The Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 was enacted on Dec. 29, 2022.
SECURE 2.0 was an update to the SECURE Act enacted in December 2019. Both the SECURE Act and SECURE 2.0 made significant changes to qualified retirement plans. SECURE 2.0 had several provisions that were effective immediately or in 2023.
The IRS has issued proposed regulations and two notices,
Mischaracterized RMDs
SECURE 2.0 extended the required beginning date for required minimum distributions. This resulted in IRA owners who turn age 72 in 2023 no longer being required to take RMDs.
However, with the passage of SECURE 2.0 so late in the year, many plan administrators could not quickly update their systems for distributions starting Jan. 1, 2023. This had the potential to result in many distributions in early 2023 being improperly characterized as RMDs not eligible for rollover.
The Internal Revenue Service has now provided that, if a taxpayer who was born in 1951 received a single-sum distribution between Jan. 1, 2023, and July 31, 2023, part of which was treated as ineligible for rollover because it was mischaracterized as an RMD, the taxpayer will have until Sept. 30, 2023 — rather than the usual 60-day rollover limitation — to roll over the mischaracterized part of the distribution. The September 30 deadline applies to mischaracterized IRA distributions made to the IRA owner or the IRA owner's surviving spouse.
The plan administrator was also granted relief for failing to properly characterize distributions made between Jan. 1, 2023, and July 31, 2023, as eligible rollover distributions to participants who attain age 72 in 2023.
Beneficiary RMDs
Under the IRS's interpretation of the SECURE Act, a non-spousal beneficiary (also excluding other special categories of beneficiaries able to use the lifetime or life expectancy payments exception) of an inherited IRA where the IRA owner had been subject to RMDs during his or her lifetime is required to take RMDs ratably over a 10-year period rather than being able to wait until the tenth year to make the distribution. This interpretation came as a surprise to some taxpayers and tax practitioners since, under the old five-year rule, the RMD could be as late as the end of the five-year period.
With some of these taxpayers having failed to make RMDs in 2021 and 2022, they could be subject to severe penalties for failure to make RMDs. With the IRS clarification not coming until 2022, the service initially provided penalty-relief for taxpayers who failed to make RMDs in 2021 and 2022. This year, the IRS has also added penalty relief for failure to make "specified RMDs" for 2023 for participants who died in 2020, 2021, or 2022.
A "specified RMD" is defined as any distribution that would be required to be made under a defined contribution plan or IRA to either:
- A designated beneficiary of an employee under the plan or IRA owner if the employee or IRA owner dies in 2020, 2021, or 2022 and on or after the employee's or IRA owner's required beginning date, and the designated beneficiary is not using the lifetime or life expectancy payments exception; or,
- A beneficiary of an eligible designated beneficiary if the eligible designated beneficiary dies in 2020, 2021, or 2022, and the eligible designated beneficiary was using the lifetime or life expectancy payments exception.
Penalty for failing to take RMDs
In addition to the waiver of the penalty for failure of inherited IRA beneficiaries to take RMDs in 2021, 2022, and 2023, SECURE 2.0 has also lowered the penalties for failure to take RMDs when they do apply. Beginning in 2023, the penalty for failing to take an RMD is lowered from 50% to 25% of the amount of the required RMD not distributed. The penalty may be further reduced to 10% if the individual takes action to withdraw the sum not taken and submits a corrected tax return and pays any tax in a timely manner within two years after the year of the missed RMD.
The IRS has indicated that, even with the lower penalties, it will continue to consider waiver of the penalties for good cause shown by the taxpayer.
SECURE 2.0 also provided several new exceptions to the 10% penalty, including a withdrawal of up to $1,000 for unforeseeable or immediate family emergency expenses, a withdrawal by an individual certified as having a terminal illness, and, beginning in 2024, up to the lesser of $10,000 or 50% of the vested retirement account balance for an individual who had been subject to domestic abuse.
Other SECURE 2.0 changes
Besides the increase in the RMD age from 72 to 73 effective Jan. 1, 2023, SECURE 2.0 also authorizes employer matching contributions to be made to Roth accounts.
Individuals over age 70½ may make a one-time $50,000 (adjusted for inflation) qualified charitable distribution to a charitable remainder trust or a charitable-gift annuity. As with other qualified charitable distributions, such distributions count toward RMD amounts.
Final regulations
The IRS has stated that when final regulations are issued, they will not be effective until 2024 at the earliest.
