Late last year Congress passed, and the President signed into law, the second major piece of retirement legislation (SECURE 1.0 was passed in December 2019) in three years’ time. Much of SECURE 2.0 pertained mostly to contributions to qualified retirement plans rather than withdrawals from qualified plans, though there were a few adjustments that were made concerning (1) an increase in the Required Beginning Date (“RBD”) of age 73 for those individuals born after December 31, 1950 to begin Required Minimum Distributions (“RMDs”), and (2) distributions from inherited IRAs by eligible designated beneficiaries (“EDB”). For reference, the general provisions of SECURE 2.0 were contained in our 2022 Fourth Quarter Investment Commentary, which can be accessed here:

A section of SECURE 2.0 that has received much attention relates to “catch-up” contributions for taxpayers aged 50 and over. To assist taxpayers who may have had more pressing financial priorities and who minimized or avoided funding retirement contributions earlier in life, Congress, in 2001, provided a mechanism for taxpayers who had attained age 50 to contribute additional amounts annually to their retirement accounts (401(k) and IRA) on a tax-deferred basis as a means of better preparing them for eventual retirement. In 2023, employees age 50 or older who fund 401(k) accounts may contribute up to an additional $7,500, for a maximum contribution of $30,000. Individuals age 50 and over, who are eligible to fund both Roth and Traditional IRA accounts, may contribute an additional $1,000 in 2023, bringing the maximum contribution allowable to $7,500. While the incremental “catch-up” contribution amount is indexed for inflation annually for 401(k), 403(b), and 457(b) arrangements, Congress believed that taxpayers who have earned income (essentially wages) of more than $145,000 (during 2023; threshold to be indexed thereafter), should make “catch-up” contributions on an after-tax or “Roth” basis, rather than on a before-tax basis, effective January 1, 2024. This provision meant that many employers would need to amend their plans and receive Department of Labor approval to provide for Designated Roth Accounts separate from the traditional tax-deferred 401(k) contributions in one year’s time. There was also some language in SECURE 2.0, which was cobbled together literally in the waning moments of calendar year 2022, making financial planning professionals concerned that catch-up contributions would no longer be permitted beginning January 1, 2024.

Thankfully, the IRS has come to taxpayers’ rescue with the release of Notice 2023-62 on August 25 providing a two-year moratorium, until January 1, 2026, in the after-tax treatment of catch-up contributions. This Notice provides employees with an additional two years, beyond 2023, in which to make catch-up contributions on a tax-deferred basis, and it also grants employers two additional years in which to amend their qualified retirement plans to provide for Designated Roth Accounts and to receive DOL approval.

Of particular note, employees age 50, and over who have long-standing arrangements with their employers for contribution of a fixed percentage of compensation, may wish to revisit these instructions with their HR Benefits Representatives to ensure that they are taking full advantage of the contribution limits and income tax benefits available from these catch-up provisions.

Another area that was recently addressed by the IRS under an earlier Notice 2023-54 concerns Required Minimum Distributions (RMDs) from Inherited IRAs and the new 10-year rule. Essentially, the position of the IRS, based on prior law still in effect, SECURE 2.0 notwithstanding, turns on whether or not the original account owner had reached his or her Required Beginning Date (RBD) prior to date of death. For Inherited IRA situations where an account owner had reached the Required Beginning Date prior to death, beneficiaries (other than surviving spouses) of Inherited IRA accounts must take a Required MinimumDistribution beginning with the year following the year of death using the beneficiary’s age and life expectancy factor from the  Single Life Expectancy Table (Table I, IRS Publication 590-B) for the initial distribution, and then subtracting a factor of one in each successive year until the 10th year following the year of death when the entire balance in the IRA must be distributed. To be clear, beneficiaries of Inherited IRAs where the account owner had reached his or her RBD must take a distribution each year in years 1 – 9 at least equal to the appropriate Table Factor, and must fully deplete the account by December 31 of the tenth year following the year of death of the original account owner.

In situations where the original account owner had not reached the Required Beginning Date (RBD) prior to death (i.e., had not begun taking RMDs), the Inherited IRA beneficiary has a bit more flexibility in that nothing is required to be distributed until December 31st of the 10th year following the year of death, at which point the entire IRA account balance must be distributed in full.

At this point, due to mass confusion in IRS policies following the passage of SECURE 2.0 late in 2022, the IRS has announced it will not seek to penalize IRA beneficiaries who fail to take RMDs on Inherited IRA accounts and were required to do so, per the above position, for calendar years 2021, 2022, 2023. Notwithstanding the penalty avoidance position, Inherited IRA Beneficiaries are still subject to the ultimate 10-year rule for complete distribution of account balances. In this regard, IRA beneficiaries should be mindful of the time compression that occurs by delaying withdrawals and the resulting potential increased income tax liabilities. For example, for IRA beneficiaries of Inherited IRA accounts where the account owners died in 2020 and who opted to not take periodic distributions in 2021, 2022, & 2023, have now accelerated and increased their minimum eventual distributions by 43% (1/10th = 10%; 1/7th = 14.29%) in the fourth year or later following the account owner’s death.

Clients who may wish to model distribution approaches from Inherited IRA accounts or their own retirement plan accounts are invited to speak with their Eagle Ridge Investment Management Relationship Manager for assistance on a complimentary basis.