Secure 2.0 Holds Lots of Benefits for Clients  

Rule changes for retirement savings, RMDs, 529 plans and charitable contributions will help people stash more money and delay spending it.

By Linda Hildebrand 

The devil isn’t in the details of the SECURE 2.0 Act, but the details could bedevil savers who want to use the new advantages in their retirement strategies.

Last-minute changes to the legislation that became law on Jan. 1 left 64-year-olds out in the cold for the ballyhooed boost in catch-up contributions to retirement plans.

“SECURE 2.0 has had bipartisan support, but several drafts were discussed, including the Securing a Strong Retirement Act (SSRA), which passed the House of Representatives in March,” said Daniel Gregoire of RightCapital in Shelton, Conn. “The SSRA included additional catch-up provisions through age 64, but ultimately it was the language approved by the Senate that made its way into the omnibus appropriations bill.”

Gregoire, customer relationship and training manager for the financial planning software company, couldn’t say why the Senate switched the eligibility scale to leave out 64-year-olds.

Gregoire hosted a recent webinar to highlight a few of the 92 savings provisions that financial advisors need to know in SECURE 2.0, part of the 4,000-plus-page Consolidated Appropriations Act.

“We’ve seen headlines about it for the past year,” Gregoire said. “It’s front-of-mind for clients.

“They will want to know how it impacts their lives,” he said.

The act is designed to get people to save more and build on the first Setting Every Community Up for Retirement Enhancement (SECURE 1.0) Act of 2019.

Some provisions went into effect on Jan. 1, and others start next year and beyond.

2.0 and beyond

The added allowance for catch-up contributions begins in 2025, so financial advisors and accountants will want to alert clients ages 61 and younger to the new options for their tax strategies, he said.

“We assume the same (IRS) standards are applied to the age 60-63 rule as they are to the age 50 catch-up provision rule,” Gregoire said. The new law allows greater catch-up contributions — at least $10,000 a year — for those 60-63.

“A participant is catch-up eligible with respect to a plan year if the participant turns age 60 by the end of the calendar year in which the plan year ends, and the participant is eligible to make elective deferrals under the plan,” he said.

Besides savings, 2.0 adds flexibility in Roth conversions and allow employers to contribute to employee Roths to benefit high-wage earners’ strategies for tax-efficient distributions from pre-tax retirement accounts, Gregoire said.

High earners can be surprised by a rising tax bracket after age 70, when income from mandatory Social Security and required minimum distributions (RMDs) kick in, often supplementing company pension payments that started earlier.

Most people don’t have an embarrassment of riches, though. Gregoire said the new retirement savings incentives come as studies show:

  • The median total retirement savings per household across all workers in 2021 was about $93,000.
  • Only 55% of households ages 55-64 had any retirement savings account in 2019.
  • 51% of U.S. households in 2021 were at risk of not being able to maintain their pre-retirement income.
  • By 2050, if projections hold, American retirees would outlive their savings by an average of eight to 20 years.

The Senate’s SECURE 2.0 and the House’s SSRA were rolled into the annual omnibus spending bill on Dec. 20. The Senate passed it on Dec. 22, and the House on Dec. 23. President Joe Biden signed the bill on Dec. 29.

Catch-up comparison

SECURE 2.0 starts indexing IRA catch-up contributions for inflation in 2024, according to RightCapital.

“It was certainly a long-time coming,” Gregoire said. “The IRA catch-up contribution was the only one not previously indexed for inflation.”

“That alone is a pretty big impact we’ll be able to show for clients,” he said.

The legislation’s catch-up provisions also will let workers ages 60 to 63 save at least an extra $2,500 per year in retirement plans, Gregoire said.

Currently, the IRS’s contribution limits for 2023 are:

  • 401(k), 403(b), most 457 plans and federal workers’ Thrift Savings Plan: $22,500/year. People age 50 and older may contribute an additional $7,500/year ($30,000 total).
  • IRA plans: $6,500/year. People age 50 and older may contribute an additional $1,000/year ($7,500 total).
  • SIMPLE IRA plan: $15,500. People age 50 and older may contribute an additional $3,500/year ($19,000 total).

Starting in 2025, a second tier of catch-up provisions is available for 401(k), 403(b), Thrift Savings and most 457 plan for participants ages 60-63. The $7,500 maximum catch up provision increases to the greater of $10,000 or 150% of the regular catch-up provision, indexed for inflation, Gregoire said.

As an example, Gregoire said, in 2023, 150% of the catch-up amount would be more than $10,000, as 1.5 x $7,500 = $11,250.

For SIMPLE plan participants, in 2025 a second tier of catch-up provisions is available fpr ages 60-63 where the $3,500 maximum catch up provision increases to the greater of $5,000 or 150% of the regular catch-up provision indexed for inflation.

High-wage clients earning more than $145,000 a year will have added catch-up options too, but only in their Roth savings programs, he said. Another provision will allow employers to contribute to their Roths, as well.

“I will note that there are some interesting things to talk about with clients in the language of how these all are written,” Gregoire said. For example, the bill uses the word “wages,” so it’s not yet known if the IRS rule-making process will translate the bill to include self-employed clients, he said.

“A lot of clients are potentially going to have questions about all of this,” Gregoire said.

Relaxing RMD

The changes in RMDs will matter to the annual tax planning for clients with large account balances who don’t need their pre-tax funds to support current spending or want their retirement savings to be legacy vehicle for their families, Gregoire said.

With income taxed at nearly the lowest rates ever, successful retirement savers can face sticker shock when they get to RMD age and must take out deferred taxable funds.

On Jan. 1, SECURE 2.0 raised from 72 to 73 the age that retirees born in 1959 or before must start regularly paying themselves from their pre-tax savings, Gregoire said. Down the road, it raises RMDs to age 75 for people born in 1960 and after.

So, clients who were 71 as of Dec. 31 can postpone an RMD for one extra year than they had expected, he said.

And, beginning next year, 2024, RMDs won’t be required from Roth 401(k)s, according to RightCapital.

In addition, the act reduced the current 50% penalty to 25% for failing to take RMDs. If the shortfall is corrected within a certain window, the penalty can drop to 10%.

It relaxed the rules for surviving family, too, Gregoire said.

Starting in 2024, spousal beneficiaries of inherited IRAs can use their late spouse’s RMD dates rather than their own, as has been required, Gregoire said. If the decedent reached RMD age, distributions will be based on the Uniform Lifetime Table instead of the Single Lifetime Table, he said.

If the surviving spouse also dies before RMD begins, the subsequent beneficiaries — typically their children — are treated the same as the original beneficiary.

SECURE 2.0 also stretches out the period to make the distributions beyond the 10-year distribution rule for inherited accounts.

“That alone can make a big difference,” Gregoire said.

The saver as lender

There’s something in 2.0 for clients across the spectrum, such as expanded options for part-time workers to save, he said. Together, it all makes for significant new law.

Meanwhile, it also expands penalty-free access to take early distributions from the workplace retirement savings.

Starting in 2024, “unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses” permits a $1,000 distribution per year, Gregoire said.

“Many clients may be in a circumstance they didn’t expect with hardships at home,” he said.

An emergency disbursement would have to be repaid, but it would save clients the interest cost of a commercial loan

Special exemptions will be available for public safety workers, such as firefighters and law enforcement; for victims of domestic violence; for the terminally ill; and for recovery from qualified disasters.

Two-fer tweak

Beginning in 2024, the $100,000 total maximum qualified charitable distribution (QCD) will be indexed for inflation to help clients contribute more to their favorite charities.

“A tool for mapping that out appropriately might be important in talking through what charitable contributions are important to your clients in the next few years,” Gregoire said.

Beginning this year, QCDs can be used to fund a split interest entity ($50,000 maximum), Gregoire said. It’s a new benefit that applies to certain trusts, he said.

However, the QCD limit isn’t changing from $10,000, and eligibility remains at age 70.5, he said.

529 friendly

2.0 relaxes some rules for overfunded 529 education plans.

It lets savers roll unused 529 funds into a siblings’ account, and starting in 2024, to roll over up to $35,000 tax- and penalty-free into a Roth IRA, Gregoire said. However, there are some catches.

  • The Roth IRA must be in the name of the beneficiary of the 529 plan.
  • The 529 plan must have been maintained for 15 years or longer.
  • Any contributions to the 529 plan within the last five years and earnings on those contributions are ineligible to be moved to a Roth IRA.
  • The annual limit for how much can be moved from a 529 plan to a Roth IRA is the IRA contribution limit for the year, less any “regular” traditional IRA or Roth IRA contributions that are made for the year.
  • A maximum of $35,000 can be moved from a 529 plan to a Roth IRA during an individual’s lifetime.

“These can provide some really great conversations in 2023,” Gregoire said. “It’s a great opportunity to connect with clients and bridge the gap on what they’re seeing in headlines.” To watch and/or listen to the webinar, click here.

Linda Hildebrand is a longtime newspaper editor and consumer-action reporter.


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