Big Changes Coming with Secure Act 2.0?

Transcript: 

Hey guys, Mike Frontera here back with another Retirement Theory video!

So by this point, you may have heard rumblings about a major piece of retirement legislation known as the SECURE Act 2.0. As you might guess, SECURE Act 2.0 is a follow up to the original SECURE Act – which brought some big changes for retirees and tax planning. Setting Every Community Up for Retirement Enhancement, aka the SECURE Act, aka SECURE Act Classic (all right that one is mine), did not have the public impact that it might during more ordinary times. The Act was signed into law in December of 2019 but was, of course, quickly overshadowed by news of the novel Coronavirus outbreak in China.

But the SECURE Act brought us everything from increasing the Required Minimum Distribution Age to 72, to the removal of the lifetime stretch for inherited retirement accounts, changes to 529 plans, and 401(k), and much more.

I put out a video covering the original SECURE Act. Check a link the video description if you missed out seeing it the first time around. By the way, be sure to not miss any of our videos covering all things retirement planning by clicking that subscribe button below. And if you like this video, please let me know by clicking that like button too! Remember every time a like button is clicked on YouTube, an angel gets its wings!

What changes do we see in store with the SECURE Act 2.0? And what does it mean for your retirement plans? There are plenty of changes, so let’s check out the biggest ones.

OK, for those of you who are already retired, perhaps the biggest change is a further postponement of required minimum distributions, or RMDs. RMDs increased from age 70 ½ to age 72 as a result of the first SECURE Act. The government is not afraid of making the rules confusing, and they plan to add some complexity to that RMD age. RMDs would be pushed out to age 75, but the increase will be phased in over several years. So starting in 2023, they would go to 73, then 74 in 2030, and finally 75 in 2033.

Now…this may seem like a small change, but actually it provides a giant opportunity for up to 3 more years, actually up to almost 5 more years versus the old 70 ½ RMD age, to do some great distribution planning. For folks with larger IRAs, particularly those who aren’t drawing heavily off of them, this means more time for pre-RMD accelerated withdrawals, capital gains harvesting, and perhaps Roth conversions.

Some of the other major changes impact those still saving for retirement. Those of you working for a small business might be part of a SIMPLE or SEP IRA. One of the drawbacks of both of those plans is the lack of a Roth option. But effective 2023, both plans would now allow Roth contributions.

How about catch-up contribution provisions for savers age 50+? SECURE Act 2.0 increases what you can put away for yourself.

IRA catch-up contributions of $1000 are now to be indexed annually for inflation starting in 2024. SIMPLE IRAs catch-ups would go from $3000 to $5000, and 401(k)s and other qualified plans would go from $6500 to $10,000 each year, again, indexed annually for inflation starting in 2024. Another wrinkle, likely to make it harder to remember, is that those increases would only impact those between ages 62 – 64.

Finally, there is a hodgepodge of other goodies, including:

the ability for employers to match employee 401(k) Roth contributions to their Roth account. Right now all match contributions go in pre-tax. Employers would also be able to match employee student loan payments through their 401(k) as well. Faster eligibility for part-time employees to contribute to their 401(k) (from 3 years of service down to 2). And a reduction in withdrawal penalties, including a halving of the brutal penalty for missing an RMD, from 50% down to 25%, as well as a new exception for the 10% early withdrawal penalty for victims of domestic abuse.

There’s also a planned increase of the Saver’s Credit, which I love, both on income limitations and credit percentage. Now, that one is not effective until 2027, but stayed tuned. That one has the potential to be huge for savers. Don’t know about the current Saver’s Credit? I’ll put a link in the description for a video where I walk through it, and it’s fun for the whole family!

Alright, so why is the government doing this now? Well, there’s no doubt that in the post-pension era, we are more responsible for our own retirement outcomes. Both SECURE Act 1 and 2 provide somewhat of a helping hand from Big Brother. It’s also arguable that from a tax-revenue perspective, the Acts are at least somewhat self-serving. Additional Roth conversions and availability of Roth contributions, they both can serve to accelerate tax revenues. Right, because these are all after-tax contributions. Also, children and other non-spouses who ultimately inherit retirement accounts, no longer enjoy a stretch of those withdrawals over their lifetime. Especially for those who don’t plan ahead, this provision to require all retirement funds to be withdrawn from their account within 10 years of death has the strong potential to push inheritors into a much higher tax bracket than they would be otherwise. This causes a larger percentage of your retirement funds to go toward what our government does best. Spend money!

So, do you have questions for me? Come visit me at www.retirementtheory.com or send me an email at mike@retirementtheory.com. Did you click subscribe on this video or follow me on Facebook? I think that you should. You’ll continue to see videos like these on everything retirement planning. Once again, thank you for joining me, we’ll see you next time.

Sources:

1. https://www.investopedia.com/what-is-secure-act-how-affect-retirement-4692743#:~:text=Key%20Takeaways,in%20an%20employer%20retirement%20plan.
2. https://tax.thomsonreuters.com/news/house-passes-secure-2-0-summary-of-key-tax-provisions/
3. https://www.lordabbett.com/en-us/financial-advisor/insights/retirement-planning/secure-act-2-0-would-expand-retirement-plan-savings.html#:~:text=New%2C%20Increased%20Catch%2Dup%20Contributions,a%20401(k)%20plan.