Three years after the Setting Every Community Up for Retirement Enhancement (SECURE) Act eliminated the ‘stretch inherited IRA for most beneficiaries, SECURE 2.0 brings several key changes to retirement plans. This legislation was included as part of the Consolidated Appropriations Act, 2023 that was enacted just prior to year-end 2022. SECURE 2.0 contains numerous provisions, a few of which are outlined below.
FIRST RESPONDERS & PUBLIC SAFETY WORKERS
Expansion of the Public Safety Worker Early Withdrawal Exception
Effective immediately, the Age 50 Public Safety Worker Exception to the 10% early retirement plan distribution penalty tax for those who separate from service in the year they turn 50 or older is expanded as follows:
- Private-sector firefighters, state and local corrections officers, and other forensic security employees are now included individuals for purposes of this exception.
- Those who have not yet reached age 50 but have performed 25 or more years of service with employer sponsoring the plan are eligible for the exception.
- The language as written suggests that the 25+ years of qualifying service must be with the same employer.
Disabled First Responders Eligible to Continue Excluding Certain Payments from Income
Beginning in 2027, tax relief is coming for qualifying first responders receiving disability payments. Eligible individuals include law enforcement officers, firefighters, paramedics, and EMTs who receive service-connected pensions.
Currently, disability pension payments to first responders are generally non-taxable. However, upon reaching regular retirement age, the disability pension becomes a retirement pension and is taxable. The new law addresses this disparity by introducing an “excludable amount” that allows such individuals to continue the tax-free disability payment for their lifetime. The excludable amount is defined as the income received during the year before retirement age.
While this provision is not effective until 2027, it does not appear that payments need to begin after that time to qualify. Those who previously received non-taxable disability payments and are now receiving taxable retirement benefits should see a significant increase in their after-tax income starting in 2027.
Distributions from Governmental Plans for Health & Long-Term Care Insurance
Current law provides an exclusion from gross income ($3,000) for a distribution from a governmental retirement plan to a public safety officer to pay for health insurance premiums. The exclusion requires that the plan directly pay the insurance premiums. Beginning immediately, SECURE 2.0 repeals the direct payment requirement.
- RMDs are delayed until age 73 for anyone who didn’t turn 72 on or before 12/31/2022 and delayed until age 75 for anyone born in 1960 or later
- Employer matching contributions can be made as Roth contributions (contributions will be included in the employee’s current income).
- Roth contributions are now allowed in SIMPLE and SEP IRA plans
- Missed RMD penalty decreased to 25% and can be further reduced if rectified within the “Correction Window,” to only 10%.
- The 25% of balance Qualified Longevity Annuity Contracts (QLACs) maximum purchase has been removed and replaced with a $200,000 cap (indexing with inflation).
- QCDs can now fund a Charitable Remainder Unitrust (CRUT), Charitable Remainder Annuity Trust (CRAT), or Charitable Gift Annuity (CGA) for a maximum amount of $50,000 per person once in their lifetime. Restrictions apply to the CRTs & CGAs.
- Employees with wages over $145,000 (adjusted for inflation) with be required to make catch-up contributions as Roth contributions.
- RMDs from plan Roth accounts (401(k)s/403(b)s) will no longer be required during the account owner’s lifetime.
- IRA catch-up contributions will begin to adjust with inflation
- 529 accounts can be rolled over into a Roth IRA (account needs to be open for at least 15 years; contributions must have been made over 5 years ago; subject to annual Roth contribution amount; subject to lifetime conversion of $35,000)
- SIMPLE IRA contributions will increase by 10% for employers who have 25 or less employees.
- Qualified Charitable Distributions (QCDs) begin to index with inflation from $100,000.
- Up to $10,000 in penalty free distributions from employer plans for domestic abuse.
- Surviving spouse can elect to be treated as the deceased spouse for RMDs (think spouses who are older than the deceased spouse).
- Partial rollovers from 72(t) accounts are allowed so long as the 72(t) payment continues to leave the account in full each year.
- Individuals aged 60-63 will be permitted to make additional catch-up contributions of $10,000 ($5,000 for SIMPLE plans) or 150% of the regular catch-up contribution, whichever is greater.
- Subject to the same Roth restrictions for those earning over $145,000.
- ABLE accounts can be established for those who were disabled before age 46 (increased from age 26)
- Penalty-free distributions from qualified accounts up to lesser of 10% of vested balance or $2,500 to pay LTC premiums.
Disclosure: This material is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Diversification cannot assure profit or guarantee against loss. There is no guarantee that any investment will achieve its objectives, generate positive returns, or avoid losses. Sequoia Financial Advisors, LLC makes no representations or warranties with respect to the accuracy, reliability, or utility of information obtained from third-parties. Certain assumptions may have been made by these sources in compiling such information, and changes to assumptions may have material impact on the information presented in these materials. Sequoia Financial Advisors, LLC does not provide tax or legal advice. Information about Sequoia can be found within Part 2A of the firm’s Form ADV, which is available at https://adviserinfo.sec.gov/firm/summary/117756