Wealth Planning Newsletter | Q1 2023

SECURE Act 2.0

The SECURE Act 2.0 is a very extensive piece of bi-partisan legislation passed at the end of 2022. It has brought a myriad of changes to promote retirement security and savings. To help demystify this bill, we have summarized those provisions with immediate effect and those most relevant for you, your family, and your heirs.

Immediate Provisions

Section 107: RMD Age Goes Up

Starting in 2023, Required Minimum Distributions (aka RMDs) are now required at age 73 (an increase from age 72). Furthermore, starting in 2033, the age for RMDs will increase to 75.  RMD rules apply to all employer sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans and also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs.

Section 108: Indexing IRA Catch-Up Limit

Currently, IRA catch-up contributions for those age 50 and older have been limited to $1,000 increments. Starting in the 2024 tax year, catch-up contributions will be indexed to inflation. This will be helpful for those who are 50 and over approaching retirement.

Section 118: SEP IRAs for Nannies

If you have a domestic employee (e.g., nannies), you now are able to provide a SEP IRA for that employee. In the highly competitive caregiving market, providing this benefit maybe the difference in hiring a great nanny.  

Section 302: RMD Penalty Cut in Half

The IRS penalty for failing to fulfill your Required Minimum Distribution requirement was 50% of the amount not withdrawn on time. Going forward, this penalty is reduced to 25%. You still can submit IRS form 5329 (Additional Taxes on Qualified Plans Including IRAs and Other Tax-Favored Accounts) in a timely fashion to correct a RMD that you have not taken for a reduced penalty of 10%.  

Section 601: Roth SIMPLE and SEP IRAs

Previously, all employer-sponsored plans (i.e., 401(k), 403(b)) allowing pre-tax employee contributions were allowed to accept Roth contributions except for SIMPLE IRA’s. Section 601 now allows SIMPLE IRAs to accept Roth contributions as well. Additionally, Section 601 allows employers to offer employee and employer SEP contributions as Roth. This will be a valuable planning tool for small business owners as well as self-employed individuals.  

Future Provisions and What's to Come

Section 325: ROTH distributions

ROTH IRA account owners are not required to take required minimum distributions. Prior to the SECURE Act 2.0, participants in employer qualified retirement plans – i.e., 401(k), 403(b), governmental 457(b) plans, and Federal Thrift Savings Plans – were subject to pre-death distribution requirement from their ROTH accounts. With the passage of this legislation, this distribution requirement is now eliminated beginning after December 31, 2023. Beginning in 2024, employees may opt to keep their assets in their ROTH accounts subject to the availability of desired investment options/expenses, and other individual wealth planning needs.  

Section 126: 529 rollovers

For the first time ever, families have options on how to handle residual balances in their 529 accounts.  529 account beneficiaries are permitted tax and penalty free rollovers to ROTH IRAs in their own name and up to a lifetime maximum up to $35,000.

The rule, which will begin taking effect in 2024, is subject to a few conditions:  

·   The amount to be rolled is capped every year and equals the annual contribution limit for ROTH IRAs, currently $6,500.

·   Any ROTH or Traditional IRA contributions made by the 529 account beneficiary would also count towards the $6,500 annual rollover limit.

·   Rollovers generated from 529 account contributions or earnings for the preceding 5 years is prohibited.  

·  The provision requires that the 529 account must have been open for at least 15 years.  

·  ROTH IRA annual income limitations don’t apply to these rollovers.

A couple of key questions or unknowns that have been brought to the surface is whether withdrawals of 529 earnings transferred to a ROTH IRA will be subject to the 5-year rule and changing who the 529 beneficiary is triggers a restart of the 15-year waiting period.  We will further elaborate as more information becomes available.  

Our team also looks forward to sharing additional guidance on other future SECURE Act 2.0 provisions as their implementation date nears.

Inherited RMDs

When the first SECURE Act was passed at the end of 2019, it included significant changes to inherited IRAs. The initial interpretation of the law had many inheritors and their advisors believing that any Inherited IRA had to be drawn down to a $0 balance at the end of a 10-year timeframe. However, in 2022, the IRS released new guidance, which again will change how inherited IRAs are to be depleted. While this guidance was waived for tax years 2020-2022, it will apply to all inherited IRAs subject to SECURE Act rules going forward.

Below is an outline of the current rules regarding inherited RMDs:  

Did you inherit an IRA from a Spouse? If yes, and you are 100% primary beneficiary, you may treat the IRA as your own. This IRA is subject to Required Minimum Distributions as determined by the SECURE Act 2.0.  

If you are a non-spouse beneficiary and not considered an eligible designated beneficiary (i.e., minor children of the decedent, those who are chronically ill, those who are permanently disabled, or less than 10 years younger than the decedent account holder), you have the following options of withdrawal:

·  Was the account holder under Required Minimum Distribution age? If yes, then you can transfer the funds to an Inherited IRA and withdraw funds either by 1) withdrawing all assets over a 10-year time period or 2) withdrawing all assets at once via a lump sum.

·  Was the account holder over Required Minimum Distribution age? If yes, then you can transfer the funds to an Inherited IRA and are required to take distributions as calculated by your or the oldest beneficiary’s life expectancy and can withdraw remaining funds either by 1) withdrawing all assets over a 10-year time period or 2) withdrawing all assets at once via a lump sum.

Income Tax Filing Tips

Make every effort to (e-file) your tax returns rather than filing a paper tax return
Individuals who submit paper tax returns risk an array of problems, including IRS key-punch errors on the name, taxpayer ID numbers, or important documents getting separated.

Review 2022 W-2 wage forms, 1099 forms and K-1/K-2/K-3 statements upon receipt  
Below are the dates you should expect these forms:

·  W-2 forms will be available online or mailed to employees by January 31, 2023.  

·  1099 forms should be made available online or mailed out to recipients no later than February 15, 2023.  

·   Partnership K-1/K-2/K-3 statements may not be available until March 15, 2023 (assuming no extension).

Beware of the April 18, 2023 filing deadline for filing 2022 federal income tax returns
For certain Californians, the IRS and CA Franchise Tax Board extended the tax filing deadline to May 15 due to winter storms. Both individuals and businesses in counties affected by the disastrous wind, rain, and flooding will have until then to file tax returns, make tax payments, and make 2022 contributions to IRAs and health savings accounts. Californians in the disaster areas impacted by winter storms may also be eligible to claim a deduction for a disaster loss at the Federal and State level. You can visit CA.gov for eligibility requirements and the IRS publication on Casualty Losses & Other Relief.  

Expect a smaller refund or have a balance due on your 2022 federal income tax return
While most individuals automatically received their 2021 stimulus checks, some received the money as a “recovery rebate credit” of $1,400 per person on their 2021 income tax return. No “recovery rebate credit” appears on the 2022 federal income tax return. No non-itemized charitable deductions as well - Congress did not extend this temporary tax break that allows a special philanthropic deduction for individuals who take standard deductions.

Make sure you get all your documents to your CPA in a timely manner
You do not want what your tax preparer rushing through your return at the last minute and making a mistake!