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The Smart Take:
The much anticipated Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 recently passed Congress as part of the Consolidated Appropriations Act of 2023. While no single change made in this act will have the same level of effect on your retirement planning as some changes made in the original SECURE Act, passed in December 2019, there are far more provisions in this act that may impact your planning.
Hear Tyler Emrick, CFP, CFA discuss some of the more impactful changes and how they will affect your planning and retirement.
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The Hosts:
Kevin Kroskey, CFP®, MBA – About – Contact
Tyler Emrick, CFA®, CFP® – About – Contact
Intro:
Hey there. Welcome to another edition of Retire Smarter. I’m Walter Storholt alongside today, Tyler Emrick, wealth advisor, CERTIFIED FINANCIAL PLANNER™ at True Wealth Design, serving you throughout northeast Ohio, southwest Florida, and the greater Pittsburgh area. You can find Tyler and the team at TrueWealthDesign.com. Click on the “Are we right for you?” button to schedule your 15-minute call with a member of the team today.
Walter Storholt:
Tyler, what’s up? I was about to say Merry Christmas, but I meant Happy New Year.
Tyler Emrick:
Hey, we’re past that. Come on. Happy New Year. It’s good. Well, I’m a huge Buckeye fan, and they got beat by Georgia, so watching that game last night between TCU and Georgia was a little bit of a heartbreak. So I’m still reeling from that, trying to get in the groove this morning.
Walter Storholt:
I was so glad to have something else to do on championship football Monday night. This year, for whatever reason, I just didn’t get into blocking off my time to watch the game last night. So when I checked the score when I got home, I was like, oh my goodness, I’m so glad that I didn’t waste my time watching.
Tyler Emrick:
You did not miss much.
Walter Storholt:
Not a thing. It was over before it started, it looks like. My goodness, what a drubbing, that. So we’ve turned the page on several different things now, here at the beginning of the year, the end of college football season. But there is something that has a lot of details and will leave us with lots to talk about as we rock through the beginning of the year here, Tyler. And no better topic to tackle than SECURE Act 2.0, something that’s been coming down the pike, but then at the turn of the year passed through legislation, and so now we can actually talk about this, not so much in theory, but look at the exact changes that SECURE Act 2.0 has made to the retirement landscape.
Tyler Emrick:
Not quite as exciting as college football.
Walter Storholt:
Well, I don’t know, with that score, this may be just as exciting as that game was.
Tyler Emrick:
We’ll try to make it that way today for sure, but-
Walter Storholt:
I know the score will be 65 to seven in favor of you, Tyler, by the end of this. So you’re going to own SECURE Act 2.0 by the time we’re done.
Tyler Emrick:
I appreciate the confidence. Yeah. So SECURE Act 2.0 or Setting Every Community Up for Retirement Enhancement. So yes, as you so eloquently said, SECURE Act 2.0 sounds a lot better, and it recently passed. It was part of the Consolidated Appropriation Act of 2023. That act, that Consolidated Appropriation Act, it was a spending bill authorizing, I think it was like 1.7 trillion in federal spending. That’s trillion with a T, quite a bit of zeros after that. And the SECURE Act was a part of that and was really something that was an extension or something that built off of the SECURE Act that was passed a few years ago, back in December of 2019, which we all know brought a wide range of changes to the retirement planning landscape. And I think this one’s no different.
Now, we don’t have time to dive into everything inside of the SECURE Act, and certainly, we’re not going to cover everything in the Consolidated Appropriation Act, but we are going to hit some of the highlights and what we think is going to be the most impactful for the listeners today.
Walter Storholt:
And Tyler, you’re kind of breaking things down into three categories For us.
Tyler Emrick:
We are. First section or category, as I think about this, has to do with required minimum distributions, or RMDs, for short. And one of the big changes that we have there is the RMD age being pushed back. So for those listeners that aren’t familiar, required minimum distributions are when the good ole IRS is going to have you start taking distributions from your pre-tax retirement accounts. And it was starting at the age of 70 and a half, you had to start doing those distributions. The SECURE Act passed in 2019, kind of pushed that age to 72, and then now we’re seeing it being pushed back further with SECURE 2.0. And the age is pretty self-explanatory, but it’s going to be based off of the year that you were born. So if you were born before 1950, no real change, you’re taking your RMDs.
If you were born between the year of 1951 and 1959, your RMDs will begin at age 73. And if you were born after 1960, your RMD age is now going to be age 75. So very similar to Social Security, for those listeners that are familiar and your full retirement age being based off the year you were born, they did something similar here with RMDs now.
Walter Storholt:
So a little bit of a more staggered age instead of just that one across the board and then increasing as well. Do you see that as a good development for folks?
Tyler Emrick:
I do. I think it’s going to be a welcome change for most individuals. So if you’re sitting here listening to this going, darn, I have to take my RMDs two years later, that means my account balances might be higher, that might impact my taxes when I actually have to start doing it by increasing the RMD, and it might increase my medical premiums or create a whole host of other issues. I think you’re looking at it in the wrong lens. Successful savers with a good mix of tax-deferred, taxable, and tax-free assets, it’s going to give them a few more years to be proactive taking a tax-smart approach to their retirement distributions. And really, we’re talking about utilizing things like tax bracket management or maybe do two more years of Roth conversions and really use some of these strategies to optimize their after-tax wealth. So I would urge individuals to say, hey, in aggregate, this should be a pretty welcome and good change for the vast majority of us and really gives us an opportunity to take advantage of some of those, hopefully, some of those strategies you’re already utilizing.
Walter Storholt:
Excellent. Any other changes to RMDs to be aware of?
Tyler Emrick:
Just a couple other, one thing I want to make sure that we note is that this has no bearing on Qualified Charitable Distributions. Qualified Charitable Distributions are one of the biggest opportunities for individuals that do a lot of gifting. That’s where you can take distributions out of your pre-tax retirement accounts and gift them directly to a charity. You can still start those at age 70 and a half. So this pushback of an age really has no effect on when you can start doing those Qualified Charitable Distributions, or QCDs, as we might get into a little bit later. But as we finish up the RMD changes, they did reduce the penalty for not taking RMDs. You have any idea what the penalty might have been before the change?
Walter Storholt:
Ooh, I can’t remember off the top of my head.
Tyler Emrick:
It’s a big one, 50%.
Walter Storholt:
Oh, 50, that’s right. Oh my gosh.
Tyler Emrick:
50%. They did reduce that to where if you miss your RMD or don’t take it, the penalty’s going to be reduced to 25%, and then you can even rectify it a little further if you rectify it in what they call the correction window, the penalty can be reduced further to only 10%. So I think that’s a welcome change. Pretty self-explanatory.
Walter Storholt:
Yeah, 10% sounds more like a penalty. 50% sounds a little bit more like theft.
Tyler Emrick:
Pretty hefty. That’s a good point.
Walter Storholt:
That’s a hefty fee.
Tyler Emrick:
And then the final thing as we think about RMDs. This is going to be effective now for 2024. They eliminated RMD for Roth accounts and qualified employer plans. So for those of you that have maybe saved inside of your 401(k) or 403(b), traditionally, you have two options, pre-tax and Roth. So if you started to save a little bit of Roth inside of that account and that account has grown, and now you have to start taking RMDs from that 401(k), and you have a pot of money in there that’s pre-tax and a pot of money that’s Roth, traditionally, we would have to look at your total balance in the account, i.e. both pre-tax and Roth and calculate the RMD amount from there. Now they’re going to actually allow us to separate out that Roth portion inside the account, thus lowering the balance in the RMD calculation and lowering the RMD in aggregate. So I think that’ll be a welcome change for those individuals that still have money inside of a 401(k) or a 403(b) and want to lower their RMDs.
Walter Storholt:
So far some pretty welcome changes in the RMD category it sounds like.
Tyler Emrick:
All good. And as we’re talking about Roth, I think that’s kind of our next big segment or category that we want to touch on. There were a handful of changes in regards to, or what we would call Roth-related changes in the bill. And again, most of these should be neutral to good news for clients in terms of planning, consideration, and opportunities that they’re going to provide. The first change, as we think about the Roth-related changes, employers are now able to deposit matching or non-elective contributions to employees’ Roth accounts inside of their 401(k) or 403(b). So again, as you think about your retirement account through your employer, normally, you would only have the option to save pre-tax or Roth. Anything that you would get from your employer would go into that pre-tax bucket. This law’s going to change that, and now your employer’s going to have a choice to be able to contribute to your account either pre-tax or Roth.
Now, if they do start contributing Roth on your behalf, those amounts will be included in your income for the year. They must be non-forfeitable. So what that means, essentially, they can’t be subject to any investing schedule, so they would be immediately vested and immediately yours once they’re given. So good, I think that’s, again, giving employers flexibility. I do think a change like this that’s immediately available, you’re probably not going to see it available in 401(k)s for a little while. HR departments and companies are going to have to wrap their arms around this change and implement it in their plan. So it might take a little bit of time before you’re actually seeing this come down the road.
Walter Storholt:
Kind of a neat change. I like that one where we can, you mentioned flexibility, and gosh, honestly, I feel like that word doesn’t usually come along with new governmental rules, but that’s kind of neat to see more flexibility injected into the equation.
Tyler Emrick:
It does, and I think it’s a big change than what we maybe have seen from in the past in regards to Roths and some of the legislation that we were thinking was going to get passed was going to be much more restrictive and potentially make the Roths a lot less advantageous, and it didn’t go that way. There’s actually some good news for individuals or small business owners as well. So individuals that work for a small business or owners that are using SIMPLE IRAs or SEP IRAs, they now have an option to do a SIMPLE Roth IRA or a SEP Roth IRA. So it’s very similar along the lines of what we’re talking about with the 401(k) employer contributions being able to be Roth. Now, these small businesses and individuals using these steps can do Roth as well inside of those accounts.
Starting in 2024, employee catch-up contributions to employer plans such as your 401(k)s, 403(b)s for high-income earners will be required to be Roth. So this is the one that’s a little more, I wouldn’t say controversial, but some individuals might look at it either neutral or negative. So I guess the question would become, well, what’s a high-income earner and who will be required to do their catch-up contributions as Roth? And that definition is if your wages for the proceeding calendar year from the employer sponsoring the plan exceeds 145,000 and that number will be indexed for inflation, then you will be required to do your catch-up contributions in Roth. And what I mean by catch-up contributions, again for those listeners who maybe might not be familiar, once you’re over the age of 50, your retirement plans, your 401(k)s, 403(b)s, the contribution limits will be increased for you, and you’re eligible to do what’s called a catch-up contribution or put a little bit more inside of your retirement plans. And that’s the part of the equation that they’re talking about here.
The new rule does not apply to catch-up contributions inside of individual retirement accounts such as IRAs or SIMPLE IRAs. We’re really talking about employer plans here.
Walter Storholt:
Just out of curiosity, do they define high earner differently based on the program? Is that a term that’s used in Social Security or in some other part of the tax code, and is it a different amount, or does this set the high earner number across the board in sort of all these different considerations?
Tyler Emrick:
For this consideration, when we talk about high-income earner, they’re talking about W2 wages, which I think is a really important detail here. If you’re an individual that has flexibility over your wages or you don’t have W2 wages, I’m thinking about self-employed individuals, maybe S-Corp owners, partners, sole proprietors. And if you find yourself in this category where you, again, have flexibility over the amount of wages that you take or you don’t have wages, then it appears that you’re not going to be subject to this restriction and be allowed to continue making pre-tax catch-up contributions regardless of your income. And these are really for those individuals maybe using a solo 401(k) or a 401(k) for a small business owner or sole proprietor. So there is a little bit of flexibility there and maybe some planning opportunities for individuals if you fall in that category.
Kind of a wrapping up the Roth portion of this, starting in 2024, there is going to now be a 529 to Roth transfer allowed after 15 years. And as you think about 529 accounts, these have traditionally been or are used for education expenses for you to save into and then use for qualified education expenses down the road. And as I talk about these with families over the years, one of the major concerns is over-funding those accounts should those education needs and expenses change over time. And I think this legislation is really meant to solve that issue and give you some flexibility and some options on what you can do with 529 money that maybe you’ve already paid for some of your college education, you’re trying to figure out what to do with the account.
Now, there are a number of conditions on this one. The Roth IRA receiving the funds must be in the name of the beneficiary on the 529 plan. The 529 must be maintained for at least 15 years or longer, and any contributions to the 529 plan within the last five years, and this includes earnings on those contributions, are ineligible to be moved to the Roth. So those are a few of the restrictions. And then they have a couple on the actual amount and the details on how much you can do per year. So the maximum you can use to transfer from that 529 to the Roth is 35,000 over the beneficiary’s lifetime. And then, as you look at it on an annual basis, the maximum that you can move to the 529 is going to be the annual limit for IRA contribution limits for that year. So as you think about traditional IRA or Roth IRA contribution limits for this year, you can contribute $6,500 if you’re under the age of 50.
If you do this, and when you take money from a 529 and move it over to the Roth in this transfer, that will eliminate your ability to make a contribution that year of 6,500 to the Roth IRA. Now, they kind of work off each other, so what that means is if you have a few thousand dollars that you move from your 529 over to the Roth, well then that would lower your limit, and then you can make up the difference as a contribution. So there are some quirks to this one, but I think it’s a really a welcome change, and it solves a big problem that we’ve been dealing with for a number of years.
Walter Storholt:
All good stuff so far. We’ve covered all the RMD changes, these Roth changes, certainly several of them layered into there. And I know it’s not all about those two things, though, right, we’ve got sort of the catch-all third category.
Tyler Emrick:
We do, we got a catch-all. And one other point I’ll want to make there too about the 529 is that for individuals that are looking to maybe jumpstart their children’s retirement savings, this is going to take some planning, but you think about the ability to transfer some money from a 529 or get money into a Roth, Roth is one of the best vehicles that you can use. And if you do your planning properly and you think about higher net worth families being able to sock away some money and not only being able to do that but able to get it inside of a Roth, I think that’s extremely advantageous. Albeit there are some lifetime limits and things like that, but something that I think a lot of people will start to build into their plans. But yeah, I think that’ll put a bow on the Roth piece of that.
And then let’s move on to some of the other miscellaneous things that I want to touch on that the bill is going to introduce. And one of those are going to be catch-up contributions to your retirement plans. And again, we touched on these a little bit earlier in the podcast, but it’s important to know the difference between there’s catch-up contributions in your IRA accounts, and then there’s catch-up contributions that are going to go to your employer plans. So the catch-up contribution, as we think about it in terms of IRA accounts, it’s traditional IRAs, Roths, that’s if you’re over the age of 50, you’re eligible for a thousand dollar catch-up. And it’s been a flat thousand dollars since the Pension Protection Act of 2006. So it’s been a while.
And effective starting in 2024, this amount will actually start to increase with inflation in increments of a hundred dollars. So again, I think this is a smaller change, but again, a welcome one. It’s going to allow you to put a little bit more money back if you’re over the age of 50 and you want to put more money inside of your IRA accounts. But this one, again, is effective starting in 2024.
Now in 2025, if we look at the other side of the coin, which would be on the employer side, the employer catch-up contribution limits will be increased for participants who are age 60 through 63. So the catch-up contribution this year inside of your employer plans is actually $7,500. So this is a little bit more restrictive. This is, again, for individuals who are ages 60 through 63, their catch-up contributions will be increased to the greater of 10,000 or 150% of the regular catch-up contribution amount indexed for inflation. And they do something similar for SIMPLE plans as well if you have those.
But as I think about this and we were running through some of the math on it, Walt, it’s a little bit wonky because if you think about it, the catch-up contribution right now is 7,500. And if we apply that 150% to where it’s at now, that means that for these individuals between 60 and 63, they should be able to put in 11,250 bucks as a catch-up contribution starting in 2025. So I don’t know where the 10,000 is really going to come into play here, but it does seem like, nevertheless, that hey, a couple years down the road here, starting in 2025, we are going to have another pot of money or another place where you can start putting a little bit extra funds, earmark them for retirement, which is, hey, that’s all good news.
Walter Storholt:
Maybe not quite as much as you would’ve expected there, but still, it’s an increase, and that’s the celebration.
Tyler Emrick:
Yep. And one point to note there too, these catch-up contributions, again, if you’re a high-income earner, to our point noted earlier, they’ll need to be Roth for certain individuals. There’s some complexity here and some things to kind of work around, but all in all, really good news and ability for families to start taking advantage and putting a little bit more money back.
Now, a few other things that we’ll touch on before we finish up here. There were a couple changes in regards to Qualified Charitable Distributions. These are these QCDs. I alluded to them a little bit earlier when I told you that the age that you can start the QCDs will not be pushed back, but there were two changes. This is a little more specific, but I do want to make sure we bring them up here. And those changes were around the maximum annual QCD amount that will now be indexed for inflation. So traditionally, it’s been, you can gift up to a hundred thousand dollars a year max. That number will start to be indexed for inflation beginning in 2024, and they do offer now a one-time opportunity to use QCDs to fund a split-interest entity. So beginning in 2023, you can take advantage of this one-time opportunity where you can use a QCD to fund a charitable remainder unitrust, a charitable remainder annuity trust, and charitable annuity as well. So again, some opportunity there for individuals that are using some of these trusts for various reasons to maximize your gifting and create a pretty good estate plan.
And then finally, or I guess the last thing that I just want to touch on, there is some more options, post-death options, for surviving spouses where they can treat retirement accounts that they inherit as a deceased spouse or make a deceased spouse election, which, again, is something if you have a passing of your family, you lose a spouse, it’s going to give you a little bit more options on what you can do versus some of those accounts that you might inherit. Which again, options are good.
Walter Storholt:
We always want more options. I guess my zooming out sort of outside observer perspective here, somebody who’s not just ingrained every single day into these details, it sounds to me like the government wants more tax dollars sooner from our account. So even though they’re pushing back those RMDs, which delays a little bit of that forced withdrawal to get money into the government’s pockets a little bit sooner, it seems like they’re really pushing more and more into Roth, especially from the high earners. So increasing how much you can contribute in those catch-up provisions and some of the other changes you talked about, but then forcing you to do the Roth, they’re really forcing you to take that tax benefit now by going ahead and paying the taxes now so that you can have the growth and the seed later. So it’s a little bit good for the investor and the saver, but it’s also a clear sign that the government’s trying to pull more money out maybe to counteract that increase in the RMD age, perhaps.
Tyler Emrick:
1.7 trillion they got to find. I think that’s all I’ll say. And to build off that a little bit too, what I think is not astonishing but surprising to me is what we don’t find or what was not included in the bill, the mega backdoor Roth after-tax contributions to your employer plans, the backdoor Roth or non-deductible IRA contributions, subsequent Roth conversions, some of these strategies that we’ve been utilizing over a number of years that we thought would be kind of closed and not eligible to do anymore, they weren’t in there. So I think that’s a good thing all around for individuals that are taking advantage of those. And maybe even most noteworthy of all is that there is nothing in SECURE Act 2.0 that provides any sort of simplification to the rules surrounding retirement accounts. I think retirement accounts became much, much more complex. As I think about my question strategies and getting to know families, there’s much more that I need to take into consideration now as we’re starting to build those retirement plans and starting to maximize how people are utilizing them, which complexity adds opportunity, but it certainly did not do anything to simplify those rules.
Walter Storholt:
Yeah, you would think that simplification could be a goal of a 1.7 trillion expedition here, but apparently not. Good news for you guys, though, because that’s your job. You get to help navigate people through all of these complexities, and, like you said, the opportunities that abound from those complexities. So not a bad thing that you guys have more levers to pull, I suppose, and areas and rocks to look under and try to figure out from there. So very interesting, great breakdown of all of that, Tyler. And it’s crazy that you’re saying this is not a comprehensive breakdown of SECURE Act 2.0. There’s a lot more that we won’t get into today, but those are the main highlights that have caught your eye.
Tyler Emrick:
You got it.
Walter Storholt:
All right, well, very good. Well, I know if you listen to today’s show and you’re interested in some of these changes, how they may impact or affect you, whether you have a current financial plan in place or you’ve never really walked down that road of a formal plan, now may be the time to get one in place, especially if you’re approaching retirement coming up in the next couple of years. Is that on the horizon for you soon, time to start making really smart decisions with your money. So get in touch with Kevin Kroskey, Tyler Emrick, and the great team at True Wealth Design by going to TrueWealthDesign.com and click on the, “Are we right for you?” button to schedule your 15-minute call with an experienced financial advisor on the team. We’ll link to that in the description of today’s show as well. You can also call 855-TWD-PLAN, that’s 855-TWD-PLAN, and you can get in touch that way as well. Tyler, thank you so much. Happy New Year to you, my friend, and we’ll look forward to another new episode with you guys soon.
Tyler Emrick:
It’s been great.
Walter Storholt:
Appreciate it. That’s Tyler, I’m Walter. We’ll see you next time right back here on Retire Smarter.
Disclaimer:
Information provided is for informational purposes only and does not constitute investment, tax, or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance references historical are not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.
