Secure Act 2.0 -- The New Retirement Plan Rules
Introduction:
David L. Blain, CFA, CEO of BlueSky Wealth Advisors, and author of "Invest In Your Life, Not Just Your Portfolio," addresses the key topics regarding new retirement plan rules:
- Elimination of the "stretch IRA"
- Elimination of age limit for making Traditional IRA contributions
- Raising the age for RMDs
- Expanded plan eligibility for part-time workers
- New employer protections for offering annuities
Transcript of: Secure Act 2.0: The New Retirement Plan Rules
(00:00) - Introduction to Retirement Planning and Legislation Changes
Hi everybody. David Blain, CEO of BlueSky Wealth Advisors here today. And we're going to talk a little bit about retirement planning, retirement legislation. There have been some significant changes to the retirement plan landscape in the past couple years. Under two important piece of legislation dubbed the Secure Act, stands for Securing Every Community Up for Retirement or Secure Act. The first one was passed in 2019, effective January of 2020. And it changed for the first time since the 80s, really significantly, the retirement plan landscape. The largest change was the elimination of what's called the stretch IRA. No longer will people be able to stretch the IRA out over the lifetime of their beneficiary, it has to be distributed within the first 10 years. The second major change of that was the elimination of the age limit to make IRA contributions. It used to be you had to stop at age 70 and a half.
(01:03) - Key Changes to Retirement Planning Legislation
It also is significant was it raised the age for the required minimum distribution from age 70 and a half, and I'm not sure who came up with 70 and a half, but that was the rule for years and years and years was, at age 70 and a half, you had to start required. You were required to take out money from your IRA and of course, pay tax on it if it was a pre-tax IRA. So the original Secure Act raised that age limit to age 72. It also did a few other things, expanded plan eligibility for part-time workers, had some protections in there for plan sponsors offering annuities, and it had lowering barriers for employers with multiple employer plans. Anyway, some minor stuff. The big changes in 2020 were the elimination of the stretch IRA and the raising of the required minimum distribution age.
(02:02) - Updating Retirement Legislation in 2023
So that was a good start. Well, we have something that's dubbed Secure Act 2.0 and that's really the focus of this video. I just kind of want to update you on what happened a couple of years ago, because this term secure act is kind of stuck and so they're calling this new one, the Secure Act 2.0. Technically, it was part of the Consolidated Appropriations Act of 2023. The large huge omnimus bill that funds the federal government, and this is what they do, is they stick all these different provisions in there that really have nothing to do with funding the government. But anyway, that's where the Secure Act 2.0 came in. So the number one big change in this is, it raises the required minimum distribution age once again. It will increase in 2023 to 73 and all the way up to 75 in 2033.
(02:57) - Latest Changes to Retirement Planning and RMD Age Increase
So 10 years from now. People that have already started their RMDs can't stop them, but it's a good change. And the reason for this is people are living longer and longer. When the concept of required minimum distribution came out, people were not living as long, and the government gave people a benefit for putting money into their 401K or into their IRA. They got a tax deduction. And so the Congress decided it was beneficial to let people defer all that tax and then at some point later in life to start taking it out and they would pay the income tax over their life expectancy. Well, as people's life expectancy grew and grew, people were working longer and longer and it just made sense to raise the age to start these minimum distributions. So the big one, it goes up to 73 and then 10 years from now, it goes up to 75.
(03:53) - Increased Catch-Up Contributions & Raised RMD Age for Retirement Planning
Another big change is the increase in the catch-up contribution limits. So if you're over age 50, you are allowed to put an extra $7,500 into your 401K account just by virtue of the fact that you're over 50. Now, it is a deferral, it has to come from your own pay, but that's a huge benefit. It has traditionally not been an index for inflation, though it's been 7,500 for a long time. So the Secure Act 2.0 indexes that amount for inflation. It also changes the IRA catch-up limit. Has been a thousand dollars for a long, long time. It also indexes that amount for inflation starting in 2024. The other big thing is between age 60 and 63, people will be able to put in an additional amount. So in addition to the $7,500 catch-up, there's the supersize catch-up, I don't know what you want to call it, but people age 60, 61, 62 and 63 can put another $10,000, well, the greater of $10,000 or 150% of the catch-up limit, the regular one.
(05:09) - New Benefits for Middle-Aged Savers
So it's indexed for inflation in the future so that $7,500 is going to go up. So whichever is greater either 10,000 or $150,000 of that limit, they'll be able to put into their 401K. This is a huge benefit for people that in middle age and 30s, 40s, they've been raising kids, sending kids to college, buying houses, buying cars, all those things, and maybe they didn't get around to saving like they should have. This allows them to put a lot more money away in those early 60 years as they hit the home stretch towards the traditional retirement age of 65. So that's a real benefit that they have. Another little tweak, the Secure Act is allows employers to make matching contributions based on student loan payments. So sometimes taxpayers or employees have to make a choice, "Should I pay off my student loans or should I save for retirement?"
(06:08) - 529 Plan Flexibility: Employer Matching and Orphan Money Options
So this provision allows an employer to make matching contributions based on an employee making a student loan payment. I will tell you as an employer, this would be a huge administrative burden, the paperwork and things like that. It's also optional. So your employer would have to decide to offer this, but it's allowed. My guess is that most small employers will not do this. Just simply do the overhead administrative burden of that. Another change, any of you out there that have 529 plans and your children got scholarships or maybe went to the military academy like myself and didn't need that 529 money, what do you do with it? Well, they can certainly use it for grad school, you can transfer to another child, but there are a lot of cases where people end up with, what I call orphan money in a 529 plan.
(07:05) - New 529 to Roth IRA Transfer Provision and Technical Fix for Roth IRA Holders
So in order to fix that Congress past a rule, now you can transfer up to $35,000 from a 529 plan to a Roth IRA for the benefit of the person that the 529 plan was for. Now, the 529 plan has to have been in existence for 15 years and $35,000 is something, but it's not a tremendous amount. But still it's a nice little benefit to get that money out of the 529 plan that maybe you didn't use and put it into a Roth IRA for your child. So nice little benefit there. And kind of a technical glitch, if you had a Roth IRA. So let's back up for a minute. There are two types of IRAs. A regular IRA or a pre-tax IRA, you get a tax deduction for putting money into it. You're not taxed on the money that you put into it if it's a 401k or if it's an IRA, you receive a tax deduction for it.
(08:11) - Roth IRA No Longer Requires Mandatory Distributions
The Roth version of these, you pay the tax. Now you don't get a deduction immediately. It's called post-tax, but the benefit is it grows tax free, and then when you withdraw it at retirement or whenever you take it out, there's no income tax due. The whole science behind whether they do a regular IRA or a Roth or a regular 401K or a Roth 401K, that's the subject of another video, maybe I'll do. But suffice to say a Roth IRA does not require required distributions. You never have to take the money out. Well, with a technical glitch and the way the rules were written, if it was a Roth inside a 401K, it did require required distribution. So they fixed that. So any type of Roth, whether in a 401K or out of a 401K, no longer requires mandatory distributions at age 73. The new limit. Previously 72 and before that 70 and a half. So no required distributions from the Roth.
(09:20) - New Changes to RMD Rules and QCD Limit
If you messed up and you didn't use BlueSky as your advisor and you missed your RMDs, the penalties were onerous for that. It was 50% of the amount you were supposed to take out. Well, there's still a huge penalty, but it is cut in half to 25%. Bottom line is, don't miss the RMD rules. Get with us if we're your advisor and we'll make sure you're straight. We've never missed one or messed that up in 24 years. If you're on your own, make sure you understand the rules, they're getting really confusing. So the penalty is still 25%, but they did lower it. In another really good move, Congress raised the QCD Limit that stands for Qualified Charitable Distribution Limit. From $100,000, it is now indexed for inflation. And what this allows people to do is take that required distribution from their IRA that they would ordinarily pay income tax on, and it allows them to distribute it directly to a charity and there's no income tax due on that amount.
(10:32) - Impact of QCD on Adjusted Gross Income and Tax Deductions
Now if you're really tracking the tax code, you may say, "Well, what benefit is that? I could take the money out and then just give it the charity and I'll get a tax deduction for charitable contribution." You're right that if you are in the certain tax circumstance, the QCD maybe of no benefit to you. You pay tax on the RMD coming out, but then you get a deduction for giving it the charity. However, with the higher standard exemptions, a lot less people are qualifying for itemizing deductions. It just doesn't make sense. So for those people, it doesn't make sense. The other thing is when you do a QCD, it doesn't raise your adjusted gross income. So for example, if you take an RMD, your income on your tax return goes up and certain things in the tax code are indexed to your adjusted gross income.
(11:29) - Roth Provision Changes for Employees and Catch-Up Contributions
So for example, taxability of social security, eligibility for different medical itemized deductions depends on your adjusted gross income. So by doing the QCD, depending on your tax bracket and your individual tax situation, it can be a really good deal. And I was glad to see they indexed that for inflation. They also put in a rule that $50,000 of a QCD can go to a charitable gift annuity. Very complicated, won't go into that at this point. But in certain limited circumstances, that may be a good move. That was previously not allowed before. A couple other changes you can now make, well, first there's several changes to the Roth provisions. So number one is, now you can allow employees in an retirement plan, employees can now take their matching contributions from an employer as a Roth match. What does that mean? It used to be, even if you as the employee took a Roth, you wanted your 401K invested in Roth money, meaning you didn't get deduction now, but in the future you could take it out tax free.
(12:53) - Updates on Roth Matching Contributions and Catch-Up Contributions
Prior law was, but if the employer put money into your account, it was always pre-tax. And so you had this situation where in your 401K you had some post-tax money and some pre-tax money. The new legislation allows you to elect that you would like to receive matching contributions as Roth money. Of note, this does not affect profit sharing contributions or... So employer profit sharing contribution will still be pre-taxed, but matching contributions now can go into a Roth account. It's a very important little change. People have been asking for that for a while. It's wonderful, it's a great change. The other part is along with that is catch-up contributions, so remember we talked about catch up contributions. People over age 50, $7,500 now, and then the super size catch-up, which is going to into effect soon for people age 60 starting in 2026, $10,000 or the greater of 150% of the regular inflation.
(14:06) - Catch-Up Contributions Targeted at High-Income Taxpayers
Those have to be Roth matching or a Roth contribution. So if you make a catch-up contribution in the future, it will have to go into Roth money. And why is that? People that are high earning income are deferring a lot of money between this year, between the regular deferral and the catch-up, if you're over 50, you can put $30,000 into your 401K. And of course the IRS, the treasury's not getting any tax benefit of that. So they're tweaking that and saying, "If you are doing the catch-up, it now has to go into Roth, so you'll pay current tax on that and in the future you can withdraw that money tax free." The exception of that is if you made less than $145,000, that does not apply. So everything I just said doesn't apply if you make less than $145,000.
(15:02) - Establishing Uniform Rollover Rules for 401Ks
It's really designed to target higher income tax payers and making them pay more tax now and making those catch-ups go into a Roth. Really interesting tweak to the tax code. The other, the last thing, kind of a minor thing, but for anyone that works in the industry like we do, it's a big one, is that the treasury is going to be required to establish uniform rollover rules. So when people change jobs now, they go from Google to Facebook to Apple or whatever, rolling those 401Ks over between employers sometimes can be very difficult rolling over to an IRA. Each company has their own procedures and processes, and so this law establishes or mandates that treasury come up with uniform process to do those rollovers. So lots of stuff, and look, that's just the highlights. The Secure Act 2.0 has a lot of other minor provisions. I tried to hit the highlights of what I thought maybe most applicable to people that we work with or people that are watching this video. But there's a ton of other things in that law.
(16:15) - Understanding the Congressional Changes for Retirement Savings
Congress is continuing to make changes. They're trying to get employers to establish plans if they don't have them, they're trying to get people to save for retirement because Americans in general are just not saving enough for retirement. Okay. So that is the summary of the Secure Act. I hope you learned something today. If you are confused, don't take it personally, I had to read the thing like 12 times to try to figure it out. Congress and the lawyers and lobbyists that write these things are not known for their straightforward language. So if you got any questions, feel free to reach out to us. We've got a good grasp on it now and we'll be happy to help you.