Monthly Minute – March 2023

Secure Act 2.0

SECURE Act 2.0

On December 23, 2022, Congress passed the Securing a Strong Retirement Act of 2022 (Secure 2.0) as part of the Consolidated Appropriations Act of 2023, which President Biden signed into law.

With 92 loosely related sections and various effective starting dates for multiple changes, there’s a lot to digest. Our Monthly Minute for March will focus on critical highlights that may impact a financial plan.

Required Minimum Distribution (RMD) start dates.

If you were born between 1951 and 1959, your RMD begins when you turn 73. If you were born in 1960 or later, your RMD starts when you turn 75.

The bump in age effectively extends the tax planning window for potential Roth conversions, capital gains harvesting, accelerating taxable distributions, etc.

Another way to delay RMDs is to consider putting a portion of your IRA into a qualified longevity annuity contract (QLAC) that would enable you to delay taking RMDs on that portion until age 85. This strategy’s new limit is $200,000 (inflation-adjusted).

Employer matches can now include the Roth option.

Employers can now match in a Roth. Consider if a Roth account at your employer would better suit your tax planning.

SEP or SIMPLE IRAs can now include Roth options.

This change is a nice perk for sole proprietors or gig economy workers interested in a SEP retirement account or a SIMPLE IRA for their business.

Education Planning

Overfunded 529 Plans can now be transferred to a beneficiaries Roth IRA (with limitations).

Further guidance may follow on this particular benefit. Still, as things stand, the account needs to be open for at least 15 years, the beneficiary needs earned income, the rollovers are subject to the Roth IRA limits, and there is a $ 35,000-lifetime limit per beneficiary.

The conditions severely limit the impact, but we like that this alleviates some of the fear of overfunding for college. And it encourages establishing a long runway for your child’s savings to compound. For example, if you open the account when your child is born, and they begin working at age 15, they could realistically roll the $35,000 by age 20. Thus a modest investment could become a million-dollar retirement account by age 65 ($35K at 7.8% for 45 years).

RMDs are no longer required for employer Roth accounts.

This makes them more like Roth IRAs, eliminating the need to roll over employer accounts to avoid the RMD.

More lax penalty-free withdrawals for public safety workers.

This change includes some jobs in the private sector. Those public safety workers over 50 and separating from service may be eligible to access retirement funds penalty-free.

The terminally ill can now access retirement funds early (penalty free).

This access could apply if your doctor expects you to pass away within the next 7 years.

Qualified Charitable Distributions (QCDs) $100K now indexed to inflation.

For those charitably inclined but interested in a charitable gift annuity, a charitable remainder unitrust, or a charitable remainder annuity trust, you can also make up to a one-time $50,000 contribution as a QCD.

Business owners planning to add a retirement plan should consider reviewing all the new changes more thoroughly.

Owners now must consider things such as the new Starter 401K, decreased hour requirements for employee participation, changes to non-elective contributions to SIMPLE plans, etc. Sole proprietors may also be able to set up a plan for the prior tax year.

Catchup contributions

Catch-up contributions for retirement plans have increased for those 60-63.

You may make increased catch-up contributions to your 401(k) for $10,000 or 150% of the applicable catch-up limit from the prior year (whichever is greater).

If you have a SIMPLE plan, you may make increased catch-up contributions of $5,000 or 150% of the applicable catch-up limit for the current year (whichever is greater).

This is by no means a complete and exhaustive list, but if you’ve stuck with me, you now are aware of some of the major changes that the SECURE Act 2.0 brings for retirement plans. If you have more questions about the details of these changes or any planning topic, contact your financial planner.

Did You Know?

Do you know that the SECURE Act 2.0 is 130 pages long but only a small part of the 4,000+ page Consolidated Appropriations Act of 2022.

Quotable 

“The only difference between death and taxes is that death doesn’t get worse every time Congress meets.”

― Will Rogers

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