (SALT) capped at $10,000, most taxpayers aren’t able to itemize.
A QCD is a special distribution exclusively available to owners of IRAs. With a QCD, you are able to direct the administrator of your IRA to send funds directly to the charity of your choice, and that amount will not be taxable. You can do this for up to $100,000 annually per IRA owner on or after the date you turn 70 ½. This means for a married couple, each spouse can make $100,000 in QCDs for a total of $200,000. The limitation is that distributions may not be made to a private foundation or a donor-advised fund.
The benefit is that the QCD can reduce your adjusted gross income.
This was already a planning opportunity, but SECURE 2.0 made a few notable changes. First, starting in 2024, the $100,000 figure will be indexed for inflation, meaning each year, that amount will increase. For instance, in 2024, that amount will be $105,000. Additionally, SECURE 2.0 offers a one-time contribution of up to $50,000 to one of the following types of split-interest entities: charitable remainder unitrusts (CRUT), charitable remainder annuity trusts (CRAT), and charitable gift annuities, given that the annuity or trust is funded solely by the QCD and in the case of a charitable gift annuity, sets fixed payments of 5% or more, not later than one year from the date of funding.
SECURE 2.0 made many changes to retirement legislation. We hope that we can be a resource to help navigate these changes. Please contact us if you have any questions.