Taxes

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Do you have questions about SECURE 2.0 Act that passed in the final hours last year? You are not alone. I’ve been reading a lot about it and I too even have some questions for lawmakers.

As we wrapped up 2022, President Biden signed the SECURE 2.0 Act into law on December 29th.[1] The new act is being called SECURE 2.0 based on the name of its thematic predecessor, the Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE Act”). This legislation makes notable changes to qualified retirement plans. These will increase the age for RMDs, make enrollment and escalation automatic for most new 401(k)s and 403(b)s, and increase tax credits for low-income retirement savers, among other changes. Here’s a summary of some notable changes that occurred.

1. The age for RMDs goes up to 73 for those who turn 72 in 2023 and 75 in 2033. This is great news for those who don’t need the funds from qualified accounts. We help our clients with Roth conversions, and this allows more years to do this.
2. Most of the new 401(k)s and 403(b)s will be required to enroll employees automatically and escalate contributions automatically after December 31, 2024. This is what we preach about–improving investor behavior. Check out our behavioral finance page to learn more.
3. RMDs are eliminated from Roth accounts in 401(k)s and 403(b)s for tax years after December 31, 2023. As a result of SECURE Act 2.0, plan Roth accounts and Roth IRAs will be on more of a level playing field. It won’t be quite so obvious to determine whether or not rolling over a plan Roth account to a Roth IRA is in your best interest going forward. (We can help you with the decision)
4. Catch-up contribution limits will go up for those age 60 and 63 after December 31, 2024 to the greater of two: either $10,000 or 150% of the regular catch-up amount for those 50 and older. (Keep in mind that high wage earners will be required to use Roth option for catch-up contributions.)
5. The bill decreases the penalty for missed RMDs (or distributing too little) from 50% to 25% of the shortfall, and if the mistake is corrected in a timely manner, the penalty is reduced to 10%. (If you are a client of Intelligent Investing–we handle this automatically for you.)
6.  There are some great (and complicated) planning options around Roth accounts inside and outside your employer plans. The Act authorizes the creation of both SIMPLE Roth accounts, as well as SEP Roth IRAs, for 2023 and beyond. Previously, SIMPLE and SEP plans could only include pre-tax funds. We help business owners setup Simple IRAs and manage their wealth in a cohesive way. (Side note: do you know it typically makes sense to put your “efficient” assets in a Roth IRA and your “less-efficient” assets in qualified accounts. It’s called tax location and something we love doing for our clients to reduce their tax bills)
7. Transfers from 529 plans to Roth IRAs (max amount in individual’s lifetime is $35,000) may be an area for high-net-worth families to consider. Great planning opportunity for high-net-worth families who have been funding their 529 Plans for a long time.
8. Those who are charitably inclined can give from qualified accounts directly to charities via Qualified Charitable Contributions (QCDs) and they can still be taken at 70.5 before reaching the new RMD ages. (We currently do this for some clients and can help you with this)

This summary scratches the surface on what all is in the SECURE 2.0 Act. Taxpayers (and especially those approaching retirement) are all but guaranteed to continue to have an endless stream of questions with respect to this complicated area.

Ask yourself: Do I have a trusted advisor who specializes in tax planning? Does my financial advisor have the right credentials (such as being a qualified CPA?) Is my advisor a true fiduciary? (i.e., do they put your interest AHEAD of their own at ALL times?)

Why don’t you make a new year’s resolution to get your “financial junk drawer” in order this year. We would love to help. We love serving our high-net-worth clients by minimizing financial stress and maximize their lives using our proprietary Intelligrations™.

You can start by subscribing to our Intelligent Money Minute podcasts or by subscribing to our Intelligent Insights blogs. Or if you are finally ready to get some professional help, please let us know.

If you want to collaborate or outsource this to qualified fiduciary professionals, please click here to reach out for a complimentary call or coffee.

Reference: Michael Kitces’ Perspective on the Secure Act 2.0