Secure Act 2.01
This post provides additional details about Secure Act 2.0 that was not covered in the original post.
In our previous post on the Secure Act we had covered most of the major details regarding the new law. However, there are some additional details that we will cover in this post.
Penalties related to not taking the required annual minimum distribution is now reduced from 50% to 25% and it will reduce it even further if it is corrected within a certain period of time. This period is before the IRS mails a notice to the taxpayer; before the 25% excise tax is assessed; and before the end of three years after the missed RMD. You typically will still prepare the waiver letter to ask for relief from any penalty. The IRS under previous rules generally waived the penalty. Will they now be more likely not to waive it since the penalty is lower and you have the ability to timely correct it. We don’t know.
If an IRA ends up doing a prohibited transaction, instead of making all of your IRAs immediately taxable, you can now segregate your self-directed IRA to only contain any investments that might create some type of prohibited transaction.
We had mentioned a one-time $50,000 into a charitable remainder trust. You can also donate this to a charitable gift annuity which makes a lot more sense for than a CRT.
If you make an excess contribution to your IRA, you have a 6% penalty each year until you correct it and typically there is no statute of limitations on these penalties since you have not filed the appropriate tax return (Form 5329). Secure 2.0 now changes this to a three-year statute if you are not required to file a return and a six-year statute if you filed a return.
Qualified Longevity Annuity Contract were limited to the lesser of 25% of retirement funds or $145,000. Secure 2.0 eliminates the 25% limitation and increases the limit up to $200,000. This applies to each taxpayer, so a husband and wife could contribute up to $400,000 into a QLAC (assuming each had $200,000 in the IRA).
If an employee makes a catch-up contribution to a 401(k) or other related plan and their income is over $145,000, the contribution must be a ROTH. This eliminates deductible contributions for these contributions.
If there is a federally declared disaster area, you are allowed to take up to $22,000 out of your retirement plan without paying a penalty and then report the income over three years. You can also elect to pay the tax in the year of distribution. You can also borrow up to $100,000 from a plan instead of the current $50,000 limit.
We will continue to review the Act and will update as appropriate.
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