The SECURE 2.0 Act of December 2022 brought significant enhancements to retirement plans and IRAs, helping individuals save for retirement and emergencies, encouraging employers to offer retirement plans (including IRA-based plans), and simplifying compliance requirements. Although some provisions are effective in 2023, the effective dates of many provisions span from 2023 to 2025, enabling regulators to provide guidance and permitting providers to accommodate the changes.  

This article provides a guide for IRA-related provisions effective in 2023 and a few details for 2024 planning purposes for financial advisors who work with IRA account holders, small employers or wealth management clients.

Required Minimum Distributions
The SECURE Act of 2019 raised the age at which an IRA account holder must take a required minimum distribution (RMD) from 70½ to 72. SECURE 2.0 increased the RMD age to 73, beginning in 2023 for account holders who had not reached 72 by December 31, 2022. Since the law passed so close to year-end, many IRA providers sent the required RMD notices in January, often as part of fourth-quarter statements, to account holders using age 72 as the trigger. While these providers are sending out corrected notices, some account holders may have taken an age 72 RMD that wasn’t required. Advisors should note the industry is requesting the IRS allow individuals to repay that distribution to the IRA, and advisors should be on the lookout for guidance in the next few months.

Another change advisors should note is the excise tax for failing to take an RMD when required is reduced from 50% to 25% of the amount not taken. The tax will be further reduced to 10% if the RMD is taken within two years following the failure. There may be some confusion because IRS Forms 5498 and 5329 have not yet been updated with this change.

The Business Perspective: SEP and SIMPLE Plans
Advisors who have corporate clients with no more than 50 employees should be aware that a tax credit can now be claimed for 100% of the cost to start a SIMPLE IRA or SEP plan (up to a maximum of $5,000 for the first three plan years. (The 50% start-up tax credit still applies for businesses with 51-100 employees.) In addition, small employers can receive a tax credit for employer contributions up to $1,000 per employee for the first five plan years. Importantly, businesses and self-employed individuals (like Gig workers) have until the 2023 tax-filing deadline to adopt a SEP plan and still contribute for the previous year.

Another provision effective in 2023 for SEP and SIMPLE plans is the ability to have plan contributions (employer and employee) made to a Roth vehicle (the contribution is after-tax, but accounts grow tax-free). While this option is now permitted by statute, the industry, in general, is not ready to accommodate this IRA type yet. The IRS still needs to provide guidance and documents to support this new positive feature.

Withdrawal Changes
As advisors may know, there are several changes to the taxation or repayment options for withdrawals their clients take from an IRA. In general, a taxable withdrawal or distribution of funds before the account holder reaches 59½ is subject to a 10% early distribution penalty in addition to income tax. The following exceptions to that 10% penalty were added in 2023:

• An IRA owner who lives in a federally declared disaster area (for disasters occurring on or after January 26, 2021), suffers an economic loss, and takes a distribution of up to $22,000 within 180 days of the disaster. (The account holder may spread taxation on the distribution over three years and repay the distribution within three years to avoid taxation.)

• Distributions taken by an account holder with a doctor-certified terminal illness. (The account holder may repay the distribution within three years to avoid taxation.)

• The removal of excess contributions and attributable earnings.

Other provisions affecting withdrawals include the following:

• Qualified birth and adoption distributions (QBADs) are now subject to a three-year repayment period. (QBADs taken before December 29, 2022 can be repaid by December 31, 2025.)

• The $100,000 limit on qualified charitable distributions (QCDs) will be indexed for inflation. QCDs are a great way to meet RMD requirements while mitigating any tax on the distribution but advisors should note that payment must be made directly to an eligible charity from the IRA to qualify.

Another IRA provision that goes into effect this year is if one of the account holder’s IRAs is involved in a transaction prohibited by law, only the IRA with the violation will be disqualified. Also, to help correct errors in an IRA (and presumably mitigate penalties), the IRS will be updating its Employee Plans Compliance Resolution System to incorporate certain IRA transactions.

Key Provisions Effective—2024
Looking to next year, several interesting provisions provide planning opportunities for advisors and their clients. 

• A beneficiary of unused 529 college savings plan funds will be able to roll the funds into a Roth IRA if the 529 account has been open for at least 15 years, and the funds rolled over have been in the 529 account for at least five years. The rollover lifetime limit is $35,000, and no more than the annual Roth contribution limit can be rolled over in any year. One unintended feature is this gives parents the ability to essentially fund a Roth IRA (to a limited degree) for a minor child that has no income.

• An IRA account holder may roll over or transfer an IRA to another IRA or plan even if the current IRA is making substantially equal payments without incurring a 10% retroactive penalty for modifying the payment arrangement as long the accepting vehicle continues to make the required payments as arranged under the original account.

There are still several outstanding questions that regulators must answer, but SECURE 2.0 has thus far been widely applauded by advisors, product providers and account holders.

Lowell M. Smith Jr. is co-founder and chief compliance officer at IRALOGIX.