Lowell M. Smith, Jr., Co-Founder and Chief Compliance Officer at IRALOGIX, Inc. Lowell is a leader in IRA products and innovation.
This article covers provisions in the SECURE 2.0 Act of 2022 that was passed as part of the federal year-end spending bill that directly affect IRAs now or beginning in 2024 that need attention in 2023. As a leader in IRA products and innovation, I’d like to share information on the law changes and outline system development and product work that needs to be done for IRA providers and accountholders to take advantage of these changes.
Increasing RMD Age
Prior to the passage of SECURE 2.0, accountholders had to begin taking annual required minimum distributions (RMDs) for the year in which they reached age 72. Starting in 2023, the RMD starting age increases to 73 for those who did not reach age 72 by the end of 2022. (The RMD age will increase to 75 in 2033.) Because SECURE 2.0 passed so late in 2022, many firms were not able to update their RMD software or RMD notices to accommodate the rule change before the notice due date of January 31, 2023. Many firms generate these notices with the annual statements in early January.
As a result of these inaccurate RMD notices, some accountholders who turn 72 in 2023 may have taken an RMD that isn’t required. Based on industry feedback, the IRS issued Notice 2023-23 to give financial institutions time, no later than April 28, 2023, to send corrected RMD notices. However, the IRS Notice did not give relief to accountholders who mistakenly took an RMD that wasn’t required. The only option to return the mistaken RMD to an IRA is to roll over the funds back into the IRA with 60 days. Note that this counts toward an accountholder’s one-per-12-months IRA rollover allowance.
SEP And SIMPLE Roth Contributions
The new law allows firms to offer a SEP and SIMPLE Roth Contribution type starting in 2023. While this is an interesting option for retirement savers, since it creates new IRA types, I believe firms are not ready yet to offer this provision. Questions remain regarding which documents or document amendments will be needed. (The IRS has yet to issue IRS 5304-SEP, 5304-SIMPLE, 5305-SEP, and 5305-SIMPLE forms that address document requirements.) In addition, recordkeeping systems need to be reprogrammed for these account types prior to accepting contributions and making distributions. Because of the uncertainty, I find it unlikely that SIMPLE Roth contributions will be available in 2023. However, since SEP IRAs are typically funded in the next calendar year near the tax-filing deadline, SEP Roth contributions may be available from many providers. The faster the IRS issues guidance, the quicker providers will be able to offer this valuable benefit. Employers are not required to offer this option to SEP and SIMPLE IRA participants, but if they do, they must obtain elections from the participants who want Roth contributions.
Automatic IRA Rollover Eligibility
Currently, if a former employee with a vested account balance under $5,000 fails to provide distribution instructions to the plan sponsor, the plan sponsor may establish an IRA for the benefit of that participant and roll over the account balance to that IRA. Beginning in 2024, SECURE 2.0 increases the automatic rollover cap to $7,000.
While this provision’s effective date is 8 months away, plan sponsors, retirement plan recordkeepers, IRA custodians and providers need to act now to be prepared. Retirement plan document providers may need to review plan documents to determine if a plan amendment to incorporate the new $7,000 limit is required for plan sponsors that choose to use the increased limit. Recordkeeping systems that process such rollovers need to be reprogrammed for the new dollar limit. Additionally, plan sponsors and IRA custodians, who typically sign one master document to authorize the establishment of automatic rollover IRA accounts for that plan’s participants, will need to review and possibly amend the agreement to make sure it covers the new $7,000 limit.
Rollover Of Excess 529 Assets To A Roth IRA
Beginning in 2024, the beneficiary of a 529 account will be eligible to roll over assets from that account to a Roth IRA if the account has been open for at least 15 years. Rollovers are limited to the Roth IRA contribution ceiling in effect for the year and are subject to a lifetime limit of $35,000. Note that contributions made in the previous five years are not eligible for rollover to an IRA. This provision not only solves the problem of what to do with excess assets in a 529 plan without incurring additional taxation, but it can also create a Roth IRA backdoor funding vehicle while minors do not have earned income or for 529 beneficiaries whose income exceeds the Roth IRA income cap. Firms offering IRAs and/or 529 plans will need to provide guidance to existing and prospective accountholders as well as marketing material to tout this new feature.
Currently, however, IRA and 529 plan recordkeeping systems do not include a 529-to-Roth IRA rollover option. Providers of IRAs and 529 plans may need to add additional programming to their systems and change distribution and rollover forms to properly record the distribution and the source of the rollover. 529 providers will be responsible for providing reports to IRA providers that receive the rollovers with information regarding the contributions, distributions, and earnings of the 529 account as of the date of the rollover. The IRS may require additional reporting for IRA custodians and accountholders to record the rollover distribution from the 529 plan, but that is yet unknown.
For advisors and providers, I advise that you carefully follow this legislation, looking for additional clarification from the regulators when needed. In many cases, specific final actions cannot be taken to address the advantages of this new law until further guidance is issued.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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