Planning Opportunities with SECURE Act 2.0

Cameron Hamilton

SECURE Act 2.0 is good for retirement savers.

Key Takeaways:

 

  • RMD Age Delayed from 72 to 73, then 75 for those born in 1960 & later
  • Expanded Roth savings opportunities
  • Expanded savings opportunities, especially for pre-retirees

 

It’s becoming a holiday tradition.  On the morning of Christmas eve, I sat down to a cup of coffee at my in-laws’ house in Atlanta and read that Congress did it again.  Three years and three days after Congress tucked the biggest retirement reform in a generation inside the 2019 year-end appropriations bill, they followed that SECURE Act with SECURE Act 2.0.  Unlike last time, this little brother bill is almost all positive in creating new planning opportunities for our clients.  

 

The surprise reform in 2019 left me feeling like we had been visited by the Grinch.  When the first SECURE Act took away stretch-IRA treatment for non-spouses and replaced it with the 10-Year Rule, they massively reduced the incentive to leave pre-tax retirement dollars to your children.  We felt like pioneers at Ballast for recommending Roth savings & conversions for a decade, sometimes even in high tax brackets.  When the SECURE Act whittled away at the benefit of pre-tax savings, we saw the financial planning industry move in our direction.  Our focus on tax optimizing the balance sheet for lifetime tax minimization now has a few new tools thanks to this momentum and reform inside of SECURE Act 2.0.

 

RMD Age Delayed Again

SECURE Act 2.0 again extended the age at which savers must distribute funds from their retirement accounts.  Instead of age 72, it is now 73 for birth years 1951-1959, and age 75 for those born in 1960 or later.  This represents a great opportunity as it extends the number of years between when most people retire and when they must take Required Minimum Distributions (RMDs) from their retirement account.  These years can be used to distribute funds in a lower tax bracket, as normal distributions, Roth conversions, or charitable distributions (still allowed at age 70.5.)

 

Expanded Roth Tools

We have always believed in the power of Roth, a savings bucket that is tax-free for your lifetime with no required distributions.  SECURE Act 2.0 provides more opportunities to utilize Roth:  

  • SEP (Simplified Employee Pension) IRA & Simple IRA Roth Contributions – good for small business owners
  • 401(k) & 403(b) Employer Match as Roth – expands Roth bucket, the employee pays the tax
  • 529 Accounts can fund Roth contributions after 15 years – for the small minority who overfunded a college savings account

 

Expanded Retirement Savings & Distributions

  • IRA catch-ups ($1,000 today) will go up with inflation
  • Expanded catch-ups for ages 60-63 ($10,000 compared to $7,500 for ages 50-59)
  • Qualified Charitable Distributions ($100,000/person/year today) will go up with inflation

 

One Compulsory Roth Contribution

One final expanded Roth tool is a little less positive.  Retirement plan catch-ups will be required to be Roth for earners making $145,000 or more.  This affects workers aged 50+ who want to max out their retirement plan with a $22,500 deferral and a $7,500 catch-up contribution.  This is potentially less positive because, in many cases, an earner in their last few years may be in a higher tax bracket than when they retire.  For example, if someone makes $500,000/year and plans to retire with an expected taxable income of $200,000, we’re losing the opportunity to reduce income in the 37% tax bracket and convert it into the first year of retirement into the 24% tax bracket.

 

Except for that last compulsory Roth contribution, SECURE Act 2.0 feels like the Grinch brought back all our goodies and then sum.  We can forgive that one very niche drawback as the government needs tax money now in exchange for these other expanded tax deferrals.  We look forward to utilizing these new opportunities to improve the long-term outlooks for the families we serve. 

 

SOURCE:

Consolidated Appropriations Act, 2023

https://www.congress.gov/bill/117th-congress/house-bill/2617

 

 

Ballast, Inc. is a registered investment adviser with the SEC.  Registration with the SEC does not indicate that the adviser has achieved a particular level of skill or ability, nor is it an endorsement by the SEC.  All investment strategies have the potential for profit and loss. Ballast, Inc. is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation.

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