Planning Article
September 2023 – By Ryan Boyle CFP®
In what seems like a never-ending game of kick the can, the IRS has pushed back deadlines to begin newer provisions contained in the SECURE Act 2.0. Along with this pushback of rules, the IRS has provided an update on the 10-year rule and who needs to take inherited IRA RMDs, along with providing some relief for missed RMDs.
The Updates Pertaining to the 10-Year Rule & Relief Extension
Back in 2019, the SECURE Act was passed and brought along several changes, with the most notable being a change to how inherited IRAs have their required minimum distributions taken, transitioning away from the life expectancy method over to a 10-year (or in some instances a 5-year) window to distribute funds. While initially, this was meant to seem simple, future updates to the SECURE Act have caused additional confusion due to changes in RMDs, resulting in waived penalties for missed RMDs for 2021 and 2022. In July of this year, the IRS posted an extension for relief on missed RMDs, applying to non-qualified designated beneficiaries only. Unfortunately, this means spouses of the decedent, children of the decedent, and beneficiaries who are disabled or terminally ill would not receive this benefit of relief.
401(K) Catch-Up Provision Delayed
One critical change brought on within the SECURE Act 2.0 involved a special provision for high-income earners and how their catch-up contributions were made. Originally starting in 2024, If you are making over $145K per year at a single company, all catch-up contributions made into your employer-sponsored retirement plans would have been required to be made as Roth contributions, and not tax-deferred contributions. Given the concerns retirement plan administrators had revolving around the implementation of these new provisions, numerous organizations pushed for a delay in the commencement of this provision in the Secure Act to allow their retirement plans time to adjust to adding these additional requirements and changes (American Benefits Council). The new start date for this provision is currently set to 2025 and would mean that higher-income earners would lose a tax break when the catch-up contributions are being made but would get the benefit of potential tax-free growth within the Roth portion of their retirement plans.
Given the size of the maximum catch-up contributions allowed, coupled with the potential sunset of the Tax Cuts Job Act tax code at the end of 2025, an unprepared individual may see unexpected increases in their tax liability over the course of the next few years, especially if they fall within the forced Roth catch up contribution threshold. Although these changes can seem negative at first glance, there were some positive changes that came through with the SECURE Act 2.0, including a reduction in the total penalty for missed RMDs from 50% to as low as 10% in certain circumstances.
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