The Secure Act 2.0 was included in the Consolidated Appropriations Act of 2023 (H.R. 2617). It includes many changes that are intended to enhance and facilitate retirement benefits.

Since passage of the original Secure Act in 2019, both House and Senate Members have been working on further changes to encourage saving for retirement. The Secure Act 2.0 will increase the required minimum distribution age, allow a larger catch-up contribution limit, facilitate rolling some Section 529 plans into Roth IRAs and generally expand access to retirement plans for moderate and lower-income employees.

Senator Ron Wyden (D-OR) is Chair of the Senate Finance Committee. He stated, "Americans deserve dignified retirements after decades of hard work, and our bill is an important step forward."

Brian Graff, CEO of the American Retirement Association stated, "We are grateful to the many members of Congress and staff who worked tirelessly to get Secure 2.0 included in the omnibus legislation…This important legislation will enhance the retirement security of tens of millions of American workers – and for many of them, give them the opportunity for the first time to begin saving."

Paul Richman from the Insured Retirement Institute, noted, "Including Secure 2.0 retirement provisions in the last major legislation of the year means that Congress is poised to help millions more workers and retirees with significant improvements to the nation's private retirement system."

1. Required Minimum Distribution Age — Starting in 2023, the age for required minimum distributions (RMDs) will increase from 72 to 73. The RMD age will increase again in 2033 to age 75. Individuals who are currently taking RMDs will continue to take a distribution each year based on their age.

2. Catch-Up Contributions — Individuals who are age 50 and older are permitted to make an additional catch-up contribution. During 2023, the catch-up contribution for retirement plan participants over age 50 is $7,500. However, starting in 2025 individuals who are 60, 61, 62 or 63 will be permitted to make a larger catch-up contribution. The new amount will be the greater of $10,000 or 150% of the catch-up limit for that year, indexed for inflation.

3. Matching Contributions for Student Loan Payments — Many younger workers have substantial student loans and may not be able to make both their student loan payments and fund a retirement plan. Employers will be permitted to match the student loan payments with a contribution to a Section 401(k) or 403(b) retirement plan.

4. Roth 401(k) Plans Exempt from RMDs — The Roth IRA is currently exempted from distributions even if the owner has reached the normal RMD age. Starting in 2024, Roth 401(k) plans also will be exempted from RMDs. With no required distributions, Roth IRA and 401(k) plans will be permitted to increase in value during the life of the owner.

5. Required Minimum Distribution Penalty — The existing penalty for failing to take a required minimum distribution is 50%. Starting in 2023, this penalty will be reduced to 25%. If the plan participant corrects the failure in a timely manner, the excise tax on the penalty is reduced further to 10%.

6. Section 529 Plans Rollover to Roth IRAs — A Section 529 plan is frequently used for college savings. If the 529 plan is no longer required because the beneficiary has completed his or her education, then up to $35,000 of that plan may be rolled over into a Roth IRA for the benefit of that individual.

7. Qualified Charitable Distributions Enhanced — The IRA charitable rollover or qualified charitable distribution (QCD) limit of $100,000 for 2023 will be indexed for inflation starting in 2024. Individuals age 70½ or older are permitted to make distributions from their IRA directly to charity and avoid recognition of income. The act expands the QCD by allowing a one-time transfer of up to $50,000 to a charitable remainder annuity trust, a charitable remainder unitrust or an immediate charitable gift annuity.

8. Roth Catch-Up Contributions — Individuals age 50 and above are permitted to make a catch-up contribution to a retirement plan. Starting in 2024, individuals who have incomes over $145,000 will be required to transfer their catch-up contribution to a Roth IRA. This will require them to pay tax on the catch-up contribution, but the future distributions from the Roth account will be tax free.

Sen. Wyden concluded, "We are making significant progress for millions of low- and middle-income workers, who are far less likely to have retirement savings. These workers often have demanding, physical jobs, and depend solely on their Social Security income. For the first time, millions more workers would access resources for retirement and see federal retirement contributions year after year, even if they have no tax liability. These are reforms that will make a meaningful difference for workers who have struggled to save."

IRA to Charitable Gift Annuity Rollover in 2023

Section 307 of the Secure 2.0 Act allows a one-time rollover of $50,000 from an IRA to a life income plan. This provision amends Internal Revenue Code Section 408(d)(8) and creates a limited one-time IRA rollover into certain qualified life income plans. The qualified charitable distribution (QCD) of up to $50,000 into a life income plan is permitted on or after January 1, 2023.

The $50,000 IRA distribution may be to a charitable remainder annuity trust (CRAT), a standard payout charitable remainder unitrust (CRUT) or an immediate charitable gift annuity (CGA). A net income plus makeup unitrust (NIMCRUT) or a deferred payment gift annuity are not qualified charitable life income plans.

The remainder trust with the remainder interest of the life income plan must be distributed to a qualified nonprofit. For a charitable gift annuity, it must have a 5% or higher payout rate and be qualified under Section 501(m)(5)(B).

The payments from the CRT or CGA must either benefit the IRA owner, or the IRA owner and spouse. All payments from a charitable remainder trust will be ordinary income. Because there is no investment in the contract under Section 72(c), all payouts from a gift annuity will also be ordinary income.

The bill permits an inflation adjustment starting in 2024. The $100,000 limit for current IRA rollover gifts and the $50,000 one-time limit for gifts to a life income plan will be adjusted for inflation. The new numbers will be rounded to the nearest thousand dollars.

Editor's Note: This new one-time QCD option will be used primarily for IRA-to-gift annuity rollovers. It is unlikely that donors or trustees will fund or accept a $50,000 charitable remainder unitrust or annuity trust. At a future date, there may be an expanded rollover limit that enables IRA rollovers to charitable remainder trusts.

Syndicated Charitable Conservation Easement Limit

Section 605 of the Secure 2.0 Act limits the charitable deductions for gifts of charitable easements by syndicated partnerships. Senator Steve Daines (R-MT) has been the primary sponsor of bills that limit charitable conservation easement deductions for syndicated partnerships. Senator Ron Wyden (D-OR) and Senator Chuck Grassley (R-IA) have questioned the excessive amounts of certain charitable deductions by syndicated limited partnerships.

In numerous cases, the syndicated partnerships have purchased property, obtained appraisals based on highly aggressive assumptions that the property could be fully developed for residential or commercial purposes and provided investors with extremely large charitable deductions. Senator Grassley has opined that many appraisers have greatly overvalued the conservation easement's charitable deductions.

Section 605 creates a limit of 2.5 times a partner's relevant basis for the deduction under Section 170. There are specific and technical provisions designed to clarify the amount of the basis. The "modified basis" is the basis before the contribution, without regard to Section 752, and taking into account additional provisions as promulgated by the Secretary of the Treasury.

The 2.5 limit applies to gifts made within three (3) years of the contribution by the partner to the partnerships. There are various technical provisions designed to reduce the ability of partnerships to avoid the three-year rule.

There are exceptions for family partnerships and certified historic structures. A partnership owned by an individual and spouse or by other members of the family under Section 152(d)(2) is excluded from the limit. Generally, the family may include parents, siblings, children, grandchildren and their spouses.

The limits also apply to Subchapter S Corporations and similar entities. The accuracy-related penalties under Section 6662(b) are amended. There is no "reasonable cause" exception for gross valuation misstatements.

These provisions limiting charitable deductions for syndicated partnerships will apply to contributions made after the date of enactment.

Editor's Note: Several land conservation nonprofits supported the new limits on charitable deductions by syndicated partnerships. Section 605 also requires the IRS to publish safe harbor text for extinguishment clauses and boundary line adjustments within 90 days of enactment.

Applicable Federal Rate of 4.6% for January — Rev. Rul. 2023-1; 2023-2 IRB 1 (15 December 2022)

The IRS has announced the Applicable Federal Rate (AFR) for January of 2023. The AFR under Section 7520 for the month of January is 4.6%. The rates for December of 5.2% or November of 4.8% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2023, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.