The long-awaited passing of the Secure Act 2.0 has made a number of changes to the rules governing retirement plans. Perhaps the largest, and most anticipated change is the change to the Required Minimum Distribution (RMD) rules.
Starting in 2023 RMDs will now start in the year that a retirement plan owner turns age 73. For decades, RMDs started in the year that retirement account owners turned age 70.5. The original Secure Act changed this to age 72. Now, retirement account owners will have one additional year to delay taking RMDs and it will get even better in the future as the age will change to 75 after 2032. So, in summary, taxpayers who turned age 72 in 2022 or earlier will still be subject to RMDs. Those who turn age 72 in 2023 will have a one-year reprieve. Going forward, those who turn age 73 in 2023-2032 will start their RMDs in the year they turn age 73. Thereafter, RMDs will begin when the retirement account owner turns age 75. Simple right?
In addition, the rules related to Qualified Charitable Distributions (QCDs) were not changed. Therefore, retirement account owners will be eligible to make direct contributions from their IRAs to a qualified charity without reporting the distribution as taxable income after they reach age 70.5, even though they are not yet required to take RMDs. Of course, taxpayers are not allowed to double-dip by claiming an itemized deduction for charitable donations made via QCDs, but for many taxpayers who do not have sufficient itemized deductions to benefit from them, QCDs are a more advantageous way to donate to charity.
The amounts that can be contributed to qualified charities using QCDs were also improved slightly. The $100,000 annual limit for QCDs will be indexed for inflation going forward so it will increase each year. In addition, there is now a provision that allows retirement account owners to contribute a lifetime limit of $50,000 to a charitable trust using the QCD rules. The limit is per person so a married couple could contribute $100,000 to a charitable trust in their lifetime. However, the new rules require that the contributions be made to a separate trust (cannot be contributed to existing charitable trusts that hold non-QCD money) and the taxation of the charitable trust distributions are not as favorable for traditional charitable trusts making this option less attractive.
These new rules offer several financial planning opportunities for retirement plan owners. First, the delay in taking RMDs will make it easier for many taxpayers to avoid taking income that could increase their Medicare premiums under the Income Related Monthly Adjustment Amount (IRMAA) rules which causes higher income taxpayers to pay higher premiums for Medicare part B and D in the following year. Second, many taxpayers may be able to engage in tax planning, such as Roth conversions, for several more years before they are forced to start taking RMDs. This strategy can be very effective as taxpayers may be able to take advantage of lower tax rates to convert taxable retirement account money into a tax-free Roth IRA. In addition, any distributions taken during this time will reduce the taxable retirement account balance which will reduce the RMD amount when they eventually start. Third, the ability to do QCDs several years before the start of RMDs will allow taxpayers to reduce their taxable retirement account balance before their RMDs start, resulting in reduced RMD amounts when they do eventually start.