United States:
Traditional And Roth IRA Changes Under SECURE 2.0
14 March 2023
Groom Law Group
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SECURE 2.0 has brought about changes to IRAs of all types. To
help better understand these modifications, we examine the
differences in the new laws governing traditional IRA and Roth IRA
accounts under SECURE 2.0 against current law.
2023 Changes Affecting Required Minimum Distributions
Bill Section |
Current Law |
New Law |
Sec. 107. Increase in age for required beginning date
for mandatory distributions |
As established by the 2019 SECURE Act, required minimum
distributions ("RMDs") generally must begin by age 72.
Prior to January 1, 2020, the age at which RMDs were required to
begin was 70½. |
Increases the RMD age to: (i) 73 for a person who attains age
72 after December 31, 2022 and age 73 before January 1, 2033, and
(ii) 75 for an individual who attains age 74 after December 31,
2032. |
Sec. 201. Remove required minimum distribution barriers
for life annuities |
All annuity payments must be nonincreasing with limited
exceptions. One exception for annuity contracts purchased from
insurance companies permits increases that meet an actuarial test.
The current annuities actuarial test does not permit certain
guarantees such as certain guaranteed annual increases, return of
premium death benefits, and period certain guarantees for
participating annuities. |
Amends the RMD rules to relax these rules and permits
commercial annuities that are issued in connection with any
eligible retirement plan to provide additional types of payments,
such as certain lump sum payments and annual payment increases at a
rate less than 5% annually. |
Sec. 204. Eliminating a penalty on partial
annuitization |
Current regulations provide that if a retirement account holds
an annuity contract and other assets, the RMD is calculated by
bifurcating the account into the annuity contracts (which follow
defined benefit plan rules) and the other assets (which follow
defined contribution plan rules). This approach can result in
higher RMDs than if the account did not hold annuity
contracts. |
Directs the Secretary of the Treasury to update the applicable
regulations as follows: tocalculate the RMD for a retirement
account that holds annuity contracts and other assets, the employee
may elect to have the RMD calculated by applying the defined
contribution rules to the entire account. In performing that
calculation, the account balance will include the value of the
annuity contracts, and the payments from those annuity contracts
will be applied toward satisfying the RMD. |
Sec. 337. Modification of required minimum distribution
rules for special needs trusts |
Current law places limits on the ability of beneficiaries of
defined contribution retirement plans and IRAs to receive lifetime
distributions after the account owner's death. Special rules
apply in the case of certain beneficiaries, such as those with a
disability. |
Clarifies that in the case of a special needs trust established
for certain beneficiaries (e.g., a beneficiary with a
disability), the trust may provide for a charitable organization as
the remainder beneficiary. |
Sec. 302. Reduction in excise tax on certain
accumulations in qualified retirement plans |
Existing law imposes an excise tax on an individual if the
amount distributed to an individual during a taxable year is less
than the RMD under the plan for that year. The excise tax is equal
to 50% of the shortfall (that is, 50% of the amount by which the
RMD exceeds the actual distribution). (The excise tax may be abated
under a reasonable cause exception or through a VCP
submission.) |
Reduces the excise tax for failure to take RMDs from 50% of the
shortfall to 25%. Further reduces the excise tax to 10% if the
individual corrects the shortfall during a two-year correction
window. |
Sec. 313. Individual retirement plan statute of
limitations for excise tax on excess contributions and certain
accumulations |
The Code imposes excise taxes on excess contributions made to
IRAs (Section 4973) and failures to distribute RMDs from plans and
IRAs (Section 4974). The statute of limitations with respect to a
tax liability for excess retirement contributions or accumulations
generally starts to run within three years after the excise tax
return (e.g., Form 5329) is filed, but if such a return is
never filed, the statute does not begin to run. |
For purposes of any excise tax imposed on excess contributions
or on certain accumulations in connection with an IRA (Code Section
4973 and 4974), the applicable return to start the statute of
limitation now includes the income tax return filed by the person
on whom the tax is imposed for the year in which the act (or
failure to act) giving rise to the liability for such tax occurred.
Therefore, the filing of Form 5329 should no longer be required to
start the statute of limitations for these penalties. However, if
the income tax return is used to start the running of the statute
of limitation, the statute of limitations is six years rather than
three years for Code Section 4973 excise tax. And this relief does
not apply if the 4973 excise tax is due to acquiring property for
less than fair market value. For a person not required to file a
return for that year, the statute of limitations begins on the date
that the return would have been required to be filed. |
Sec. 307. One-time election for qualified charitable
distribution ("QCD") to split-interest entity; increase
in qualified charitable distribution limitation |
Under current law, certain charitable IRA distributions (called
qualified charitable distributions) up to $100,000 are excluded
from gross income of the individual. QCDs also count for minimum
required distribution purposes. |
Allows individuals to make a one-time election of up to $50,000
(indexed for inflation) for qualifying charitable distributions to
certain split-interest entities, including charitable remainder
annuity trusts, charitable remainder unitrusts, and charitable gift
annuity. Indexes the $100,000 limit, and new, one-time $50,000
limit, to inflation for taxable years beginning after 2023. |
Additional 2023 Changes
Bill Section |
Current Law |
New Law |
Sec. 311. Repayment of qualified
birth or adoption distribution limited to three years |
Following the SECURE Act, current law does not limit the period
during which a qualified birth or adoption distribution may be
repaid and qualify as a rollover distribution. |
Requires qualified birth or adoption distributions to be
recontributed within three years of the distribution in order to
qualify as a rollover contribution. (This aligns the rule with
similar disaster relief provisions and simplifies plan
administration.) |
Sec. 331. Special rules for the use of retirement funds
in connection with qualified federally declared
disasters |
In recent years, Congress has eased plan distribution and loan
rules in cases of disaster on a case-by-case basis. |
Provides permanent special rules governing plan distributions
and loans in cases of qualified federally declared disasters. Up to
$22,000 may be distributed to a participant per disaster; Amount is
exempt from the 10% early withdrawal tax; Inclusion in gross income
may be spread over 3-year period; Amounts may be recontributed to a
plan or account during the 3-year period beginning on the day after
the date of the distribution; Allows certain home purchase
distributions to be recontributed to a plan or account if those
funds were to be used to purchase a home in a disaster area and
were not so used because of the disaster; and Increases the maximum
loan amount for qualified individuals and extends the repayment
period. |
Sec. 202. Qualifying longevity annuity contracts
("QLACs") |
Existing regulations limit the premiums an individual can pay
for a QLAC to the lesser of $125,000 (indexed) or 25% of the
individual's account balance,. and provides for other
restrictions on non-spouse death benefits. |
Eliminates the 25% limit and increases the dollar limit from
$125,000 (indexed) to $200,000 (indexed). Clarifies that a divorce
occurring after a QLAC is purchased but before payments begin will
not affect the permissibility of the joint and survivor benefits
under the contract. Further clarifies that employees may rescind a
contract during the 90-day trial period ("short free-look
period"). |
Sec. 308. Distributions to firefighters |
Current law permits "qualified public safety
employees" in a governmental plan to take retirement
withdrawals beginning at age 50 after separation from service
without incurring a 10% early withdrawal penalty. |
Extends the age 50 early withdrawal exception for qualified
public safety employees to also apply to private sector
firefighters receiving distributions from a qualified retirement
plan or 403(b) plan. |
Sec. 326. Exception to penalty on early distributions
from qualified plans for individuals with a terminal
illness |
Present law imposes a 10% tax penalty on early distributions
from tax-preferred retirement accounts unless certain exceptions
apply. |
Creates an exception to the 10% early withdrawal penalty for
distributions to individuals whose physician certifies that they
have an illness or condition that is reasonably expected to result
in death in 84 months or less. |
Sec. 333. Elimination of additional tax on corrective
distributions of excess contributions |
Current law requires a corrective distribution of an excess
contribution to an IRA, along with any earnings on the excess
contribution. The distribution is subject to the 10% early
withdrawal penalty. |
Exempts corrective distributions and corresponding earnings
from the 10% early withdrawal penalty. |
Sec. 305. Expansion of Employee
Plans Compliance Resolution System
("EPCRS") |
Under existing rules, employer sponsors of qualified plans have
only limited opportunities to self-correct plan errors under EPCRS.
This generally involves operational failures that are insignificant
(or otherwise corrected within a three-year period). |
The Treasury Department is directed to expand EPCRS to (i)
allow IRA custodians to address eligible inadvertent failures, and
(ii) add preapproved correction methods for eligible inadvertent
failures, including general principles of correction, and to update
Revenue Procedure 2021-30 for these changes within two years after
enactment. |
Sec. 301. Recovery of retirement plan
overpayments |
Fiduciaries for plans that have mistakenly overpaid a
participant must take reasonable steps to recoup such overpayment,
such as collecting the overpayment from the participant or employer
in order to maintain the tax-qualified status of the plan and
comply with ERISA. EPCRS includes various procedures for correcting
overpayments made from defined benefit and defined contribution
plans. The Pension Benefit Guaranty Corporation ("PBGC")
also has overpayment recoupment policies for terminating defined
benefit plans. |
A 401(a), 403(a), 403(b), and governmental plan (but not
including a 457(b) plan) will not fail to be a tax favored plan
merely because the plan fails to recover an "inadvertent
benefit overpayment" or otherwise amends the plan to permit
this increased benefit. In certain cases, the overpayment is also
treated as an eligible rollover distribution, which is why this
provision impacts IRAs. There are additional provisions related to
overpayments under ERISA-covered plans that do not apply to
traditional or Roth IRAs. |
Sec. 322. Tax treatment of IRA involved in a prohibited
transaction |
If an IRA owner or beneficiary engages in a prohibited
transaction with respect to the IRA, the IRA loses its tax-favored
status and ceases to be an IRA as of the first day of the taxable
year in which the prohibited transaction occurs. As a result, the
IRA is treated as distributing to the individual on the first day
of that taxable year the fair market value of all of the assets in
the account. |
Clarifies that, for this purpose, each IRA of the individual
shall be treated as a separate contract. |
2024 Changes
Bill Section |
Current Law |
New Law |
Sec. 108. Indexing IRA catch-up limit |
Currently, annual IRA catch-up contributions for those who are
age 50 or over are a flat $1,000 and are not indexed for
inflation. |
Indexes IRA catch-up contributions in $100 increments in the
same manner as the indexing for regular IRA contributions. |
Sec. 115. Withdrawals for certain emergency
expenses |
Current law imposes a 10% penalty on early withdrawals before
normal retirement age from tax-preferred retirement accounts. |
Allows one penalty-free withdrawal of up to $1,000 per year for
"unforeseeable or immediate financial needs relating to
personal or family emergency expenses." The withdrawal may be
repaid within three years. Only one withdrawal per three-year
repayment period is permitted if the first withdrawal has not been
repaid. |
Sec. 314. Penalty-free
withdrawal from retirement plans for individual in case of domestic
abuse |
N/A |
Permits certain penalty-free early withdrawals in the case of
domestic abuse in an amount not to exceed the lesser of $10,000
(indexed) or 50% of the value of the employee's vested account
under the plan. In addition, such eligible distributions to a
domestic abuse victim (defined by the amendment to Code Sec.
72(t)(2)(K)(iii)(II)) may be recontributed to applicable eligible
retirement plans, subject to certain requirements. (This is similar
to the QBAD provision under Section 311.) |
Sec. 120. Exemption for certain automatic portability
transactions |
Plans are permitted to involuntarily distribute terminated
vested accounts of under $5,000. Those amounts are generally
distributed to an IRA or, for accounts under $1,000, may be
distributed as a check. An industry consortium – the
Portability Services Network – recently launched a program to
facilitate the automated roll-in of involuntarily distributed
accounts back into an employer-provided plan with an active account
for the participant. The discretion to execute the roll-in
implicates the prohibited transaction rules under the Code. |
Creates a statutory exemption from the prohibited transaction
rules under Section 4975 of the Code providing relief when an
entity receives compensation in connection with the transfer of an
involuntary distribution (made under Code Section 401(a)(31)(B)(i))
from an IRA into an employer-provided defined contribution plan
after the individual has been given timely notice and has not opted
out. The relief is subject to a number of conditions. DOL is
directed to issue certain guidance and studies related to the
exemption. Treasury also is directed to issue a report regarding
the involuntary distribution notices. |
Sec. 323. Clarification of substantially equal periodic
payment rule |
Present law imposes a 10% tax penalty on early distributions
from tax-preferred retirement accounts, but an exception applies to
substantially equal periodic payments that are made over the
account owner's life expectancy if certain criteria are
met. |
Clarifies that the exception for substantially equal periodic
payments continues to apply after certain rollovers (effective
2024) and for certain annuities (effective 2023). |
Sec. 126. Special rules for certain distributions from
long-term qualified tuition programs to Roth IRAs |
Code Section 529 qualified tuition programs permit
contributions to tax-advantaged accounts that can be invested and
used to pay for the qualified education expenses of a designated
beneficiary. Amounts in 529 plans not used for qualified education
expenses may not be rolled over to a Roth IRA or other types of
retirement plans. |
Allows certain assets in a 529 qualified tuition program
account maintained for at least 15 years for a designated
beneficiary to be directly rolled over on a tax-free basis to a
Roth IRA maintained for the benefit of the beneficiary. The
rollover is subject to the limits on Roth IRA contributions and the
requirement that a Roth IRA owner have includible compensation at
least equal to the amount of the rollover. Permitted rollovers
would be limited to (1) the aggregate amount of contributions to
the account (and earnings thereon) before the 5-year period ending
on the date of rollover, and (2) a lifetime limit of $35,000. |
2025 Changes
Bill Section |
Current Law |
New Law |
Sec. 501. Provisions relating to plan/IRA
amendments |
Current law generally requires plan amendments to reflect legal
changes to be made by the tax filing deadline for the
employer's taxable year in which the change in law is first
effective (including extensions). The Code and ERISA provide that,
in general, accrued benefits cannot be reduced by a plan amendment
(the "anti-cutback rule"). |
Allows plan/IRA amendments made pursuant to the Act to be made
by the end of the 2025 plan year as long as the plan operates in
accordance with such amendments as of the effective date of a
legislative or regulatory requirement or amendment. Extends the
plan amendment deadlines under the SECURE Act, CARES Act, and
Taxpayer Certainty and Disaster Relief Act of 2020 to these new
remedial amendment period dates, as previously reflected in IRS
notices (although the IRS notices had a December 31, 2025 deadline
regardless of the plan year). |
2027 Changes
Bill Section |
Current Law |
New Law |
Sec. 103. Saver's Match |
The existing Saver's Credit employs a tiered percentage
system ranging from 10-50% based on Adjusted Gross Income
("AGI") to determine the amount of the credit. |
Modifies the existing Saver's Credit to make it refundable
and turns it into a direct government matching contribution to the
taxpayer's IRA or eligible retirement plan. Enhances and
simplifies the Saver's Credit by creating one credit percentage
(with no tiers) of 50% for all savers below the AGI threshold
($41,000 for joint filers), at which point the credit phases out.
The credit is treated as a pre-tax contribution to the
recipient's plan or IRA, meaning it will be taxable when
distributed. |
The content of this article is intended to provide a general guide
to the subject matter. Specialist advice should be sought about
your specific circumstances.
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