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            Having just adjusted to the Setting Every Community Up for Retirement Enhancement (SECURE) Act [1] and its significant changes to retirement accounts, estate planners and clients alike had concerns when an updated version of the Act was adopted a mere three years later.   The updated Act, aptly named SECURE 2.0, became law as part of the Consolidated Appropriations Act, 2023 [2].

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            Some of the biggest changes brought about by the original SECURE Act for estate planners and their clients involved required minimum distributions (RMDs).  First, SECURE increased the beginning age for RMDs to 72 (originally 70 ½).  Next, SECURE eliminated the “stretch” for inherited retirement accounts.  Prior to SECURE, when a beneficiary inherited a retirement account, the taxable distributions could be “stretched” over the beneficiary’s life expectancy.  Post-SECURE, for most beneficiaries, except for “eligible designated beneficiaries” [3], the balance of the account must be withdrawn within 10 years of the retirement account owner’s death. 

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            With SECURE 2.0, the changes (at least from an estate planning perspective) are largely positive.  Here is an overview of the most important changes for estate planners to share with their clients:

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1. Clarification on RMD’s. While SECURE brought about the 10-year rule, it did not clarify whether beneficiaries had to take a distribution each year, or just withdraw the balance by year 10.  SECURE 2.0 makes clear that required distributions must be taken each year and the entire balance must be withdrawn by year 10.

2. Increased age for RMDs.  SECURE 2.0 increases the age for RMDs to 73 (for anyone turning 73 after 12/31/22).  In 2033, the age will be increased even further to 75.

3. Decreased Penalties.  Pre-SECURE 2.0, there was an excise tax of 50% due to failure to receive an RMD.  This amount has been decreased to 25% and there may be circumstances where the excise tax is lowered to 10%[4].

4. Special Needs Trusts With Charitable Beneficiaries Qualify.  Prior to SECURE 2.0, a special needs trust with a charitable organization as remainder beneficiary, which was named as a beneficiary of a retirement account, would not qualify as an “eligible designated beneficiary” (even though a disabled individual would be considered eligible if the sole beneficiary of the trust or a named beneficiary), and therefore the balance would need to be withdrawn within 10 years.  Post-SECURE 2.0, the trust will still be considered an eligible designated beneficiary, even with a charitable organization as a remainder beneficiary, and the balance will not have to be withdrawn within 10 years.

5. Unused 529 Plans Have New Life. Starting in 2024, 529 plans which were established at least 15 years prior, may be rolled into a Roth IRA, established for the beneficiary of the 529 plan, without penalty.  There is a lifetime cap of $35,000 and an annual contribution limit (currently $6,500).

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[1] The SECURE Act was signed into law by President Donald Trump on December 20, 2019.

[2] SECURE 2.0 was signed into law by President Joseph Biden on December 29, 2022.

[3] Eligible designated beneficiaries include spouses, minor children, or disabled beneficiaries.

[4] The excise tax may be lowered to 10% when the failure is corrected by the end of the second taxable year after the RMD should have been made.