The SECURE 2.0 Act passed at the end of 2022 includes 100 changes to the rules governing retirement savings. In this episode, I’m joined by Plancorp’s Chief Planning Officer, Brian King, to talk through the most important opportunities resulting from the legislation.
Listen now and learn:
- The impact of SECURE 2.0 on people nearing or in retirement
- How new provisions make it easier for workers to balance current needs with future goals
- The biggest planning opportunities from SECURE 2.0 Act
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Show Notes
At the end of 2022, Congress passed the SECURE 2.0 Act to make various improvements to the rules governing retirement savings. Among the fairly large number of changes, highlights include extending the start date of required minimum distributions for retirees, raising catch-up contribution limits for retirement plans, and enhancing the flexibility of workplace retirement plans.
In this episode, I sit down with Plancorp’s Chief Planning Officer, Brian King, to sort through how the changes impact people in or near retirement as well as people who are many years (if not decades) away from retirement.
One thing to keep in mind during our conversation is that several of the affected agencies and institutions are yet to digest all the new provisions. Some of the law’s language requires interpretation, and in some cases, financial institutions and plan managers may have already printed and issued year-end documentation that reflects the rules that existed before the law was passed.
So as you listen to Brian and I discuss some of the changes that result from SECURE 2.0, do exercise caution if you take action without consulting a financial professional because it may take some time for all the changes in SECURE 2.0 to be entirely understood and implemented.
With that in mind, here are my notes from our conversation.
The Role of Chief Planning Officer at Plancorp (00:20)
Much like I set and communicate investment policy as Chief Investment Officer, Brian’s role as Chief Planning Officer is to think through different planning opportunities for clients. Having people like Brian and me (along with the Financial Planning Committee and Investment Committee we lead) gives our advisors more time to spend with their clients.
That can be a fairly substantial difference between working with a larger firm like Plancorp that has the resources to let specialists dig into the nitty gritty so that advisors can focus on providing great service to our clients.
Not only does the Chief Planning Officer and the Financial Planning Committee research and provide guidance on planning opportunities, but they also perform due diligence on the tools we use to serve clients.
How SECURE 2.0 Act Impacts People Near or In Retirement (5:10)
The sheer number of changes is much larger with SECURE 2.0 Act than with the SECURE 1.0 Act passed three years prior. But arguably, the potential for impact on financial planning strategies is far smaller. Likewise, no change from SECURE 2.0 creates the same level of urgency for planning considerations as SECURE 1.0.
Our conversation focused on two groups: those in retirement and those still working.
Items Impacting How Money Comes Out of Retirement Accounts
1. New Required Minimum Distribution (RMD) Rules
The legislation raises the starting age for RMDs from 72 to 73. If you turned 72 in 2022 and haven’t taken your first RMD yet, you will still need to do so by April 1, 2023, as well as your 2023 distribution at some point during the calendar year.
For investors doing strategic tax planning, the later starting age for RMDs introduces more opportunities to reduce your lifetime tax bill. However, without proactive tax planning, delaying your first RMD has the potential to actually increase the overall amount of taxes you or your heirs would pay on your tax-deferred accounts.
Other changes included a reduction in the penalty for failing to take your RMD, falling from 50% down to 25% this year. If you correct an RMD mistake, the penalty is further reduced to 10%.
And starting in 2024, RMDs for Roth 401(k) accounts will no longer be required.
2. Qualified Charitable Distributions (QCDs) Limits
For the charitably inclined, QCDs allow people over the age of 70½ to donate up to $100,000 to qualified charities through a non-taxable distribution from their IRA. Although you don’t receive a charitable deduction, QCDs do count toward your RMDs. Starting in 2023, SECURE 2.0 indexes the QCD limit to inflation.
Another change to QCDs is that SECURE 2.0 now allows a one-time QCD of $50,000 to a charitable gift annuity, a charitable remainder unitrust, or a charitable remainder trust. Notably, donor-advised funds were not among the vehicles included.
Setting up a charitable gift annuity is relatively simple and cheap, but the costs associated with setting up a charitable remainder unitrust or charitable remainder trust for a $50,000 contribution make this provision relatively unhelpful. That said, even allowing a QCD to an entity other than a qualified charity is a big step that we can hope will be expanded upon whenever the next retirement savings legislation (presumably SECURE 3.0) comes around.
3. Qualified Longevity Annuity Contracts (QLACs)
Another change to distribution limits pertains to QLACs, which are deferred income annuities that typically begin payments at age 85 and are often purchased using IRA or 401(k) savings. In 2023, SECURE 2.0 increases the premium limits from $145,000 to $200,000 while also eliminating a previous 25% limit of an individual’s retirement account balance for premiums.
Items Impacting How Money Comes Out of Retirement Accounts
1. Higher catch-up contributions
For starters, all catch-up contribution limits will be indexed to inflation, starting in 2024. Also starting in 2024, if your income exceeds $145,000, all of your catch-up contributions will need to be made with after-tax dollars into a Roth account.
But the bigger change comes for workers ages 60 through 63. Beginning in 2025, this group will be able to make a larger catch-up contribution to certain retirement plans. Within 401(k) and 403(b) plans, the additional limit will be the greater of $10,000 or 150% of the regular catch-up amount for a given year. For SIMPLE plans, it’s the greater of $5,000 or 150% of the regular catch-up amount for a given year.
So if we assumed the new catch-up provisions were effective today, a worker that is 61 years old could contribute $22,500 to their 401(k) plus $11,250 (150% of the regular $7,500 catch-up contribution) – so in total this 61-year-old could make a total contribution of $33,750.
The Roth requirement for higher earners could lead to those individuals paying higher taxes when making the catch-up contributions than they might have faced had they been withdrawing them in retirement from a tax-deferred account. But, again, proactive tax planning will be important to minimizing your lifetime tax bill and maximizing your overall wealth.
2. Matching for Roth Accounts
Speaking of Roth accounts, beginning in 2023 workers can choose to receive matching contributions to qualified retirement plans on a pre- or after-tax (Roth) basis. Previously you could only receive matching contributions to pre-tax accounts. Whether employers decide to allow matching Roth contributions is a different story. Even if they do, it will take plans some time to adopt these changes.
If you expect to be in a higher tax bracket in retirement than you are now, this could be a good change.
How SECURE 2.0 Act Impacts People Years Away From Retirement (19:05) (17:15)
Many of the provisions put in place that impact the working segment of the population were designed to make saving easier and more flexible. Brian and I discussed the three most noteworthy items…
1. 529 Plan Rollovers to Roth IRAs
This topic has been written about and talked about the most. The headline item of being able to roll 529 plans into a Roth IRA for the beneficiary sounds pretty great, but it comes with a lot of limitations.
First, the 529 account must have been open for at least 15 years. Then the beneficiary receiving the assets in a Roth IRA must have earned income that qualifies them to make a Roth contribution and the rollovers from the 529 are limited to (and count against) the annual Roth contribution limits. Finally, there is an aggregate lifetime limit of $35,000.
The provision makes it easier for people wanting to save for education that are worried about sacrificing their own retirement. But in the law’s current form, this isn’t the giant tax planning loophole you might expect from only reading headlines.
2. Emergency Savings
Another part of SECURE 2.0 Act to help out savers is the provision that allows defined contribution plans to an after-tax emergency savings account starting in 2024. The first four withdrawals in a year would be tax- and penalty-free.
Contribution limits are set by the employer, but can’t exceed $2,500 annually. Employers can also choose to make contributions eligible for an employer match.
3. Student Loan Debt
Student loan debt continues to soar, so many will be excited to see that (beginning in 2024) employers will be able to match employee student loan payments with matching payments to a retirement account.
Like some of the other items we discuss, this helps make it easier for workers to save for their future while also paying off loans.
Notably Missing From SECURE 2.0 Act (28:15)
There’s a clear trend toward trying to capture more dollars in Roth accounts versus pre-tax accounts. The benefit to the government is that they’re able to collect tax dollars now as opposed to later.
What wasn’t in the bill was also notable, specifically the legislation didn’t address the backdoor (or two-step) Roth contributions. That’s a very powerful tool that some people thought might be on the chopping block. Of the many techniques we can use today, that one might go away at some point in the future.
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Long-term investing made simple. Most people enter the markets without understanding how to grow their wealth over the long term or clearly hit their financial goals. The Long Term Investor shows you how to proactively minimize taxes, hedge against rising inflation, and ride the waves of volatility with confidence.
Hosted by the advisor, Chief Investment Officer of Plancorp, and author of “Making Money Simple,” Peter Lazaroff shares practical advice on how to make smart investment decisions your future self with thank you for. A go-to source for top media outlets like CNBC, the Wall Street Journal, and CNN Money, Peter unpacks the clear, strategic, and calculated approach he uses to decisively manage over 5.5 billion in investments for clients at Plancorp.
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