New retirement account rules will affect most and offer new benefits to a few

Amanda Lott, Head of Wealth Planning Strategy

Adam Ludman, Tax Advisory

Tom McGraw, Head of Tax Advisory

Jordan Sprechman, U.S. Wealth Advisory

President Biden has signed into law a $1.7 trillion “omnibus” bill that both funds the U.S. government through September 30, 2023 (the end of its fiscal year), and makes largely modest changes to rules governing retirement accounts.¹

Still, most taxpayers will be affected by the retirement account rule changes, a few of which are effective immediately (others will take effect in later years). Among the range of new benefits for different groups of taxpayers, there are several provisions that are available to high-earners.²

Also notable is the fact that the more dramatic changes proposed in the last few years were NOT adopted.

However, one of the most interesting tax provisions directly affecting individuals has nothing to do with retirement accounts: It essentially shuts down the “syndicated conservation easement” business that has been a thorn in the Internal Revenue Service’s side for years. But it does not impact legitimate conservation easements.

Retirement account changes in effect now

For clients of the Private Bank, the most prominent of the changes to retirement accounts that are now in force include:

• The Required Minimum Distribution (RMD) age has been increased from 72 years old to 73 for anyone born in the years 1951–59. If you are turning 72 in 2023, you now have one more year before having to begin taking distributions from your defined contribution plan (e.g., 401(k), Individual Retirement Account (IRA), etc.).
  
• Simplified Employee Pension (SEP) and Savings Incentive Plan Match for Employees (SIMPLE) IRAs can now be designated as Roth IRAs—allowing contributions to these accounts to be made with after-tax income.
  This is a significant change for those relatively few taxpayers in a position to make such contributions because the amounts that can be contributed to such accounts are significantly higher than those that can be contributed to traditional or Roth IRAs. For instance: The most a taxpayer under age 50 can contribute in 2023 to a traditional or Roth IRA is $6,500; to a SIMPLE IRA, $15,500; to a SEP IRA, up to $66,000.
  Taxpayers who contribute after-tax income to SEP IRAs or SIMPLE IRAs are now able to take what may be sizeable distributions from those accounts in later years free of income tax.
  
• Retirement plan participants can now elect to designate some (and perhaps all) of their employer’s matching contributions and non-elective contributions as taxable Roth contributions. Previously, regardless of whether employees designated all of their own contributions to their 401(k)s as Roth contributions, employer contributions always had to be pre-tax. 
  Employees now can direct greater sums into Roth accounts, trading the necessity of paying income tax on assets in retirement accounts sooner for the ability to take greater tax-free distributions later
  As the new law requires that the employer’s plan must allow employees to designate their contributions as being made to Roths, this provision likely will take some time to implement. Only employees who are fully vested in the contributions from the employer will be able to make this election.
  

• Taxpayers are now permitted to make, on a one-time basis, up to $50,000 of qualified charitable distributions (QCDs) to charitable remainder trusts or charitable gift annuities. Any taxpayer over the age of 70.5 with an IRA can take advantage of this provision. A QCD counts toward satisfying a taxpayer’s RMD.

• Taxpayers also can now create SEP IRA plans for their households’ employees. Doing so would offer a tax-advantaged way to provide competitive benefits to a house manager, nanny, housekeeper, etc., as the contribution limits for SEP IRAs are much higher than traditional or Roth IRAs, and are completely funded by the employer.
  
• The law enhances the usability of qualifying longevity annuity contracts (QLACs) (i.e., deferred annuity contracts) purchased with IRA or defined contribution plan funds, whose payments can commence as late as age 85.
  Before payments from the contract start, QLACs are generally exempt from the RMD rules. Previously, IRS rules limited the amount that could be used to purchase a QLAC to the lesser of 25% of an individual’s account balance or $145,000. This provision repeals the 25% limit and allows up to $200,000 to be used to purchase a QLAC.
  
• The penalty for failing to take an RMD on time (by December 31) is reduced from 50% to 25% or even 10%, depending on circumstances. To be clear, even though there is a lower penalty, it is never advisable to miss an RMD.
  

Retirement account changes to come

Noteworthy changes to retirement account rules that will go into effect later include: 

• The IRA “catch-up” limit will be indexed to inflation, starting January 1, 2024. Today, taxpayers ages 50 and older are able to contribute an extra $1,000, exactly, to their IRAs, for a total contribution limit of $7,500 instead of $6,500 for those under age 50. This provision will increase that $1,000 “catch-up” amount by inflation, in $100 increments.

• The $100,000 QCD limit will be indexed to inflation, starting January 1, 2024.

• Beneficiaries of “long-term” 529 accounts will be allowed to roll over up to $35,000 of an “overfunded” 529 account to a Roth IRA tax- and penalty-free, starting January 1, 2024. The 529 account must have been open for at least 15 years and rollovers will be subject to the annual Roth contribution limit (currently $6,500 for those under age 50). This change likely means that rollovers would take place over several years.

• Employees who earn more than $145,000 in wages will have to make their age-based catch-up contributions to Roth accounts, starting January 1, 2024. This means employees over the age 50 who “max out” their 401(k) contributions will have to pay taxes today on any amounts allowed beyond the standard contribution.

• Employees ages 60–63 will enjoy a higher “catch-up” contribution limit for 401(k), 403(b) and similar plans starting January 1, 2025. The limit, now $7,500, will increase to around $11,250. If the worker earns more than $145,000 in wages, all of this catch-up amount would be treated as a Roth contribution. 
  
• S corporation owners will enjoy some key tax-advantaged provisions that now apply to individual owners of private C corporations with Employee Stock Ownership Plans (ESOPs), starting with S corporation stock sales after December 31, 2027.
  S corporation owners will be able to defer gain from the sale of stock to an ESOP if sale proceeds are reinvested in Qualified Replacement Property (i.e., debt or equity of domestic operating companies), and the ESOP owns at least 30% of the outstanding stock after the sale.
  This amendment allows up to 10% of the gain realized on the sale of S corporation stock to an ESOP to qualify for these gain deferral provisions.
  
• The RMD age will be increased to 75, effective January 1, 2033. This applies for all individuals born after 1959.

Bigger proposed changes to retirement rules did not happen

Over the last several years, several high-profile proposals related to retirement accounts were considered by Congress but not enacted. This latest bill did NOT include:

• Limitations on the use of “back-door” Roth contributions (i.e., contributing to a traditional IRA and subsequently moving those monies into a Roth IRA).
  
• Limitations on who can do Roth conversions.
  
• Requirement of current distributions from Roth or traditional IRAs based simply on the account’s value (i.e., purging “mega IRAs”—those with assets over $10 million).
  
• Restrictions on IRAs from owning privately held investments (e.g., private placement offerings).
  
• Clarification on how “non-eligible designated beneficiaries” of inherited IRAs must apply the so-called 10-year rule when the decedent was already taking RMDs. That is to say: Are annual distributions required, or instead may the entire account be distributed on December 31 of year 10? The IRS is expected to issue guidance on this point in 2023.

Stronger restrictions severely curtailed syndicated conservation easements

Effective immediately, the omnibus law denies a charitable deduction, and expands penalties, for conveyances of syndicated partnership and other pass-through entity contributions of charitable easements on property values in excess of 2.5 times the taxpayer’s basis.

There are some exceptions, including one for family partnerships, and another for taxpayers’ contributions to partnership contributions at least three years prior to the conveyance.

Not adversely affected are individual taxpayers’ bona fide charitable contributions of easements that run in perpetuity, such as preserving non-commercial shore lines, or ranch or farm usage of land.

Virtually no other tax provisions directly affecting individual taxpayers are in the new law. 

We can help  

Check with your tax advisors, J.P. Morgan team and this Tax Hub for more information about how the new law might affect you and your family. But please keep in mind our advice that taxes should never be the primary driver of personal financial decisions; they should always be considered in the context of an individual’s overarching goals.

¹The law enacted on December 29, 2022, is formally known as the “Consolidated Appropriations Act, 2023.” The section affecting retirement accounts has been dubbed SECURE Act 2.0 because it serves as a follow-up to the SECURE Act, a retirement bill enacted in 2019.

²Several additional provisions were included in the law that would increase retirement savings opportunities for lower-income taxpayers, including permitting matching contributions on behalf of employees who are repaying student loans, requiring new retirement plans to include auto enrollment and auto escalation features, replacing the “Saver’s Credit” with the “Saver’s Match,” and creating in-plan emergency savings accounts, to name a few.