Secure Act 2.0 Flashcards
2023 provisions
- RMD age is raised to 73 for years 2023-2032. RMD age is 75 for 2033+
- RMD penalties are lowered from 50% to 25% or 10% if RMD is taken by end of second year it was due
- plans can allow ER matching contributions on a Roth basis
- SIMPLE and SEP IRA can now offer roth options
- QLACs may have up to 200k invested and 25% limit is eliminated
- additional 10% penalty exceptions added
- QCD indexed for inflation and one time 50k allowed to a CRAT or charitable gift annuity
2024 provisions
- IRA catch up of 1k is indexed for inflation
- catch up over 145k must be roth contributions (now 2026)
- established starter 401k plans
- student loan payments eligible for employer matching contributions
- roth 401k, 403b, and 457 RMD eliminated
- conversion from 529 to roth allowed up to 35k ( plan must exist for 15 yrs and amount converted must be less than amount contributed and ira limit for the year) (money added in last 5 years cant be converted)
- emergency savings accounts can be created within retirement plans
Premature distributions
- in service distributions can be allowed for 3 situations
1. attainment of specific age or years of service
2. hardship
3. attainment of 62 for DB plans
Attainment of specific age or years of service
- must occur after normal retirement age (MMP)
- after 59 1/2 (401k deferrals)
Hardship
- any age in any PSP
1. financial needs test (immediate heavy financial need)
2. resources test (amount withdrawn cannot exceed amount needed to satisfy need and participant can no other sources to satisfy need)
Pension protection act (PPA) in service withdrawal
- allows in service distributions as early as 62 from DB plans
- distribution will be treated as retirement income
Hardship withdrawals from profit sharing and stock bonus plans
- wont include unvested amount
- subject to ordinary income tax and 10% early withdrawal penalty
- 10% wont apply if 59 1/2 or disabled
- safe harbor distributions
1. medical expenses
2. tuition, room, board, edu expense for 12 mo
3. principal residence purchase
4. prevent eviction or foreclosure
5. funeral expenses
6. damage to principal residence
7. cannot be in excess of immediate need - cannot force a loan
- cannot limit deferrals after hardship
Penalties and requirements that apply to qualified plans and TSA distributions
- 10% penalty
Exceptions
- exceptions to 10% penalty for early distributions (before 59 1/2)
1. death
2. disability
3. equal periodic payments following separation of service
4. separate from service 55+
5. due to QDRO
6. medical expenses in excess 7.5% AGI
7. 5k for birth/adoption
8. federally declared disaster (limited)
Substantially equal payments
must meet all
- paid at least annually
- without changing amounts for longer of 5 yrs or until 59 1/2
- based upon life expectancy
- based upon reasonable rate of interest
- based on reasonable mortality assumption
No modification of substantially equal payments
- once payments begin they may not increase, decrease, or change prior to 59 1/2 or 5 yrs if longer
- if payments modified in any way, 10% tax applies to all payments received before 59 1/2
- exception: one time change allowed from annuity/amortization method to RMD method (used to reduce payments and tax)
Annuity distribution options
- Life annuity: payments for participants life
- Joint and survivor: payments to participant for life, at death beneficiary receives percentage for their life
- Life annuity with guaranteed payments: payments made for longer of life or some guaranteed period
- Annuity certain: specified amount monthly paid
- Lump sum: may be available
Qualified joint and survivor annuity (QJSA)
- post retirement DB for participants spouse
- qualified pension plans are required to provide QJSA option
- survivorship annuity must not be less than 50% or greater than 100% payable during joint lives
Qualified optional survivor annuity (QOSA)
- PPA requires second QJSA option called QOSA
- minimum QOSA must be 50% joint and survivor annuity
- can elect out only with written spousal consent during 180 day period before start
Qualified preretirement survivor annuity (QPSA)
- preretirement DB for spouse upon death of participant before QJSA start date
- must not be less than what wouldve been paid under QJSA
Rollovers
- used to consolidate for easier management, lower fees, better investment options
- qualified plan to qualified plan or IRA
- QDRO to IRA or qualified plan
- surviving bene to IRA or qualified plan
- 403b to qualified plan or IRA
- SIMPLE IRA to retirement plan after 2 yrs
- SIMPLE IRA to SIMPLE IRA if less than 2 yrs
- after tax contribs from qualified plan to traditional IRA or second DC account
- pretax contrib from IRA to qualified plan
- 457 to qualified plan or IRA
- 457 to 457 (nongov only)
- hardship cannot be rolled into another qualified plan
SIMPLE IRA rollover
- 403b, 457, qualified plan to SIMPLE
- receiving SIMPLE has to be established for 2 yrs
- SIMPLE to qualified and IRA only if existing for 2 yrs
IRA 60 day rule
- IRA owner can withdrawal part of balance and reinvest in within 60 days in another IRA
- only once each year per taxpayer (not per IRA)
Direct transfer vs direct distribution
Direct distribution
- if participant receives direct distribution, plan must withhold 20%
- check made payable to participant
- 20% paid to IRS
- tax deferred if made to another qualified plan or IRA within 60 days
Direct transfer
- no 20% withholding
- funds directly go to qualified plan or rollover
- check not made out to them
Conduit IRA
- accounts received from ER qualified plan may later be moved to another qualified plan by using conduit IRA
- ## holds the funds from qualified plan to be transferred to new qualified plan
Required minimum distributions (RMD)
- ER retirement plan, traditional IRA, SEP, SIMPLE IRA
- owners and participants
- when reached required begin date (RBD)
Required begin date (RBD)
IRAs, SEPs, SARSEPs, SIMPLEs
- april 1 of year following the year in which individual turned 73
- dec 31 year after
qualified plans (401k), 457, 403b
- still working and not 5% owner can delay RBD until april 1 the year following retirement
- more than 5% owner must take at 73 but can also still contribute
RMD calculations
- previous yr ending balance / life expectancy number
Uniform Lifetime table
- over 10 yrs apart use regular joint life expectancy table
Exception for joint life distributions
- sole beneficiary is employees spouse and spouse is more than 10 years younger
- permitted to elect longer period
RMD penalties
- 25% tax for amount short of RMD
- 10% tax if RMD is taken by end of second year following when it was due
Qualified charitable distribution (QCD)
- direct transfer from IRA to qualified charity
- 70 1/2 only
- up to 100k per year
- satisfys RMD without having to be taxed
- no charitable deduction is allowed
Owner dies before RBD
Spouse only beneficiary
- rollover assets to own IRA and take distributions based on own RBD
- keep assets in owners IRA and start distributions when owner would have been 73
Nonspouse beneficiaries
- take distributions within 10 years (stretch eliminated)
Owner dies beyond RBD
Spouse only beneficiary
- rollover assets to own IRA and take distributions based on own RBD
- keep assets in owners IRA and start distributions based on longer of
1. spouses life expectancy
2. no beneficiaries
Nonspouse beneficiaries
- stretch eliminated
- required to liquidate account within 10 years
exceptions - spouse
- person less than 10 years younger
- minor child
- disabled person
- chronically ill person
Spousal beneficiaries
- in year of death, RMD is zero
- rollover assets to own or keep in deceased IRA
- can rollover within 60days to own IRA if not an RMD
Owner dies with no specified beneficiary
- in year of death RMD calculated based on uniform lifetime table
- in years after death (before 73) 5 year rule applies
Eligible designated beneficiaries (EDB)
- inherited IRA: entire balance of account be distributed within 10 yrs
- EDB : 5 exceptions to this rule
1. owners surviving spouse
2. child less than 18 ( at 18 rule goes into effect)
3. disabled (use own life expectancy)
4. chronically ill
5. less than 10 years younger
Pension Protection Act of 2006
- all non spouse beneficiary may transfer 401k, 403b, 457 (gov only) to IRA and withdrawal over 10 years
- transfer to inherited ira to defer taxes
Retiring early
- between 55 and 59 1/2 : can withdrawal from 401k without 10% penalty (not IRA)
Qualified domestic relations orders (QDRO)
- retirement benefits cannot be assigned, alienated, garnished
- 2 exceptions
1. IRS may attach qualified plans to collect federal taxes
2. QDRO
Distributions due to QDRO
- if participant has no immediate right to cash payments from plan then QDRO cant require payment to divorcee
- QDRO can require assets be segregated for benefit of spouse with cash at earliest time allowed
Special penalty waiver rule for public service employees
- 10% early withdrawal waived if distribution from qualified plan (not IRA) is made to certain employees after separation of service at age 55 or older
- distributions from gov plans for public safety employees is available at 50 penalty free
- law enforcement, customs and border patrol, firefighters
Tax management techniques - distributions
- ordinary tax (except NUA)
- under certain age : 10% penalty
techniques
1. substantial equal payments (avoid 10%)
2. spread distributions out (lower bracket years)
3. use after tax investments for retirement
Net unrealized appreciation (NUA)
- difference between employer cost basis and market value at lump sum distribution to employee
- no subject to taxation until employee sells stock
- taxed long term regardless of holding period
- if stock appreciates after distribution, gain taxed at capital gain if held long term
