New Retirement Plan Rules
How the SECURE 2.0 Act May Affect Your Retirement Planning
As if planning for retirement was not already confusing, a number of major changes are coming to retirement savings plans. With nearly 100 new provisions, these changes will have a direct effect on many retirement plans.
On December 29, 2022, President Biden signed the Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0 Act). The previous SECURE Act, passed in 2020, made several changes to retirement planning including increasing the required beginning date (RBD) for required minimum distributions (RMDs) from individual retirement accounts from 70½ to 72 years of age. In addition, the Act eliminated the age restriction for contributions to qualified retirement accounts and required most designated beneficiaries to withdraw the entire balance of an inherited retirement account within 10 years of the account owner’s death.*
The 2020 SECURE Act provided a few exceptions to the mandatory 10-year withdrawal rule with a list of eligible designated beneficiaries:
Spouses
Beneficiaries who are not more than 10 years younger than the account owner
The account owner’s children who have not reached the age of majority
Disabled individuals and chronically ill individuals
SECURE 2.0 ACT Changes
The SECURE 2.0 Act made quite a few enhancements to clarify the original legislation. Several of the key enhancements are summarized below:
Raises the age for RMDs to 73 in 2023 and to 75 by 2033.
Allows early distributions for long-term care contracts without penalty.
Permits qualified charities to be named as remainder beneficiaries after the death of a disabled or chronically ill beneficiary without disqualifying the trust as a see-through trust.
Lets plan sponsors match contributions made on student loan repayments on the same vesting schedule as elective deferrals, effective 2024.
Allows 529 plans maintained for at least 15 years to be rolled over into a Roth IRA with a $35,000 lifetime limit, effective 2024.
What Should You Do?
It is imperative to properly analyze your estate planning goals and your intended beneficiaries’ circumstances to ensure that your goals are accomplished and your beneficiaries are properly planned for. Under the old law, beneficiaries of inherited retirement accounts could take distributions over their individual life expectancy. Under both the SECURE Act and SECURE 2.0 Act, the shorter 10-year time frame for taking distributions will accelerate income tax due, possibly causing your beneficiaries to be bumped into a higher income tax bracket, receiving less of the funds in the retirement account than you may have originally anticipated. Eligible designated beneficiaries exempt from the 10-year rule may still have the opportunity to benefit from more retirement plan growth.
Your estate planning goals likely include more than just tax considerations. You may be concerned with protecting a beneficiary’s inheritance from their creditors, future lawsuits or a divorcing spouse. In order to protect your hard-earned retirement account and your loved ones, it is critical to act now. Kanner Baker advises our clients to take the following steps when reviewing their retirement accounts in light of the legislative changes:
Review or amend your revocable living trust or standalone retirement trust.
Consider additional trusts based on your needs and desires:
Standalone retirement trust
Special needs or supplemental needs trust
Charitable remainder trust
Review your intended beneficiaries.
If you have any questions about how the proposed retirement plan changes may affect your estate plan, please contact us. Kanner Baker will review your situation and make recommendations based upon your situation.
*If a beneficiary is not considered a designated beneficiary, distributions must be taken by the fifth year following the account owner’s death. Common examples of beneficiaries that are not designated beneficiaries are charities and estates. See Treas. Reg. §§ 1.401(a)(9)-3, Q&A (4)(a)(2), (a)(9)-5, Q&A (5)(b).