SECURE 2.0 has brought about changes to IRAs of all types. To help better understand these modifications, we examine the differences in the new laws governing traditional IRA and Roth IRA accounts under SECURE 2.0 against current law.
2023 Changes Affecting Required Minimum Distributions
| Bill Section | Current Law | New Law |
|---|---|---|
| Sec. 107. Increase in age for required beginning date for mandatory distributions | As established by the 2019 SECURE Act, required minimum distributions (“RMDs”) generally must begin by age 72. Prior to January 1, 2020, the age at which RMDs were required to begin was 70½. | Increases the RMD age to: (i) 73 for a person who attains age 72 after December 31, 2022 and age 73 before January 1, 2033, and (ii) 75 for an individual who attains age 74 after December 31, 2032. |
| Sec. 201. Remove required minimum distribution barriers for life annuities | All annuity payments must be nonincreasing with limited exceptions. One exception for annuity contracts purchased from insurance companies permits increases that meet an actuarial test. The current annuities actuarial test does not permit certain guarantees such as certain guaranteed annual increases, return of premium death benefits, and period certain guarantees for participating annuities. | Amends the RMD rules to relax these rules and permits commercial annuities that are issued in connection with any eligible retirement plan to provide additional types of payments, such as certain lump sum payments and annual payment increases at a rate less than 5% annually. |
| Sec. 204. Eliminating a penalty on partial annuitization | Current regulations provide that if a retirement account holds an annuity contract and other assets, the RMD is calculated by bifurcating the account into the annuity contracts (which follow defined benefit plan rules) and the other assets (which follow defined contribution plan rules). This approach can result in higher RMDs than if the account did not hold annuity contracts. | Directs the Secretary of the Treasury to update the applicable regulations as follows: tocalculate the RMD for a retirement account that holds annuity contracts and other assets, the employee may elect to have the RMD calculated by applying the defined contribution rules to the entire account. In performing that calculation, the account balance will include the value of the annuity contracts, and the payments from those annuity contracts will be applied toward satisfying the RMD. |
| Sec. 337. Modification of required minimum distribution rules for special needs trusts | Current law places limits on the ability of beneficiaries of defined contribution retirement plans and IRAs to receive lifetime distributions after the account owner’s death. Special rules apply in the case of certain beneficiaries, such as those with a disability. | Clarifies that in the case of a special needs trust established for certain beneficiaries (e.g., a beneficiary with a disability), the trust may provide for a charitable organization as the remainder beneficiary. |
| Sec. 302. Reduction in excise tax on certain accumulations in qualified retirement plans | Existing law imposes an excise tax on an individual if the amount distributed to an individual during a taxable year is less than the RMD under the plan for that year. The excise tax is equal to 50% of the shortfall (that is, 50% of the amount by which the RMD exceeds the actual distribution). (The excise tax may be abated under a reasonable cause exception or through a VCP submission.) | Reduces the excise tax for failure to take RMDs from 50% of the shortfall to 25%. Further reduces the excise tax to 10% if the individual corrects the shortfall during a two-year correction window. |
| Sec. 313. Individual retirement plan statute of limitations for excise tax on excess contributions and certain accumulations | The Code imposes excise taxes on excess contributions made to IRAs (Section 4973) and failures to distribute RMDs from plans and IRAs (Section 4974). The statute of limitations with respect to a tax liability for excess retirement contributions or accumulations generally starts to run within three years after the excise tax return (e.g., Form 5329) is filed, but if such a return is never filed, the statute does not begin to run. | For purposes of any excise tax imposed on excess contributions or on certain accumulations in connection with an IRA (Code Section 4973 and 4974), the applicable return to start the statute of limitation now includes the income tax return filed by the person on whom the tax is imposed for the year in which the act (or failure to act) giving rise to the liability for such tax occurred. Therefore, the filing of Form 5329 should no longer be required to start the statute of limitations for these penalties. However, if the income tax return is used to start the running of the statute of limitation, the statute of limitations is six years rather than three years for Code Section 4973 excise tax. And this relief does not apply if the 4973 excise tax is due to acquiring property for less than fair market value. For a person not required to file a return for that year, the statute of limitations begins on the date that the return would have been required to be filed. |
| Sec. 307. One-time election for qualified charitable distribution (“QCD”) to split-interest entity; increase in qualified charitable distribution limitation | Under current law, certain charitable IRA distributions (called qualified charitable distributions) up to $100,000 are excluded from gross income of the individual. QCDs also count for minimum required distribution purposes. | Allows individuals to make a one-time election of up to $50,000 (indexed for inflation) for qualifying charitable distributions to certain split-interest entities, including charitable remainder annuity trusts, charitable remainder unitrusts, and charitable gift annuity. Indexes the $100,000 limit, and new, one-time $50,000 limit, to inflation for taxable years beginning after 2023. |
Additional 2023 Changes
| Bill Section | Current Law | New Law |
|---|---|---|
| Sec. 311. Repayment of qualified birth or adoption distribution limited to three years | Following the SECURE Act, current law does not limit the period during which a qualified birth or adoption distribution may be repaid and qualify as a rollover distribution. | Requires qualified birth or adoption distributions to be recontributed within three years of the distribution in order to qualify as a rollover contribution. (This aligns the rule with similar disaster relief provisions and simplifies plan administration.) |
| Sec. 331. Special rules for the use of retirement funds in connection with qualified federally declared disasters | In recent years, Congress has eased plan distribution and loan rules in cases of disaster on a case-by-case basis. | Provides permanent special rules governing plan distributions and loans in cases of qualified federally declared disasters. Up to $22,000 may be distributed to a participant per disaster; Amount is exempt from the 10% early withdrawal tax; Inclusion in gross income may be spread over 3-year period; Amounts may be recontributed to a plan or account during the 3-year period beginning on the day after the date of the distribution; Allows certain home purchase distributions to be recontributed to a plan or account if those funds were to be used to purchase a home in a disaster area and were not so used because of the disaster; and Increases the maximum loan amount for qualified individuals and extends the repayment period. |
| Sec. 202. Qualifying longevity annuity contracts (“QLACs”) | Existing regulations limit the premiums an individual can pay for a QLAC to the lesser of $125,000 (indexed) or 25% of the individual’s account balance,. and provides for other restrictions on non-spouse death benefits. | Eliminates the 25% limit and increases the dollar limit from $125,000 (indexed) to $200,000 (indexed). Clarifies that a divorce occurring after a QLAC is purchased but before payments begin will not affect the permissibility of the joint and survivor benefits under the contract. Further clarifies that employees may rescind a contract during the 90-day trial period (“short free-look period”). |
| Sec. 326. Exception to penalty on early distributions from qualified plans for individuals with a terminal illness | Present law imposes a 10% tax penalty on early distributions from tax-preferred retirement accounts unless certain exceptions apply. | Creates an exception to the 10% early withdrawal penalty for distributions to individuals whose physician certifies that they have an illness or condition that is reasonably expected to result in death in 84 months or less. |
| Sec. 333. Elimination of additional tax on corrective distributions of excess contributions | Current law requires a corrective distribution of an excess contribution to an IRA, along with any earnings on the excess contribution. The distribution is subject to the 10% early withdrawal penalty. | Exempts corrective distributions and corresponding earnings from the 10% early withdrawal penalty. |
| Sec. 305. Expansion of Employee Plans Compliance Resolution System (“EPCRS”) | Under existing rules, employer sponsors of qualified plans have only limited opportunities to self-correct plan errors under EPCRS. This generally involves operational failures that are insignificant (or otherwise corrected within a three-year period). | The Treasury Department is directed to expand EPCRS to (i) allow IRA custodians to address eligible inadvertent failures, and (ii) add preapproved correction methods for eligible inadvertent failures, including general principles of correction, and to update Revenue Procedure 2021-30 for these changes within two years after enactment. |
| Sec. 301. Recovery of retirement plan overpayments | Fiduciaries for plans that have mistakenly overpaid a participant must take reasonable steps to recoup such overpayment, such as collecting the overpayment from the participant or employer in order to maintain the tax-qualified status of the plan and comply with ERISA. EPCRS includes various procedures for correcting overpayments made from defined benefit and defined contribution plans. The Pension Benefit Guaranty Corporation (“PBGC”) also has overpayment recoupment policies for terminating defined benefit plans. | A 401(a), 403(a), 403(b), and governmental plan (but not including a 457(b) plan) will not fail to be a tax favored plan merely because the plan fails to recover an “inadvertent benefit overpayment” or otherwise amends the plan to permit this increased benefit. In certain cases, the overpayment is also treated as an eligible rollover distribution, which is why this provision impacts IRAs. There are additional provisions related to overpayments under ERISA-covered plans that do not apply to traditional or Roth IRAs. |
| Sec. 322. Tax treatment of IRA involved in a prohibited transaction | If an IRA owner or beneficiary engages in a prohibited transaction with respect to the IRA, the IRA loses its tax-favored status and ceases to be an IRA as of the first day of the taxable year in which the prohibited transaction occurs. As a result, the IRA is treated as distributing to the individual on the first day of that taxable year the fair market value of all of the assets in the account. | Clarifies that, for this purpose, each IRA of the individual shall be treated as a separate contract. |
2024 Changes
| Bill Section | Current Law | New Law |
|---|---|---|
| Sec. 108. Indexing IRA catch-up limit | Currently, annual IRA catch-up contributions for those who are age 50 or over are a flat $1,000 and are not indexed for inflation. | Indexes IRA catch-up contributions in $100 increments in the same manner as the indexing for regular IRA contributions. |
| Sec. 115. Withdrawals for certain emergency expenses | Current law imposes a 10% penalty on early withdrawals before normal retirement age from tax-preferred retirement accounts. | Allows one penalty-free withdrawal of up to $1,000 per year for “unforeseeable or immediate financial needs relating to personal or family emergency expenses.” The withdrawal may be repaid within three years. Only one withdrawal per three-year repayment period is permitted if the first withdrawal has not been repaid. |
| Sec. 314. Penalty-free withdrawal from retirement plans for individual in case of domestic abuse | N/A | Permits certain penalty-free early withdrawals in the case of domestic abuse in an amount not to exceed the lesser of $10,000 (indexed) or 50% of the value of the employee’s vested account under the plan. In addition, such eligible distributions to a domestic abuse victim (defined by the amendment to Code Sec. 72(t)(2)(K)(iii)(II)) may be recontributed to applicable eligible retirement plans, subject to certain requirements. (This is similar to the QBAD provision under Section 311.) |
| Sec. 120. Exemption for certain automatic portability transactions | Plans are permitted to involuntarily distribute terminated vested accounts of under $5,000. Those amounts are generally distributed to an IRA or, for accounts under $1,000, may be distributed as a check. An industry consortium – the Portability Services Network – recently launched a program to facilitate the automated roll-in of involuntarily distributed accounts back into an employer-provided plan with an active account for the participant. The discretion to execute the roll-in implicates the prohibited transaction rules under the Code. | Creates a statutory exemption from the prohibited transaction rules under Section 4975 of the Code providing relief when an entity receives compensation in connection with the transfer of an involuntary distribution (made under Code Section 401(a)(31)(B)(i)) from an IRA into an employer-provided defined contribution plan after the individual has been given timely notice and has not opted out. The relief is subject to a number of conditions. DOL is directed to issue certain guidance and studies related to the exemption. Treasury also is directed to issue a report regarding the involuntary distribution notices. |
| Sec. 323. Clarification of substantially equal periodic payment rule | Present law imposes a 10% tax penalty on early distributions from tax-preferred retirement accounts, but an exception applies to substantially equal periodic payments that are made over the account owner’s life expectancy if certain criteria are met. | Clarifies that the exception for substantially equal periodic payments continues to apply after certain rollovers (effective 2024) and for certain annuities (effective 2023). |
| Sec. 126. Special rules for certain distributions from long-term qualified tuition programs to Roth IRAs | Code Section 529 qualified tuition programs permit contributions to tax-advantaged accounts that can be invested and used to pay for the qualified education expenses of a designated beneficiary. Amounts in 529 plans not used for qualified education expenses may not be rolled over to a Roth IRA or other types of retirement plans. | Allows certain assets in a 529 qualified tuition program account maintained for at least 15 years for a designated beneficiary to be directly rolled over on a tax-free basis to a Roth IRA maintained for the benefit of the beneficiary. The rollover is subject to the limits on Roth IRA contributions and the requirement that a Roth IRA owner have includible compensation at least equal to the amount of the rollover. Permitted rollovers would be limited to (1) the aggregate amount of contributions to the account (and earnings thereon) before the 5-year period ending on the date of rollover, and (2) a lifetime limit of $35,000. |
2025 Changes
| Bill Section | Current Law | New Law |
|---|---|---|
| Sec. 501. Provisions relating to plan/IRA amendments | Current law generally requires plan amendments to reflect legal changes to be made by the tax filing deadline for the employer’s taxable year in which the change in law is first effective (including extensions). The Code and ERISA provide that, in general, accrued benefits cannot be reduced by a plan amendment (the “anti-cutback rule”). | Allows plan/IRA amendments made pursuant to the Act to be made by the end of the 2025 plan year as long as the plan operates in accordance with such amendments as of the effective date of a legislative or regulatory requirement or amendment. Extends the plan amendment deadlines under the SECURE Act, CARES Act, and Taxpayer Certainty and Disaster Relief Act of 2020 to these new remedial amendment period dates, as previously reflected in IRS notices (although the IRS notices had a December 31, 2025 deadline regardless of the plan year). |
2027 Changes
| Bill Section | Current Law | New Law |
|---|---|---|
| Sec. 103. Saver’s Match | The existing Saver’s Credit employs a tiered percentage system ranging from 10-50% based on Adjusted Gross Income (“AGI”) to determine the amount of the credit. | Modifies the existing Saver’s Credit to make it refundable and turns it into a direct government matching contribution to the taxpayer’s IRA or eligible retirement plan. Enhances and simplifies the Saver’s Credit by creating one credit percentage (with no tiers) of 50% for all savers below the AGI threshold ($41,000 for joint filers), at which point the credit phases out. The credit is treated as a pre-tax contribution to the recipient’s plan or IRA, meaning it will be taxable when distributed. |
