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Secure Act 2.0 Update - Tax Saving Tips to Consider Now

3 minute read 

On July 17, 2023, the IRS issued Notice 2023-54 (“the Notice”) which updated guidance for most non-spouse beneficiaries that inherited an IRA after December 31, 2022, and provided special rollover relief for taxpayers that mistakenly took an IRA distribution at age 72. The Notice was in response largely to the confusion created by the IRS over law changes contained within the SECURE Act 2.0 legislation. The updated guidance is described below with some accompanying tips to consider in your overall planning.

Tip #1 – Waiver of Inherited IRA Distributions for Certain Beneficiaries

Under the SECURE Act 2.0 legislation (passed December 29, 2022) beneficiaries were required to empty their inherited IRAs by December 31st of the 10th year after the year in which the death of the owner occurred. And, if the IRA owner died after their Required Beginning Date (“RBD”), then annual lifetime distributions [1] to beneficiaries were also required (prior to the remainder being distributed at the end of the 10th year). Due to the confusion created by the IRS over whether distributions were actually required during years #1 through #9, the Notice has given inherited IRA beneficiaries a waiver on taking distributions for 2023. Although a distribution is not required this year, consideration should be given to taking a distribution anyway. There may be tax advantages to taking a distribution during the year versus waiting to take a more substantial distribution in the tenth year that may push your taxable income into a higher bracket. This consideration should also be given to inherited IRAs where lifetime annual distributions are not required (i.e., Inherited IRAs where the owner died before their RBD). Remember, income tax rates are increasing after 2025. 

Tip #2 – Special Rollover Deadline

The Notice also extended a special rollover deadline for taxpayers that turned 72 in 2023. Taxpayers turning 72 that mistakenly took a distribution between January 1, 2023 and July 31, 2023 have until September 30, 2023 to return that distribution to their IRA and avoid taxation. Because SECURE Act 2.0 was enacted so late in the year, taxpayers turning 72 may have taken a distribution before they were aware the new Required Minimum Distribution (“RMD”) beginning age was now 73! For taxpayers that turned 72 in 2023, their first RMD would actually not be required until April 1st, 2025. Make sure to work with your advisors to return any unwanted distribution to your IRA by the September 30th deadline.

Tip #3 - Inherited ROTH IRA Beneficiaries Not Impacted

Since ROTH IRAs do not have RMD requirements, beneficiaries of these accounts are not impacted by the Notice. Of course, SECURE Act 2.0 did require that non-eligible beneficiaries (i.e., most beneficiaries other than a spouse) must distribute the full ROTH IRA balance by the 10th year as described above. Since the growth of these funds and their distributions are tax free, keeping the funds in these accounts for as long as possible would seem preferable. On the other hand, if you need cash flow and are trying to manage your Adjusted Gross Income levels to avoid incurring Medicare premium surcharges, net investment income taxes, etc., then combining tax free ROTH IRA and taxable IRA distributions may have the benefit of better managing your overall tax situation.

[1] Distributions calculated based upon the beneficiary’s own single life expectancy under the Uniform Lifetime Table and then subtracting by one year for each year thereafter.

If you have any questions about these changes or how to incorporate them into your planning, please do not hesitate to contact your Relationship Manager.

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Roger S. Stinnett, CPA/PFS, CFP®, CIMA®, Managing Director of Wealth Planning
About the Author
Roger S. Stinnett, CPA/PFS, CFP®, CIMA®, Managing Director of Wealth Planning