Year-end spending package tackles retirement planning: part one
Congress enacted the Consolidated Appropriations Act of 2023 on December 23, 2022. In addition, the expansive year-end spending “omnibus” bill includes the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act, commonly known as SECURE 2.0, and the Conservation Easement Program Integrity Act. These two significant new laws may have an impact on your financial planning.
The original SECURE Act was a landmark retirement savings bill passed by both parties in 2019. The Securing a Strong Retirement Act was enacted by the U.S. House of Representatives in the spring of 2022 to build on the reforms in that statute. The bill stagnated despite having substantial bipartisan support. The U.S. Senate subsequently introduced the Enhancing American Retirement Now Act as its retirement legislation.
SECURE 2.0 tackles numerous topics that significantly alter retirement planning and combines elements from both pieces of legislation, such as:
Required minimum distributions (RMDs). The first SECURE Act increased the age at which you must take required minimum distributions (RMDs) from traditional IRAs and other qualified plans and pay taxes on them from 70.5 to 72. The new law raises the retirement age to 73 as of January 1, 2023, and 75 as of January 1, 2033. As a result, people can now postpone taking RMDs and paying taxes on them.
The measure also lowers the 50% excise (or penalty) tax to 25%, easing the consequences for failing to take full RMDs. In addition, the fine would be reduced to 10% if the error was fixed in a “timely” manner.
Qualified charitable distributions (QCDs). The use of QCDs to satisfy RMD criteria and accomplish charitable objectives has grown in popularity. After reaching the age of seventy-two, a QCD enables you to give up to $100,000 annually to a 501(c)(3) organization. You can’t claim a charitable deduction, but the distribution comes from taxable income.
Per the new law, you can donate up to $50,000 once through a charitable gift annuity or charitable remainder trust (as opposed to directly to the charity). The law also indexes for inflation the annual IRA charitable distribution limit of $100,000.
Catch-up contributions. Aged 60 to 63 individuals can make catch-up contributions to 401(k) and SIMPLE plans up to the greater of $10,000 or 50% more than the standard catch-up amount starting January 1, 2025. The higher amounts index for inflation after 2025. For 2023, the yearly cash cap for catch-up payments has risen to $7,500 from $6,500.
However, the bill also modifies how to tax catch-up contributions, which may lessen the upfront tax savings for individuals who make the maximum yearly contribution. Catch-up contributions will be considered Roth contributions made after taxes. Before this change, you could make catch-up payments on a pre-tax or post-tax basis. There is an exception for workers whose salaries are $145,000 or less (indexed for inflation).
Matching contributions on student loan payments. The law also aims to assist workers unable to make retirement contributions because of their student loan obligations and thus miss out on their employer’s matching retirement payments. Based on their eligible student loan repayments, it enables individuals to receive matching contributions to retirement plans. Employers may match employee contributions to SIMPLE IRAs or 401(k) plans. Contributions made for plan years commencing on January 1, 2024, will be subject to these requirements.
More on the year-end spending package
These are just a few of the new law’s clauses. The entire year-end spending package will undoubtedly raise more queries and regulations. We’ll inform you of any changes that might impact your financial situation. If you have any questions, please feel free to contact our RRBB accountants and advisors for further assistance.
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