Important Retirement Updates – SECURE 2.0 Final Regulations

Retirement planning continues to evolve over the years and 2025 is no exception. 

As you continue to plan and manage for your retirement, it is important to know the significant changes in the automatic enrollment for 401(k) and 403(b) plans, how the final regulations of the SECURE 2.0 Act have affected Required Minimum Distributions, as well as other rulings related to retirement plans.


AUTOMATIC ENROLLMENT FOR 401(k) & 403(b) PLANS
Perhaps one of the most significant provisions effective in 2025 is the required inclusion of an automatic enrollment feature for 401(k) and 403(b) plans. The auto enroll feature is required unless:

• Plan was established (i.e., signed) on or before December 29, 2022;
• Employer normally employs 10 or less employees;
• Employer in existence for fewer than three years; or
• Plan is a SIMPLE, governmental or church plan.
  
  

These plans must have an initial deferral rate between 3% and 10% of pay with required annual escalation until the deferral rate reaches between 10% and 15% of pay. 

REQUIRED MINIMUM DISTRIBUTIONS

You Will Be Required to Take Your Required Minimum Distributions in 2025
If you are 73 this year, you will be required to take your RMD this year. SECURE 2.0 pushed the starting age back from 70 ½ to 72 but gave individuals who turned 72 in 2023 some flexibility, allowing them to wait until April 1, 2025. Bear in mind that those who deferred taking their RMD will need to report two taxable distributions in 2025.

Roth 401(k)s and 403(b)s No Longer Have Required Minimum Distributions (RMD)
In a rule change for 2024, account holders with Roth accounts in an employer-sponsored plan no longer need to take RMDs on those accounts. This change allows participants to maintain their Roth 401(k) or 403(b) plans without needing to roll them over to Roth IRAs.

Roth Conversions Require All IRA RMDs To Be Satisfied First
This rule was confirmed in the 2024 final SECURE Act regulations, released this past July 2024. If a person has multiple IRAs, the total aggregated IRA required minimum distribution (RMD) must be withdrawn before any Roth IRA conversion (or 60-day rollover) can be completed. [This does NOT include RMDs from work plans like a 401(k).]

Rules Around Inherited IRAs
The rules around Inherited IRAs can seem overwhelming and confusing. However, the following guide may be helpful in determining what type of IRA beneficiary you are considered and how it affects your RMDs.

• Is the IRA beneficiary an eligible designated beneficiary (EDB), a non-eligible designated beneficiary (NEDB) or a non-designated beneficiary (NDB)?
   
  • EDB is a Surviving Spouse of the IRA owner; a minor child (under age 21) of the IRA owner; a chronically-ill or disabled person; or someone not more than 10 years younger than the IRA owner.
  • NEDB is an individual beneficiary who does not qualify as an EDB.
  • NDB is a beneficiary who isn’t a person (e.g., an estate, a charity or certain trusts).
• Did the original IRA owner die BEFORE their required beginning date for RMDs? 
  (Required beginning date is April 1st of the following year the IRA owner turned 73 years old.)
  
  
  • EDBs – A surviving spouse may treat the Inherited IRA as their own. 
    A non-spouse EDB can elect to stretch RMDs over their life expectancy, or have the 10-year payment rule apply. If the 10-year rule is elected, the entire account must be emptied by 12/31 of the 10th year following the year of death. However, no annual RMDs are required during the 10-year period. 
  • NEDBs – The 10-year rule applies, but no annual RMDs are required.
  • NDBs – The 5-year rule applies. So, the entire account must be emptied by 12/31 of the 5th year following the year of death, but no annual RMDs are required during the 5-year period.
• Did the original IRA owner die AFTER their required beginning date for RMDs? 
  (Required beginning date is April 1st of the following year the IRA owner turned 73 years old.)
  
  
  
  • EDBs – Stretch RMDs apply. But if the EDB is older than the deceased IRA owner, the EDB can use the deceased person’s older life expectancy in calculating RMDs. (However, the inherited IRA must be emptied when EDB’s life expectancy runs out.) 
  • NEDBs – The IRS proposed regs say that both the 10-year rule applies and annual RMDs during the 10-year period are required. However, because of widespread confusion, the IRS has waived the annual RMD requirement for 2021, 2022, 2023 and 2024 in this situation. 
  • NDBs – Annual RMDs must continue over the deceased IRA owner’s remaining single life expectancy had he lived (the “ghost rule”). 

For a refresher on Required Minimum Distributions, please refer to our published newsletter in 2024, Understanding Required Minimum Distributions.

OTHER NOTABLE RULINGS OF 2024

• The trustee of a trust, which is the IRA beneficiary, no longer must give the IRA custodian a copy of the trust or information about the beneficiaries by October 31 of the year following death.
• Final SECURE Act regulations liberalize the definition of disabled, which may provide an easier path to qualifying for stretch IRAs for some EDBs.
• For RMD shortfalls, the statute of limitations has increased from two to three years, beginning when the taxpayer files a Form 1040 income tax return for the relevant year, but this does not apply in cases of a false or fraudulent return with the intent to evade tax. 
• The SECURE 2.0 Act’s emergency exception to the 10% penalty is not retroactive, so it does apply to distributions before the law’s effectiveness, beginning in 2024. (Caren Kohl v. Commissioner, T.C. Summ. Op. 4/25/2024)
• The first-time homebuyer exception from the 10% additional tax does not apply if the taxpayer cannot show that the withdrawal was from an IRA. (Edward George Shlikas v. Commissioner, Tax Court Summary Opinion 2024-10, 6/10/2024)
• The 60-day rollover deadline may be extended if the delay was due to a fraud scheme. (PLRs: 202441015; 2024300140)

At First American Trust, we provide personalized service when administering retirement plans. We work closely with you to identify your investment objectives and appropriate risk tolerance to help grow and preserve your retirement assets. If you are planning for retirement and would benefit from financial planning, we can help you put a strategy in place and review it on a regular basis. In addition, we monitor and track your plan to help you reach your goal of an ideal retirement. 

We are here to support you in your retirement planning and are available to answer general questions, or those specific to your plans. 

Author:

Henry Tanaka, CTFA, ChSNC®, NQPC™ Vice President, Senior Relationship Manager, Manager of Retirement Plan Services First American Trust

Henry brings 20 years of experience in financial services to his role as Senior Relationship Manager and Manager of Retirement Plan Services.

In his dual role, he acts as a trust officer for high-net-worth families and manages retirement plans for corporations and business owners, which include the administration of Rabbi Trusts. He is part of a team that collaborates with families and institutions to help preserve, protect and grow their wealth.

The following article is for informational purposes only and is not and may not be construed as legal, tax and/or investment advice. Investments contain risks, no third-party entity may rely upon anything contained herein when making legal, tax and/or investment determinations regarding its practices, and such third party should consult with an attorney, tax advisor and/or an investment professional prior to embarking upon any specific course of action.

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