SECURE Act 2.0, passed by Congress and signed into law by President Biden in December 2022, may have an impact on your retirement savings and income strategy. Jennifer and Mike sit down to explore the most important aspects of the new legislation, including new RMD starting age, new catch-up contribution limits, 529 rollovers, and more.
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Video Transcript – SECURE Act 2.0
JENNIFER
Well, it’s been a while since we’ve done a video, so we’re excited to hopefully start doing this on a more routine basis again, and it’s nice to be back. Although, it feels a little awkward just because it’s been a while.
MIKE
I’m pretty sure the last video that we did we also said, “We’re hopefully going to start doing this on a more regular basis.”
JENNIFER
Hopefully we mean it this time.
MIKE
Hopefully we mean it this time, yes.
JENNIFER
We’ll see. But it is fun to do because we get to explain current topics and sometimes just educational things, but it is fun to do this and just feel like we’re kind of — it’s more personal, I guess, than writing.
MIKE
Yeah.
Changes to the SECURE Act
JENNIFER
But the thing we wanted to talk about today is, there was a major law change right at the end of December. Congress actually did get something passed, some legislation passed. It’s being referred to as the SECURE Act 2.0.
MIKE
Right.
JENNIFER
And if you may recall, the original SECURE Act was passed late in 2019, effective for 2020, and it made some changes to IRAs and various other things. Now, this builds on those prior laws on various topics, so we’re going to go through the highlights with them. There are more nuances.
MIKE
Yeah. We heard, I don’t remember the exact numbers, but one of the IRA professionals that we get a lot of our training and information from, he laid out the numbers on the SECURE Act 1.0. He said it was something like 12 changes to the tax code and then this one, it’s like 140 or something.
JENNIFER
Yeah
MIKE
There’s a lot more.
JENNIFER
So, sit back, eat popcorn.
MIKE
Yeah. So, hopefully…
JENNIFER
In a couple hours, we’ll be… no.
MIKE
One thing that was interesting with this one is, it seemed like very few of them seem to affect lots of people.
JENNIFER
Yes. There’s a lot of very —
MIKE
So, there’s a lot of small things.
JENNIFER
— niche sort of things. Yea. But we’re going to cover the big ones or the things we think most apply to our clients and other people that we work with.
MIKE
Yeah.
JENNIFER
So, yeah. So, the first big one was…
SECURE Act 2.0 – RMD Age Change
MIKE
Yeah. So, the first the first big one, which is also a part of SECURE Act 1.0, we’ll call it, was the change of the RMD age. When the first SECURE Act came out, it pushed that back from 70 and 1/2 to 73, and the SECURE Act 2.0 is now pushing — excuse me — to 72, and the new one is pushing that age 72 to 73, and eventually 75. So ,they’ve kind of already put into place those changes. We found, I think, the easiest way to think about it. So, if you’re watching this and you are or you know somebody that was born prior to 1951, they’re not affected by this change from the SECURE Act 2.0. Born in 1951, or between, I guess, 1951 and 1959, your RMD age is shifting to age 73. So, there were clients going into this year that were going to have to take their first RMD and they no longer have to.
JENNIFER
Yeah.
MIKE
It was actually an interesting or a fun fact that nobody is taking their first RMD in 2023.
JENNIFER
Yeah. That was fun.
MIKE
That that’s not the case for anybody.
JENNIFER
Yeah
MIKE
So, anybody born 1951 to ’59, your new RMD age will start, or your first RMD age will start at age 73, and then 1960 and beyond, so if you are younger than or were born in 1960 or later, your age will be age 75 until the next change comes.
JENNIFER
Yeah
MIKE
And then we’ll see.
JENNIFER
We’ll see.
MIKE
But for now, we’re assuming that anybody born 1960 or after will have an RMD age starting age 75.
JENNIFER
Yeah. And to be clear, an RMD is required minimum distribution that you’re required to take from your IRA and your 401k, if you still have a 401k plan, and it’s the way for the government and for you to get all those dollars you put in pre-tax, now you’ve got to start paying taxes on them. So, it does give you a little more time for tax planning by that and just a little bit bigger planning window, really.
MIKE
Yeah.
JENNIFER
Yeah.
MIKE
That’s one of the one of the more fun tax planning opportunities we have is when a client stops working, they no longer have employment income, and they haven’t reached that Required Minimum Distribution age, so they don’t have to start taking money out of IRAs, we could be flexible with those, with kind of tax planning and have a little bit of control there.
JENNIFER
It does provide an opportunity.
MIKE
Yeah.
JENNIFER
For sure. Yeah. And we should also mention that we have several clients who take QCDs, which are Qualified Charitable Distributions out of your IRA. That age has not changed. It’s still age 70 and ½. We hadn’t really planned to go into detail about QCDs, but they can be a really great way also to manage your taxes, because you can get money into charity without it ever hitting your tax return. So, if you don’t if you take the standard deduction especially, it’s very valuable to you and you’re charitably-inclined.
SECURE Act 2.0 – Employer-Sponsored Plans
JENNIFER
Another big change was with employer-sponsored plans. There’s a few changes there. One is, in 2025, the normal catch-up provision is If you’re over 50, you can put in an extra $6500 into your 401k plan, but there’s going to be this weird window after, starting in 2025, if you happen to be between the ages of 60 and 63 after that, you can put in an extra $10,000 a year just for those years. I don’t know why. Why not 65? No idea, but that’s what they decided. But they also said if you’re a high wage earner and you make over $145,000 a year, you can no longer put — all of your catch up will have to go into a Roth portion of a 401k plan, so you cannot deduct that catch up provision on your taxes. So, I don’t know what they were doing.
MIKE
Yeah.
JENNIFER
They were drinking a lot of coffee.
MIKE
Yeah. And there are some odd nuances to that as well. So, if you fall into that category, do some research on it. You can give us a call. There’s some interesting – and it is the catch up contributions, not just the $10,000 years, any catch up contributions when you’re that age.
JENNIFER
Yes. Good point.
MIKE
If you’re an employee making above 145, those catch-up contributions have to be to the Roth portion of the sponsored plan.
JENNIFER
Which is kind of a pain because a lot of high wage earners, the one reason they put so much in their 401k is to avoid paying taxes on them, with the hopes that they’re in a lower tax bracket after they retire.
MIKE
Yeah. And there are still a lot of employer-sponsored plans that don’t have a Roth option —
JENNIFER
Yeah.
MIKE
— which essentially eliminates the catch-up contribution.
JENNIFER
Yeah. You just can’t do it.
MIKE
So, definitely look into that.
JENNIFER
Pressure on them to add them. And there’s another little nuance here. Normally, when your employer matches your contributions, whether you put it in a Roth portion or a regular, it has to go in the tax deferred portion of the 401k plan, but now you can elect for your employer to match into your Roth. So, you have the ability to really build up some big Roth IRA money, which is very valuable because that money is all distributed tax-free later in life. So, it’s gold basically.
MIKE
Yeah. For younger clients, a very common recommendation that we’re giving is to take advantage of a Roth, if there’s a Roth portion of your employee plan or employer plan, take advantage of it, and now you have the option for that to be even larger, that contribution, if the employer’s match can also go to that Roth portion.
JENNIFER
Yeah
MIKE
And that will inherently increase your taxes for that year. Your income will be higher because that will count as — this will go towards your W-2 once you get that at the end of the year.
JENNIFER
Yeah, for sure. Want to do the backdoor student debt?
SECURE Act 2.0 – College Funding
MIKE
Yeah. Is that we’re on, the 529? Yeah. So, a couple things around college planning and kind of student debt, I guess just college funding. And one is the back door, they’re calling it. I don’t know who “they” is, I guess. The article that we read is calling it a backdoor student loan relief. So it’s kind of this pretty cool element that an employee, excuse me, employer has the option to match employee student loan payments. So, if you have student loans that you’re making payments toward, some employers have the ability to provide a match to that, that can go toward your retirement accounts and essentially match the payments that you’re making to a student loan. I could see the biggest or most common use case here is somebody that has a lot of student loans, that’s trying to pay that off, and has difficulty justifying putting money into their employer account, you know, into the 401k, because we’ve got large student loan payments that we need to make. So now, you can make those payments and still get the company match by being able to do that, potentially. Now, that’s one of those things that it says that the option is there, but I think employers still have to kind of say, “Hey, we’re willing to do this for our employees.”
JENNIFER
Yeah. I could see some of the tech industry potentially doing that, anyone in a business that wants to attract, but there’s no requirement, so we’ll see what really happens with that one.
MIKE
Yeah.
JENNIFER
I’m sorry, we covered my notes.
MIKE
Yeah, sorry.
JENNIFER
Then, the other — this is fascinating, actually. There is a provision that says, starting in 2024, so we’ve got a year, that you can roll 529 plans into a Roth IRA. Those two never spoke before, so this is completely new.
MIKE
One of the biggest concerns people have given about 529s is, “Well, you know, what if we don’t use this toward…” “What if my son or daughter gets scholarship money or they don’t go to school or they go..” You know, whatever it may be.
JENNIFER
Trade school. Yeah.
MIKE
“Am I losing this money?”
JENNIFER
It used to be you would have a penalty on the earnings. And, you know, there are limits here. So, one thing is the beneficiary of the 529 plan has to be the owner of the Roth IRAs. So, the student that you have a 529 for, the Roth IRA has to be in their name. There’s also a total lifetime maximum, as of now, of $35,000 over the lifetime. So, if you have a $100,000 in a 529 plan still, it can’t all go over. It’s also subject to the annual contribution limits of that year. So, depending on your age, or I guess the beneficiary’s age, would be $6000 or $7000 at a time. So, it would take time, but it would definitely be worth the effort if you didn’t need the money for education.
MIKE
Yeah.
JENNIFER
And there are a couple other things like the 529 plan has to have been open for five years.
MIKE
15 years.
JENNIFER
15. Thank you. And any funds you move over has to have been in the 529 plan for five years. So, it’s not like a slam dunk easy thing, but definitely worth pursuing if you have that option.
MIKE
Yeah.
JENNIFER
Yeah.
MIKE
What else?
JENNIFER
Well, we just have those extra two little things. I mean, there’s 140, but there are a couple others that might be sort of big for people.
SECURE Act 2.0 – Disaster Relief & Victims of Abuse
JENNIFER
One is the disaster relief. There is a penalty-free option for taking a distribution from your IRA if you have suffered a disaster. I don’t know all the definitions of that. I don’t know how they’re going to define that because disasters are natural, you know, lots of different ways that could happen.
MIKE
There were several small elements to access to money. You know, right now, for the most part, you’re going to be penalized if you try to touch retirement funds prior to the appropriate ages, for most people 59 and ½.
JENNIFER
Yeah
MIKE
And there were several areas like that, disaster relief or victims of abuse, that have become, I guess, looser around the penalties around accessing that money. So, that’s potentially a little bit more accessible to somebody that might need those funds.
JENNIFER
Yeah. So, you still pay income tax if you’re in a traditional IRA, but the 10% penalty, which is really what kills it in some cases because you might end up paying half of what you distributed in taxes. So, waiving that 10% penalty does help people in desperate situations. The victims of abuse has a $10,000 ceiling but, you know, that could go a long way in setting someone up if they need to get out of a situation. So, it’s great they were thinking about that. So, yeah, there’s a lot of things that could affect many people, but not all of them will affect everybody, I guess, is the way to look at it.
MIKE
Except I guess maybe, for the most part, the RMD was I guess the most widespread change, the change in the RMD age.
JENNIFER
Yeah. We had clients who were like December 23rd, going, “Okay, I don’t have to take my RMD next year.”
MIKE
Yeah.
JENNIFER
Yeah. They were ready. So, yeah, we hope this was helpful to you. Please let us know if you have questions. We’re still digesting a lot of the change in the law as well. I don’t know what all 140 changes are, do you?
MIKE
No. Definitely not.
JENNIFER
But anyway, as it unfolds and people have a chance to digest it, and sometimes, some nuances in the law come out later, such as what was the provision of SECURE Act 1.0 with inherited IRAs.
MIKE
Yeah. That 10-year rule. We’re still getting different definitions on what that means.
JENNIFER
Different answers on what that means. Yeah. So, if you’re in that situation, and we have two clients who are and we’re waiting for clarity, if your loved one died in 2020 or later and you inherited their IRA, you could take distributions over your lifetime. They changed it so you had 10 years to take the money out of the IRA, which is good for the government because that makes the taxes come out faster. But the original interpretation of that law was, you had 10 years and you could take none out and take the very last day of the 10th year, technically the 11th year because it starts the year after death, and now we’re finding out that there actually are Required Minimum Distributions that have to happen every year along the way. And you had total flexibility within that 10 years, or so we thought, where you could take some out now, skip a year or whatever. However, since they never clarified that and the entire financial institution world thought it was, you know, anytime within that 10 years, they’ve waived the penalties for people who did not take distributions in 2020, ’21, and ‘22 because nobody knew to do that.
MIKE
Yeah
JENNIFER
So anyway, things change, evolve, so we’re trying to stay on top of all that. Let us know if you have questions about that too. The two clients, we will be talking to as soon as we know more.
MIKE
Yeah. I guess the standing situation is, we know there are RMDs for those 10 years, and we’ll get back to you as far as what that is.
JENNIFER
We don’t know what the schedule is.
MIKE
We’re still waiting on what exactly that’s going to look like.
JENNIFER
So yes, it does kind of limit tax planning with that, but we just take what we can get and then do the best with it what we can within tax laws. Tax laws are complicated, as we all know. Well, thank you for listening to us. We hope that was helpful. Have a happy New Year. We’re sitting here in January 2023. Wow. I can’t believe that. Anyway, it’s been a crazy holiday season, so I’m personally glad to be back at work where it’s calmer.
MIKE
I know. Yeah. We’ll have to do one of these soon that’s just all personal. We’ll just talk about the personal stuff, maybe just for our clients.
JENNIFER
He keeps wanting to do that.
MIKE
I know. I feel like there’s so much that’s happened that we need to talk about, but yeah. So, that’s what we know about the SECURE Act 2.0.
JENNIFER
We’ll see.
MIKE
Yeah. We’ll just be on camera and I’ll sneak in the questions and make Jennifer talk about it.
JENNIFER
Sounds good.
MIKE
Awesome. Bye.
JENNIFER
Bye!
