How SECURE Act 2.0 Changes The Retirement Game!

Transcript:

Hey guys, Mike Frontera here back with another Retirement Theory video. A few months ago I made a video highlighting potential retirement rule changes with SECURE Act 2.0. 

Well, SECURE (Setting Every Community Up for Retirement Enhancement) PART 2 is now the law of the land, and there’s so many updates that almost everybody will be impacted by something.

So gather the family around, put on some popcorn and let’s check out the biggest highlights of the new rules:

Let’s start with one of my favorite topics, Roths! It’s not too tough to understand why Roth contributions are being expanded under these new rules. Remember, qualified withdrawals from Roths are tax-free, but in exchange, your contributions go in after-tax. That means, the government gets their tax dollars now, and so their bloated deficits don’t look quite as bad. 

With that, we first have that Roth contributions are now going to be allowed inside of SIMPLE and SEP IRAs that many small employers run. 

For those contributing to 401(k) and 403(b) plans with a match, employees may now elect to have their employer matches come into their Roth accounts. Previously all employer would be pre-tax and be fully taxable upon withdrawal. Of course, the employee would then have to claim the match money on their taxes. Another stipulation is that these Roth matches are required to be immediately and fully vested.

And this next one blows my mind…starting in 2024, if you are making those age 50 catch up contributions and you earn more than $145,000 per year, which is indexed for inflation, you are only allowed to make those contributions to the Roth portion of your retirement plan. So for those in the highest tax brackets this could actually be a major disincentive to putting money into your retirement plan as the cost to do so is so much higher. Again --- government wants their tax dollars now! 

Well, I suppose that’s not the case with every change. They’re willing to wait when it comes to your required minimum distributions, or RMDs. Those are now being pushed off until age 73.  And--  if you’re born in 1960 or later, your RMDs don’t start until 75! So, on the surface this maybe sounding great. More time to let your money grow tax-deferred. But hang on. 

Remember, that under the original SECURE Act removed the ability for non-spouse beneficiaries to take minimum distributions over their life expectancy. Instead, all qualified money has to come out within 10 years. So, does pushing that RMD out further potentially cause more money to pass down to beneficiaries where they’ll be now forced to pull it out over a shorter timeframe, thus pushing up their tax rates and ultimately generating more tax revenue? Definitely planning opportunities there for sure. 

One piece of relief around RMDs, by the way. That previously brutal 50% penalty for missing a required withdrawal will now be lowered down to 25%. And in IRA accounts in which a missed RMD is taken within two years (or before the IRS mails you a notice about it if earlier), that penalty is reduced further down to 10%. That is definitely some much needed relief. However, several experts have noted that previously, exceptions on that 50% penalty were handed out like candy. So as long as you could come up with a decent reason on why you missed your RMD. The point is, is it possible that ultimately the IRS will be less lenient in granting these exceptions since the penalty is so much smaller. 

Now, there are several other RMD updates, each with their own planning opportunities, but I’m going to cover those for a future video and continue on with more highlights.

Let’s switch gears and talk about college planning. There are a couple of awesome updates here that you don’t want to miss:

First, starting in 2024, 529 college savings accounts can now be rolled tax-free into Roth IRAs on behalf of the 529 beneficiary. This could actually come as a huge relief for parents who diligently saved for their kids’ education, only to have the market drop right out from under them just before it was time to use the money. Now at least that money can be used to help their retirement savings instead. Lots to think about here, including how we think about 529 portfolio construction, unconventional Roth funding strategies, and simply reducing the reluctance of some to fund these plans in the first place. 

Now, some major stipulations for these 529 to Roth rollovers though:

1. The 529 must first be in existence for 15 years
2. The amount of each rollover can be no more than the annual contribution limits for Roth IRAs
3. There’s also a lifetime aggregate limit of $35,000 rolled over for each 529 plan.

Overall – great rule. And I love proactive education funding. Here’s another one that new graduates may like. Starting in 2024, employers may elect to consider qualified student loan payments as retirement plan contributions for purposes of receiving a match. What a great way not just to get young employees started in their retirement savings, but also as a potential recruitment tool for employers that are looking to attract for young talent.

 

There’s really more than we can cover, so let me wrap up with some highlights about contributing and withdrawing from your retirement plans:

First we have what is what I call the super catch up contribution. Now, as many of you know, at age 50 or older can put an additional $7500 into their 401(k) / 403(b) plans each year. Well, starting in 2025, there will be another catch up tier, that covers savers from 60 to 63. At those ages, your catch-up contribution will be at least 50% higher than the standard. So instead of say $7,500, you’ll be able to kick in an extra $11,250. 

Next, are you trying to recruit or retain a great household employee, like a nanny or housecleaner? Well now you can set up your own retirement plan for them. Starting this year you can establish a SEP IRA for domestic employees!

Finally, for those of us who need to grab money out of our retirement plans before reaching age 59 ½, there’s a handful of relief provisions to that pesky 10% tax penalty:

Starting immediately, and with some stipulations, 

• Any amount for a terminal illness which is defined as a reasonable expectation of death within 84 months or less
• Up to $22,000 for qualified disaster recovery and the tax can actually be paid over 3 years. 

Starting in 2024

• For domestic abuse victims up to $10,000, or half of their balance if less, again tax can be repaid over 3 years. 
• For anyone, $1,000  for “unforeseen personal or family emergencies”. So… I don’t know if it includes Johnny not getting a PS5 for Christmas, but it seems really broad and simply requires a self-certification.   Either way that can be repaid over 3 years.
• An even better way to access emergency funds -- employers will be able to carve out emergency access Roth accounts for up to 3% of contributions, with a max of $2,500, that can be accessed for any reason and at least once per month. What a fantastic way to get the inertia of retirement savings going while still allowing for some access when the going gets tough.

And starting in 2026, up to $2,500 per year in distributions without 10% penalty for “high-quality” long term care insurance premiums.

Whew, ok, did you get all of that? Well, there some great opportunities there to make for more flexible and more fruitful retirement savings efforts. I’ll continue to put out videos that are incorporating these new provisions and more from SECURE Act 2, into smart planning strategies. In the meantime, 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.cbh.com/guide/articles/secure-act-2-0-summary-of-key-tax-provisions/#:~:text=SECURE%202.0%20covers%20numerous%20changes,and%20funding%20retirement%20savings%20plans.
2. https://www.journalofaccountancy.com/news/2023/jan/key-tax-retirement-provisions-secure-2-act.html
3. https://www.bakerlaw.com/alerts/secure-20-act-2022congress-final-gift-2022-retirement-plan-sponsors#:~:text=The%20SECURE%202.0%20Act%20of,29%2C%202022.
4. https://www.investors.com/etfs-and-funds/retirement/the-secure-act-2-0-its-highlights-and-limitations/?inf_contact_key=dc5ec4e959b8fde31604dae7f8c3bd894dfbc39d7283b2cb89d5189540b69330
5. https://www.bdo.com/insights/tax/secure-2-0-act-of-2022-introduces-key-changes-for-workplace-retirement-plans