The “Setting Every Community Up for Retirement Enhancement” Act—more commonly known as the “SECURE Act”—was signed into law on December 20, 2019 and brought enormous changes to the treatment many qualified retirement accounts, such as IRAs and 401(k) accounts. In 2022, additional regulations proposed by the Treasury Department, along with a recent Congressional update known as “SECURE Act 2.0,” bring further clarifications and changes to the treatment of qualified retirement accounts.

If you would like to read about the original SECURE Act, please see the great blog post by Attorney Joshua M. Reinertson here. Otherwise, read on to learn about the new changes and proposed regulations.

SECURE Act 2.0

The Consolidated Appropriation Act of 2023, containing the provision collectively known as “SECURE Act 2.0,” was signed into law on December 30, 2022. As there are many different changes, the below is only a summary those changes relevant to most individuals:

Increased Mandatory Distribution Ages: If you turned age 72 after December 31, 2022, you have to start taking distributions at age 73. If you attain age 74 after December 31, 2032, you have to start taking distributions at age 75.

Increased Catch-Up Contribution Limits: Starting in 2025, catch-up contribution limits for individuals aged 60-63 have been increased to the greater of $10,000 ($5,000 for SIMPLE Plans) or 150% of the regular catch-up amount for individuals who are not age 60-63. The increased catch-up contribution limits will be adjusted for inflation starting in 2026.

Employer Matching of Student Loan Payments: To ensure young, debt-laden employees just out of school do not forego contributing to their retirement accounts, starting in 2024, employers are now permitted (but not required) to match an employee’s repayment of qualified student loan debt with contributions to the employee’s 401(k), 403(b) or SIMPLE IRA.

Rollovers for Unused Funds in 529 Accounts: Under current law, expending funds held in a 529 education savings plan for anything other than qualified educational expenses subjects the distribution to the account beneficiary’s regular income tax (state and federal), as well as a 10% penalty on earnings. Starting in 2024, individuals may rollover a lifetime total of up to $35,000 from a 529 plan into a Roth IRA. Restrictions apply: (i) the 529 accounts must be in place for at least 15 years before the rollover; (ii) contributions made in the last 5 years to the 529 cannot be rolled over; (iii) the rollover must be a direct “trustee-to-trustee” transfer; (iv) the rollover amount each year cannot exceed the annual Roth contribution limits; and (v) you must have earned income for the year of rollover equal to at least the amount rolled over. What remains unclear is whether the rule restricting tax-free withdrawals of contributed funds or earnings to a Roth for 5 years applies to the rolled-over funds.

Qualified Charitable Distributions: Owners of traditional IRAs who are aged 70½ or older can direct up to $100,000 of IRA distributions to qualified 501(c)(3) charities. Starting in 2024, the contribution amount will adjusted for inflation. Additionally, the new law permits a one-time distribution of up to $50,000 (adjusted for inflation) to be used to fund a Charitable Remainder Unitrust/Annuity Trust or Charitable Gift Annuity.

Elimination of Penalties for Certain Early Withdrawals: Elimination of the 10% penalty on early distributions made before age 59½ is expanded to include withdrawals for the following, subject to certain conditions and repayment provisions:

• Effective immediately, individuals who are certified by a physician as having a terminal illness may make penalty-free withdrawals.

• Starting in 2024, individuals who self-certify that they were victims of domestic abuse by a spouse or domestic partner may, within one year, take the lesser of 10,000 or 50% of the vested balance of the account.

• Starting in 2026, up to $2,500 per year can be withdrawn to pay premiums on long-term care contracts.

Emergency Savings Provisions: Two new emergency savings provisions are included: First, it provides an exception to the 10% early distribution penalty for certain limited distributions up to $1,000 used for emergency expenses.  Second, employers may now offer individuals emergency savings accounts linked to their retirement plans, under which an individual may contribute a maximum $2,500 and against which the employee may make withdrawals.

Reduced Penalties on Missed Distributions: If you miss a required distribution from the plan, the 50% excise tax penalty on missed required minimum distribution amounts is decreased to 25%. Additionally, the penalty is reduced down to 10% if the error is corrected in a timely manner.

Changes to Roth 401(k) Accounts: Starting this year, individuals may now be permitted to elect to have employer matching contributions directed to a Roth 401(k) accounts and taxed in the year of contribution. Additionally—unlike Roth IRAs—Roth 401(k) accounts provided by employers are currently subject to required minimum distribution rules and the employee must take required minimum distributions from the account at after reaching specified ages. Starting in 2024, Roth 401(k) accounts will not be subject to required minimum distributions and will be treated similarly to Roth IRAs.

Proposed Regulations Affecting Required Minimum Distributions

In addition to SECURE Act 2.0, the Treasury Department recently issued proposed regulations affecting the provisions of the original SECURE Act. Full implementation of these proposed regulations has been delayed; however, the proposed regulations give taxpayers an idea of how the IRS would likely view the details of the SECURE Act requirements. Additionally, following the proposed regulations would likely be seen as a good-faith attempt of a taxpayer to follow SECURE Act requirements in the event a taxpayer is facing IRS scrutiny.

Under the original SECURE Act, most designated beneficiaries of IRAs and other qualified retirement plans must have all account funds distributed to them within 10 years after the plan participant’s death. Previously, this was thought to mean that the beneficiary could withdraw the account funds at any point during 10-year period after the plan participant’s death, regardless of whether the deceased plan participant was taking required minimum distributions when they died.

However, the proposed regulations clarify that if the plan participant died after they started taking their required minimum distributions, then the designated beneficiary of the account must take distributions from the account in years one through nine at least as fast as the deceased plan participant was required to take distributions before death. Any funds remaining in the account must be fully withdrawn at the end of year 10. Note: this does not apply to certain “eligible designated beneficiaries” of the deceased plan participant, who may take distributions across their expected lifespan (e.g., surviving spouses, minor children, and disabled or chronically ill individuals, or non-spouse beneficiaries not more than 10 years younger than the plan participant).

The new interpretation may surprise many individuals who became beneficiaries of a plan after the SECURE Act came into effect in 2020 and were not taking any distributions even though the plan participant was taking their required minimum distributions. These beneficiaries may have been planning to take all distributions at the end of year ten for tax reasons and now need to “catch up” for any intervening years that distributions should have been taken.

The failure to take required distributions could require the beneficiary to pay a 50% penalty tax on any amounts that were required to be withdrawn. However, there is some relief available: The IRS may waive penalties for certain distributions that should have occurred in 2020 and 2021.

Finally, under the original SECURE Act provisions, a child beneficiary was considered a “minor” who could take distributions based on their life expectancy if they were either (i) a minor under state law, or (ii) still in school and under age 26. The proposed regulations now draw a bright line: A beneficiary is a minor only until age 21, regardless of state law and regardless of whether they are in school. Prior to age 21, the beneficiary may receive distributions based on their life-expectancy. Once the beneficiary turns 21 the beneficiary falls under the 10-year distribution rule discussed above and the account must be fully distributed within 10 years of the beneficiary’s 21^st birthday (unless they remain exempt for another reason, such as disability).

The SECURE Act provisions and proposed regulations are complex and continue to evolve. The summary above is condensed and intended to highlight only a few of the important changes. Individual circumstances vary and you should always seek independent expert advice regarding administration of your retirement accounts.

Please contact one of our knowledgeable and experienced Estate Planning attorneys if you would like to discuss your estate plan and retirement accounts in more detail.