The effective dates for the Setting Every Community Up for Retirement Enhancement (Secure) 2.0 Act of 2022, signed into law by President Joe Biden as part of the $1.7 trillion spending bill, are "all over the place," Ed Slott warns, so advisors must pay careful attention.
For instance, "almost every headline on this legislation begins by touting the auto-enrollment provision to encourage more people to participate in company retirement plans," Slott, a CPA, IRA expert and president of Ed Slott & Co., told ThinkAdvisor Tuesday in an email. "That's fine, but this provision would not be effective until 2025 (and it only applies to new plans)."
The increase in the required minimum distribution age to 75 will be phased in over a decade, Slott points out.
The RMD age is now 73 under the new law, "but only for those who will be 72 this year or later," Slott explained. "Anyone already taking RMDs must continue."
The best way to understand this provision, which has caused some head scratching, according to Slott, is to:
"Use age 72 if born in 1950 or earlier (before 2020 the age was 70 ½);
Use age 73 if born 1951-1959; and
Use age 75 if born 1960 or later."
What's Effective in 2023
Reduced RMD Penalty
"I'm a bit cynical on this one," Slott relayed.
Before Secure 2.0, the penalty for not taking an RMD "was a draconian 50%," Slott said. "But beginning in 2023, the 50% penalty is reduced to 25%, and then to 10% if timely corrected by making up the missed RMD. 'Timely' means corrected generally in 2 years (unless the penalty is assessed earlier). However, IRS penalty waivers on Form 5329 can still be requested."
Added Slott: "In the past, almost no one ever paid the 50% penalty. IRS was very lenient on assessing such a harsh penalty. But now that it can be as low as 10%, it seems like this penalty may be assessed more."
Advisors, Slott said, "should take note and be more vigilant to help clients make sure they do not miss an RMD, and that includes beneficiaries too."
SIMPLE and SEP Roth IRAs
Secure 2.0 allows Roth options for these retirement accounts, effective immediately. "But it's unlikely that custodians are ready to open these accounts yet," Slott said. "Similarly, plans can now allow employees to elect Roth employer contributions, but recordkeepers likely aren't ready for this yet."
Special Needs Trusts (Applicable Multi-Beneficiary Trusts, or AMBTs)
A qualified charity can now be the remainder beneficiary for this type of trust.
Qualified Longevity Annuity Contracts (QLACs)
QLACs are a type of annuity that begins to pay out at an advanced age and can be purchased with retirement plan assets. Under Secure 2.0, QLAC purchases are no longer limited to 25% of assets, and the purchase limit is now $200,000, which will be adjusted for inflation.
