The recently passed $1.7 trillion dollar spending bill, the Consolidated Appropriations Act of 2023, contains numerous changes to retirement plans that apply to the currently employed, retirees, and business owners. I will not attempt to provide significant detail, but will provide some bullet points on items I found interesting and relevant to many of you. An excellent, highly detailed read can be found here. If I didn't have Jeff's excellent piece, this blog isn't happening.
Sometimes what isn't in the bill is as interesting, and the backdoor Roth survives. An excellent article on backdoor Roths is here.
The age for qualifying charitable distributions from retirement accounts (70.5) did not change. The ability to invest in privately held companies in IRAs remains as well, which is one of the main ways IRAs can grow to astronomical amounts that Congress has previously expressed an interest in eliminating.
The bad thing they didn't address is the 10 year rule created by the original SECURE Act that must be implemented by non-eligible designated beneficiaries.
RMD Age Pushed Back
RMDs are required minimum distributions that are required to take from retirement accounts. These increase your taxable income and tax bill and when the funds are not necessary for life, avoiding the RMD is a good thing. The RMD age has been pushed back, but not in a one size fits all way as it has been in the past.
For those born in 1950 or earlier, the age RMDs begin is 72, but for those who turned 70.5 before 2020, it is unchanged.
For those born between 1951-1959, the age is 73.
For those born in 1960 and beyond, the age is 75.
529 plan rollovers to Roth
Beginning in 2024, some individuals can move 529 money into Roth IRAs. The Roth must be in the name of the 529 plan beneficiary, the 529 must have been maintained at least 15 years, and contributions made in the prior 5 years cannot be transferred to the Roth, the limit on what can be moved during a year is equal to the IRA contribution limit for the year less any IRA contributions made by the taxpayer, and the maximum amount that can be moved in one’s lifetime is $35k. This would be good if a 529 plan was overfunded. For higher income taxpayers, this could be a good way to fund a child or grandchild’s retirement. Loading up a 529 in the first year of the child’s life would allow the 16-year-old child to have a $35k Roth IRA which could presumably grow a lot between age 16 and when they pass away.
Employer matching on student loan payments
Beginning in 2024, employers can amend plans to allow for matching for amounts paid by participants toward student debt. Vesting and matching schedules must match amounts for retirement plans. Employers with a younger, college educated group of employees may find this as a good way to attract talent.
New options for spouses taking over deceased spouse accounts
Beginning in 2024, spouses have a new option for how to take over their deceased spouse’s retirement account. They can be treated as the deceased spouse, which could alter the RMD amounts taken in future years. This would allows RMDs for the surviving spouse to be delayed until the deceased spouse would have reached the RMD age, the surviving spouse can use a more favorable uniform lifetime table rather than the single lifetime table, and if the surviving spouse dies before RMDs begin, the surviving spouse’s beneficiaries will be treated as though they were the original beneficiaries of the account, which would allow the stretch of distributions based on their life expectancy instead of the 10 year rule that currently applies to non-spouse beneficiaries.
Changes to catch up contributions
Catch up contributions are allowed when an employee reaches the age of 50. Current law allows those age 50 or above to add $6,500 to employer plans and $1,000 to IRA limits.
· Catch up contributions to IRAs (have been a flat $1,000 since 2006) will be indexed for inflation
· Beginning in 2025, people age 60-63 will have their catch up contributions increased to the greater of $10k (indexed for inflation) or 150% of the regular catch up contribution limit.
· High earners (over $145k, which will be adjusted for inflation) will be required to use Roth option for catch up contributions to employer retirement plans (the additional amounts allowed once you reach 50 years old). These rules get complicated quickly, but the gist is to prevent high earners from achieving additional tax deductions today for retirement contributions. There should be a lot more guidance to come on this.
Retirement Plan Start Up Tax Credit
For businesses with 50 or fewer employees, the retirement plan start up credit will be allowed for up to 100% of plan start up costs subject to existing limits maxing out at $5,000 for employers with 20 or more non-highly compensated employees. More information for employers considering adopting a retirement plan can be found here.
Employers can offer Roth matching to employees
Currently when employers make matching contributions to employee retirement accounts, the income is tax deferred and becomes held in an account which will eventually be taxable income when pulled out. Employers will be able to offer Roth matching, which would create current taxable income for the employee today and be in an account that can be distributed tax free during retirement. This seems administratively challenging, but valuable for taxpayers in lower rate brackets.
QCD limit adjusted for inflation
The $100,000 annual limit has been in place since this provision was created and beginning in 2024, it will be adjusted for inflation.
Solo 401(k) plans can be created after year-end
To parity the treatment of SEPs, a solo 401(k) plan can be created after year-end, but before the due date of the tax return of the sole proprietor, including extensions
New 10% penalty exceptions
There are new penalty exception categories for certain types of workers, victims of domestic abuse, and those with a terminal illness.
An excellent chart of relevant dates of certain changes, also from Kitces, can be found here.