An Estate Planner’s Guide To Key Changes Under SECURE 2.0

Just as most estate planners, financial advisors, employers, and plan administrators had gotten accustomed to the recent changes to federal laws and regulations that control retirement accounts, on December 29, 2022 President Biden signed into law an omnibus funding bill that included the SECURE 2.0 Act of 2022 (simply referred here as SECURE 2.0). Viewed as a sequel to the passage of the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act, this new variant contains some 92 separate provisions that alter the laws and regulations governing employer plans and IRAs. Most of SECURE 2.0’s modifications are welcomed as they generally provide a net-benefit for taxpayers (though the resulting rules are still not as tax-advantageous as the pre-SECURE Act environment, circa 2019). Some changes are retroactive, while others began rolling out January 1 of this year. Many of these changes will take effect in years 2024, 2026, and some even as late as 2033.

A complete summary of SECURE 2.0’s changes are too expansive for the scope of this article. Additionally, many of the changes effecting any client’s retirement accounts are more appropriately discussed with their financial advisor or their employer. However, the following are pertinent changes every estate planning attorney should be aware of when counseling clients who are establishing comprehensive estate plans or are administering trusts that contain retirement accounts:

• The requirement to begin taking Required Minimum Distributions (“RMDs”) from traditional IRAs will increase from age 72 to age 73 beginning this year, and then to age 75 in 2033. Clients who intend utilize charitable gifting to offset income tax liability otherwise generated by forced withdrawals should be apprised of these changes when establishing or reviewing their long term or annual gifting schedules.

(Tangentially, the penalty for not taking an RMD is reduced from 50 percent of the amount required to be withdrawn to 25 percent—and reduced even further to 10 percent if corrected within two years of the originally-scheduled withdrawal date).

• While RMDs were not required from Roth IRAs during the life of the IRA holder under previous law, lifetime RMDs were required from Roth accounts within 401(k)s and other defined contribution plans. SECURE 2.0 will exempt in-plan Roth accounts from RMDs during the life of the participant, effective 2024.
• There is now a better option for clients with overfunded or unused 529 plans— beginning in 2024, holders of such accounts may now rollover unused plan funds into Roth IRAs for benefit of the 529 plan’s beneficiary. These assets may be shifted to Roth IRAs so long as: (1) the 529 Plan is at least 15 years old; and (2) the amount rolled over is within the limits for Roth IRA contributions – i.e., the lesser of either: (a) the beneficiary’s earned income; or (b) $6,500 dollars (for 2023), and provided that the beneficiary’s Modified Adjusted Gross Income falls below the applicable threshold limits for Roth IRA contributions. Additionally, the 529 plan beneficiary must still be eligible to make Roth IRA contributions. However, any beneficiary who receives such rollovers will only be allowed to do so up to a total of $35,000 over the course of his or her lifetime.

This means that, beginning next year, if an older child has a qualifying 529 plan which has assets no longer needed for their education, then the funds from the 529 plan can be rolled into a Roth IRA for the child rather than he or she taking taxable distributions and incurring penalties by applying funds for purposes other than education. This provides tremendous opportunity for families who are planning for a young child’s future success and financial savings and encourages those making annual gifts to give greater consideration to gifting to 529 plans. An estate planner who recognizes any client’s underutilized 529 plan should alert him or her to this change and encourage them so have their financial advisors facilitate any such rollover.

• Clients who want to directly benefit charities with assets held in their traditional IRAs may soon make larger Qualified Charitable Distributions (“QCDs”). QCD’s have historically been capped at an annual amount of $100,000, but this limit will now be indexed for inflation beginning in 2024.
• Additionally, SECURE 2.0 now permits a one-time IRA charitable distribution of up to $50,000 (also indexed for inflation beginning 2023) to charities through charitable gift annuities or charitable remainder trusts effective this year. This additional rollover can be a tax-efficient way to fund charitable trusts.
• The Act establishes an online searchable database that will allow a participant or beneficiary to identify the administrators of plans in which the participant or beneficiary may have a benefit. Beginning in 2025, plan administrators will be required to share information with the Department of Labor in an effort to centralize this process. The Department of Labor has a mandate to establish this database within 2 years of enactment. If done correctly, this will minimize the amount of effort (and frustration) many probate estates undertake when marshalling assets of decedents who died without comprehensive or organized estate plans.

Estate planners that frequently work in tandem with their clients’ financial planners, wealth managers, and CPA’s ought to review the SECURE Act (the initial SECURE Act, the regulations thereto, and the most recent SECURE 2.0) in its entirety to ensure their clients are receiving the most comprehensive tax and planning advise possible.