Secure Act Update

The Secure act 2.0 is packed with changes that could make an unbelievable difference for folks. We’ll need to sit tight to see how many of these strategies become law.

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Five changes to be aware of this year

“SECURE Act 2.0” is intended to increase retirement savings. How? An attempt to simplify and clarify rules currently in law. Below you will find 5 changes to be aware of this year.

1. Increase in the Required Minimum Distribution (RMD) Age

RMDs are amounts that you are required to withdraw each year from your pre-tax retirement accounts. You are required to maintain those withdrawals for the rest of your life or until your account is depleted.

What are the changes? The RMD age has been increased from age 72 to 73 and then, beginning in 2033, the RMD age will again be increased to age 75.

Why is this important? RMDs force you to withdraw a certain percentage of your pre-tax accounts. Those withdrawals inevitably increase your annual tax liability which is less than ideal. The delay in RMD age gives you more time to allow your investments to grow and more time to execute certain tax reduction strategies.

2. IRA “Catch-Up” Contribution Limit is Now Tied to Inflation

There are annual limits on how much you can contribute to a Traditional IRA and/or Roth IRAs each year. The limits are made up of a base amount which anyone can use to fund their IRA. There is also an additional age-based “catch-up” amount that is available for individuals aged 50+. For 2023, the contribution limits are $6,500 plus $1,000 for anyone 50+ years of age.

What are the changes? The age-based catch-up amount has never been tied to inflation. This means, for years, individuals’ ability to contribute to their IRAs hasn’t kept up with cost of living.

Why is this important? Tying the age-based catch-up portion to inflation means that, over time, you’ll be able to contribute more money towards your retirement.

3. Ability to Rollover Unused College 529 Balances into a Roth IRA

This is a BIG one! However, this one has some hoops to jump through. One of the biggest concerns about using a 529 for college planning is “What happens if we don’t use all the money for school?” 529 money withdrawn for non- education purposes is subject to income tax on the growth and a 10% penalty.

What are the changes? You now have the ability to transfer unused 529 money into a Roth IRA with some caveats (see below). Once the money is in the Roth then it can continue to take advantage of tax-free growth and withdrawals.

Conditions you must meet in order to do this:

The Roth IRA must be in the same name as the beneficiary of the 529.
You must have had the 529 open for at least 15 years.
Contributions made to the 529 within the last 5 years are ineligible to be rolled into the Roth.
The amount that can be moved from the 529 to the Roth is limited to the annual Roth IRA contribution limit (minus any regular contributions you’ve made to your Roth or Traditional IRA)
There is a $35,000 lifetime limit that can be rolled over from the 529 to Roth IRA.

We’re still waiting for guidance from the IRS on certain aspects of this new rule. Specifically, if the 529 is in the name of a child, can you change the beneficiary to yourself in order to move it to your Roth IRA? Will doing so start a new 15 year clock?

Why is this important? This may potentially solve the issue of “over-saving” for college and helps to answer the question “What happens if we don’t use all of the 529 money?” This would allow you to move money into a Roth which would allow it to continue growing tax- free. The Roth could then be inherited tax-free to your beneficiaries.

4. Catch-Up Contributions to Retirement Plans Increased

As mentioned above, the IRS allows higher contributions for individuals over age 50. These age-based catch-up contributions will be expanded to add increased limits for different age groups.

What are the changes? Right now, the age 50+ catch-up amount to a 401k, 403b, etc. is limited to $7,500, however, the new law will allow an even bigger catch-up number for individuals between the ages of 60-64. The new number will be the greater of 1) $10,000 or 2) 150% of the regular $7,500 limit.

Why is this important? This will provide another great opportunity for individuals to increase their tax-advantaged retirement savings as they make the final push to retirement.

5. Availability of SIMPLE Roth IRAs and SEP Roth IRAs

SIMPLE and SEP IRAs are retirement accounts that can be used by self-employed individuals. These accounts have only allowed for pre-tax savings which allow for tax deductions to the self-employed individual.

What are the changes? The SECURE Act 2.0 will now allow for Roth SIMPLE/SEPs. This means that self-employed individuals now have increased access to accounts that provide tax- free growth & withdrawals.

Why is this important? For the longest time, self-employed individuals using SIMPLE/SEPs could only save on a pre-tax basis, however, there are situations where pre-tax accounts are not the most advantageous. The new Roth option on these accounts will provide new ways to maximize a self-employed individual’s retirement plan.

Bottom line:

There’s A LOT to unpack in the new laws. Many new rules, including changes to catch-up contributions and 529 plans, will roll out in 2024 and 2025.

As we’ve learned with previous new regulations, Congress might enact new laws, but we often have to wait for the IRS and other agencies to catch up before we can fully make use of them.

Stay tuned for more updates as the new rules shake out.

Do you have any questions right now?

We’d love the chance to answer any questions you may have!

Resources

A checklist for life and health insurance

Your life and health insurance policies are a key part of your overall financial plan. It’s important to review these policies each year.

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If there are gaps, you can work to implement proper coverage.

In this checklist:

Health Insurance

If married and both have access to health coverage, does it make sense to each take coverage or to choose the better of the two plans to cover both?
If paying for coverage on your own, has your situation changed such that you should consider shopping for a new policy?
If retired and on Medicare – items specific to your needs and how they work with Medicare plans.

Life Insurance

If covered by life insurance offered by employer, have the coverage options or limits changed?
For those who own permanent life insurance, it’s a good idea to review the policy including how any dividends are being applied and how the policy is performing.
For those who own a term policy, review the time left on the policy’s term and consider whether the client’s needs have changed

Disability Insurance

If employer provides disability insurance, have there been any changes to this coverage and is it adequate?
Do other sources of disability income, such as Social Security and personal savings, sufficiently cover potential needs, or should you consider additional insurance?

Long-Term Care Insurance

Does the policy have appropriate covered services, benefit amounts, and riders, such as inflation protection?
Have you experienced a large increase in premium? If so, it might make sense to review other options.

Updated 10/15/2021

If I retire early - Should I use the marketplace for insurance?

Health insurance coverage is often a primary concern for folks who are retiring early. Understanding and weighing options can be complicated and stressful.

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