In our Third-Quarter Newsletter, we highlighted potential legislation relating to retirement planning for people of all ages - with many of the most substantive changes impacting tax-advantaged savings accounts.

These provisions, which are part of the Consolidated Appropriations Act of 2023, offer planning opportunities for almost everybody. That said, the law also creates additional complexity that must be understood so that new strategies can be developed.

We will be adding more detailed discussion pieces to our website – so stay tuned! In the meantime, we have listed below several of the most relevant changes for our clients.

Increase the Age to Start Required Minimum Distributions (RMDs)

  • The required minimum distribution (RMD) age increases to age 73 for a person who attains age 72 after Dec. 31, 2022, and age 73 before Jan. 1, 2033 - i.e., persons born between 1951 and 1959. It will increase again to age 75 in 2033 for an individual who attains age 74 after Dec. 31, 2032 - those born in 1960 or later.
  • The planning implications of these changes include increased pre-tax deferral in certain retirement accounts. It also prolongs the opportunity to engage in "tax bracket smoothing" by taking targeted taxable distributions (including Roth conversions) to stay within certain tax brackets prior to RMD age.
  • Additionally, should you accidentally miss an RMD, the penalty has been reduced from 50% to 25% - and 10% if corrected timely.
  • The new law does not impact when someone is eligible to start making qualified charitable contributions (QCDs) from their IRA - which remains at 70 ½.
  • By virtue of the RMD age increase, the SECURE Act 2.0 pushes back the age at which the 5% test for the “still working exception” is applied – along with implications for surviving spouses.

Roth Related Changes

  • Allows for tax-free rollovers from 529 accounts to Roth IRAs.
  • Employers may now make matching contributions to employees with Roth dollars.
  • Eliminated RMD requirement for Roth 401(k) accounts.
  • The new bill allows for the creation of both SIMPLE Roth accounts, as well as SEP Roth IRAs, starting in 2023. Previously, SIMPLE and SEP plans could only include pre-tax funds.

Other Provisions

  • Increased catch-up contribution limits for participants age 60, 61, or 62, in certain employer retirement plans. Catch-up contributions in IRAs will also begin receiving an automatic inflation adjustment each year.
  • Those with wages over $145,000 in the preceding calendar year from the employer sponsoring the plan, will now have to make catch-up contributions as after-tax Roth contributions (does not apply to IRAs, including SIMPLEs).
  • The bill expands the list of eligible events for which someone can take a penalty-free distribution from a retirement account before age 59 ½.