Important retirement planning opportunities in SECURE Act 2.0

SECURE Act 2.0, enacted in December 2022, includes significant changes that could positively impact retirement and financial planning for many individuals. We previously discussed SECURE Act 2.0 in Significant Retirement Planning Opportunities in SECURE 2.0 Act and New IRS Guidance: Required Minimum Distribution rules for 2023.

Now, as a follow-up, and based on additional guidance and insights regarding SECURE Act 2.0 (and realizing the potential for year-end tax planning) here are some specific retirement planning ideas to consider.

Consider how the new RMD ages will impact your retirement withdrawal strategy.

SECURE Act 2.0 law increases the required minimum distribution (RMD) age first from 72 to 73 years old, and then to 75 in 2033.

Planning opportunity: Consider how the delayed RMD age may affect your retirement withdrawal strategies. For example, waiting to take your RMD until age 75 could allow for funds to grow tax-deferred for a longer period. However, be aware that choosing to have fewer years to take RMDs may affect the following tax and estate planning items.

• Tax and Medicare: Because Medicare premiums and Social Security taxation are determined by income, taking out more in RMDs in your later years could result in higher Medicare surcharges and higher federal income taxes.
• Estate planning: Inherited retirement plan assets generally must be distributed within 10 years by a non-spouse beneficiary. If retirement plan account balances are high, this can increase the taxes beneficiaries pay on their inheritance. 

Other RMD news regarding inherited IRAs: To allow beneficiaries of inherited IRAs time to better understand the complex distribution requirements, the IRS recently delayed the implementation of inherited IRA RMD rules to 2024. In addition, potential penalties for failing to take the appropriate distributions are reduced from 50% to either 25% or as low as 10%.

Take advantage of qualified charitable distributions in 2023 and the increased limits for in 2024

Qualified charitable distributions (QCDs), which allow IRA owners who are at least 70½ to make direct contributions from an IRA to a qualified charity, is a nifty tax planning opportunity that has been enhanced by SECURE Act 2.0.

Here are the basics of QCDs – only available for IRAs not 401(k)s or other retirement plans:

• IRA owners must be at least 70 ½ to make QCDs. Each eligible owner can donate a total of $100,000 of IRA funds a year, so some couples can donate up to $200,000 annually.
• The timing and order of QCDs is important. This is because under existing IRS rules the first dollars withdrawn from the IRA are considered the required minimum distribution, or RMD. Therefore, if you begin receiving your RMDs early in the year before designated a QCD withdrawal, those early in the year RMDs will be taxable and will not qualify as a QCD even if you make a QCD later withdrawal to a charity later in the year. For example, if an IRA owner takes a $25,000 RMD withdrawal before making a $5,000 qualified donations of IRA funds, the donations will be deductible but won’t count as part of the RMD. To count, they would have to be part of the first $25,000 RMD out of the IRA.
• QCDs must be made to 501(c)(3) charities, including many churches and schools, and they can’t be made to donor-advised funds. The funds must be transferred directly from the IRA to the charity, so the owner can’t withdraw funds and later decide to donate them.
• The amount of the QCD is not included in adjusted gross income, which can have a positive effect on other income tax calculations, and making a QCD could be a tax beneficial way to make a charitable contribution even if the donor cannot take itemized deductions.
• QCDs must be made by December 31 to qualify for the current tax year.

Under SECURE Act 2.0 the limit on qualified charitable distributions (QCDs), which has been capped at $100,000 since its introduction in 2006, will be indexed for annual inflation beginning in 2024. In addition, the new law also allows for a one-time gift of up to $50,000 from an IRA to a split-interest entity. 

Planning opportunity: If you plan to make a QCD to a qualified charity, consider that you may be able to donate a larger amount starting in 2024. And remember, although the RMD age has increased, the age at which you can start taking QCDs remains 70½. Taking advantage of QCDs before you reach your RMD age can potentially help you reduce taxes now and reduce your RMDs in later years.

Make larger catch-up contributions beginning in 2024 and 2025.

Starting in 2024, IRA catch-up contribution limits for taxpayers age 50 or older will be adjusted for inflation each year. Also, starting in 2025, employees who are 60 to 63 years old will be able to make larger catch-up contributions to 401(k), 403(b), 457(b), SIMPLE IRA and SIMPLE 401(k) plans.
 

Planning opportunity: Consider taking advantage of the new limits to boost your retirement accounts during your final working years. 

Be aware that beginning in 2026, if prior-year wages exceeded $145,000, the catch-up contribution must be made as a Roth contribution for non-IRA plans.

Consider Roth account rule changes regarding RMDs and contributions. 

Starting in 2024, RMDs will be eliminated for Roth 401(k) accounts. Also, effective for 2023, the new law allows for employer matching or profit-sharing Roth contributions and Roth contributions to SEP and SIMPLE IRAs. 

Planning opportunity: The new rules make Roth contributions — which are not taxed in retirement — a more accessible and attractive option than other tax-deferred accounts.

Additional retirement planning opportunity for retirement plans with highly appreciated company stock – Net Unrealized Appreciation (NUA)

For 401(k) or employee stock ownership plan (ESOP) participants with highly
appreciated company stock, the NUA strategy can potentially produce significant tax savings.

The plan participant pays ordinary income tax on the cost basis of the shares when they are distributed. The difference between the cost basis and the fair market value (the NUA) is not taxable until the shares are sold. At the time the sale occurs, the proceeds are taxed at favorable long-term capital gains rates even if the shares have not been held for more than one year.

NOTE: Many factors affect the decision to consider this strategy, including the risk that the net unrealized value might decline. Therefore, careful planning is necessary.

NUA requirements - the NUA strategy requires that the participant’s entire account must be emptied within one calendar year. Therefore, individuals planning to use the strategy for 2023 must start the process early enough to ensure the lump sum distribution occurs by December 31.

Education funding enhancements - In addition to retirement planning opportunities, the following are enhancements to education funding planning included in SECURE Act 2.0:

1. 529 plan improvements
   
   Starting in 2024, 529 plan owners can transfer funds from a 529 plan at least 15 years old to a Roth IRA account in the beneficiary’s name. As a result of this change, if the 529 plan beneficiary doesn’t use the full amount of their 529 savings on qualified educational expenses, the remaining funds (up to a maximum of $35,000) can be retirement savings for them.
   
   Planning opportunity:  As a result of this change parents and grandparents who may have been reluctant to fund section 529 plans might be more willing to open or fund a 529 account. The transfer of the unused 529 plan funds to a Roth IRA for the beneficiary has no federal income tax consequences to the 529 plan owner and has significant positive tax implications to the beneficiary.
   
   
2. Employer student loan match programs
   
   Starting in 2024, employers will be allowed to make matching contributions on various retirement plans, including 401(k), for qualified student loan payments.
   
   Planning opportunity: For persons repaying student loans, check to determine if your employer will be offering an employee match benefit. This is even more relevant now that the moratorium of student loan payments has ended, and student loan payments resumed in October 2023.

Final thoughts

As we approach year end, now is the time to consider these tax and retirement planning ideas for 2023 and beyond. Please contact your Herbein tax consultant if you have questions regarding the contents of this article or other retirement planning considerations.

Article contributed by Stephanie L. Atkins