What the Secure Act 2.0 Means for Your Huntsville Retirement Plans
By Brian Seay, CFA
Founding Partner, Capital Stewards
Asking what the changes in the Secure Act mean for you? Many of our clients in Huntsville are reviewing their plans given the changes. The omnibus government funding bill that was passed at the very end of 2022 included language known as the Secure Act 2.0. You may have seen reports about Required Minimum Distributions or 401k contribution changes but what do the 20 pages of the Secure Act 2.0 mean for your retirement? We’ve organized the changes into a few categories to help you quickly understand how the changes impact you. See how the changes are relevant for current retirees, retirement savers and business owners.
Secure Act 2.0 for Current Retirees (Or those over 70 who still joyfully work!)
Required Minimum Distributions (RMDs):
Now begin at age 73 and will go to age 75 in 2033.
If you turn 73 in 2023, consult an advisor. There is a drafting error in the law that resulted in no one beginning to take RMDs in 2023. This may be corrected as the year moves along.
Required Minimum Distributions have been eliminated beginning in 2024 for ROTH 401k and related plans, bringing ROTH k plans in-line with distribution requirements for ROTH IRAs.
While the law delayed the beginning of required distributions, it did not change the life expectancy tables used to determine how much to take out each year. Every year you defer your IRA withdrawal, the annual withdrawal requirement increases. Thus careful planning is required, especially as RMDs push out to age 75 or beyond. If too much money is deferred and must be withdrawn as income over only a few years, your tax rate many increase enough to wipe out the deferral benefit.
Qualified Charitable Distribution (QCD) limit indexed for inflation:
Using your IRA as a source for charitable giving is a great way to reduce your tax burden in retirement. Originally, those contributions were limited to $100,000 per year. Now the limit will increase with inflation each year.
Secure Act 2.0 for Retirement Savers
Catch-Up Contributions:
The maximum contribution in employer sponsored plans (401k, 403b etc.) for savers between age 60 and 63 increases to $11,250 or 150% of the current statutory level.
Unused 529 Plan Funds:
Savers may now move unused education savings funds from a 529 plan to a ROTH IRA.
The amount is subject to the standard IRA contribution limits on an annual basis ($6,500), a $35,000 lifetime limit and holding time requirements.
Given the restrictions, do not think of this as a “Backdoor Roth” opportunity. Instead, think of it as a good way to double your ROTH contributions for a few years if you have extra education savings available.
Don’t be shy about contributing to 529 plans, as there is now a very tax efficient option to use any leftover funds. This is even more true for young children, as they can move unused education funds into a ROTH once they begin working.
ROTH 401k Matching Contributions:
ROTH elections can now include the matching contributions from your employer. Previously, ROTH 401k elections were limited to your own contributions.
In order to qualify, the matching contributions must not be subject to future vesting because they will be included in your income for tax purposes.
Notably, there is not a provision that limits ROTH conversions or “Backdoor” ROTH funding:
Secure Act. 2.0 for Business Owners
ROTH SIMPLE and SEP Plan Options:
New ROTH style retirement plan options were created for business owners and their employees. SIMPLE ROTH IRAs and SEP ROTH IRAs allow owners and employees to pay taxes now on income and benefit from tax free growth and distribution long-term.
SIMPLE plans are useful for businesses wishing to offer retirement plan contributions as a benefit to a small number of employees.
SEP plans are typically for businesses that would like to offer matching contributions to incentivize employee saving.
Business can now match ROTH 401k contributions just like they were able to match standard 401k contributions historically.
Fund Solo-401ks for Prior Year
Business owner income is often highly variable and thus it may be difficult to know what types of retirement plans can be funded until tax time each year.
The new rules allow business owners to establish and fund Solo 401ks based on their income from the previous calendar year prior to tax filing.
Notably, Solo 401ks have one of the highest funding limits for tax deferred plans ($66,000 in 2023), making this a useful planning tool.
401k Linked Emergency Savings Accounts
For employees who have emergencies, these accounts can be utilized instead of taking oft-penalized withdrawals from the traditional portion of the 401k plan. There is a limit of $135,000 in compensation and the accounts have a $2,500 limit.
Potentially useful for businesses with many wage-earning employees that would like to continue to enhance their benefit offerings.
While the changes in the final bill were not as significant as many originally anticipated, it still makes sense to review your situation with your advisor to ensure you are taking advantage of new opportunities. If you would like to discuss how the Secure Act 2.0 may impact you, please schedule a call and our team would be happy to discuss further.
Podcast Version
For more on the Secure Act and New Year’s Resolutions, listen to the most recent episode of the 6 Figure Investor Podcast.
Transcript:
Hello and welcome to the six-figure investor. Welcome to 2023 happy new year for those of you that we haven't talked to us since the beginning of the year. On this episode of the show, as we get into the new year, we're going to talk about the one financial new year's resolution that should live above all of the other news resolutions that you've made. And why we don't like new year's resolutions. So we're going to tie all that together. We're going to talk about that.
And then we're also going to talk about the secure act 2.0 and what that means for your retirement. At the very end of the year, Congress passed a massive omnibus bill to fund the government. They also included 20 whole pages of changes to retirement planning in the United States. And so if you're a professional. Who saving for retirement, if you're a business owner, or if you're a current retiree, there are changes in there that you need to know about. And I doubt you've read all 20 pages of the bill, but we have, and we've dissected those. And we're going to talk about those.
In a way that is hopefully really easy for you to grasp, but that's, what's coming today.
On this show, we are going to continue to cover topics that are important for professionals that are looking to achieve their financial goals. Obviously 2022 was a really challenging year for markets. But we want to do more than just hope that things are going to be better in 2023.
We want to take actions that allow us to improve the probability that we're actually going to be able to achieve our goals. And so that's what we're going to talk about on this show. If you're new to the show and you haven't listened to episodes before, I really recommend that you go back. Listen to the trailer. We talk about our personal investing journey.
In addition to learning more about us, there's just a lot of great learnings and insights that we've learned along the way that we thought it would be helpful to share with you. And the first couple of episodes are really helpful as well. So don't forget to go back and check out. Some of the original episodes of the show from 2022.
So we'll dive in after the intro.
All right. Welcome back to the six-figure investor podcast. So I wanted to start 20, 23 off with a discussion of new year's resolutions, because we all know that you make new year's resolutions and at least some of you in addition to going to the gym more and dry January and all the other fun stuff that you're doing this month.
You've, you've made some financial, new year's resolutions. You're going to save a little bit more money. You're going to spend a little bit less. You're going to do some things that are different. And I have news for you. All of your news resolutions, they're going to go really, really good for the next week, week and a half. And then you're going to get to like the MLK holiday weekend around the 15th of January. And we're going to have a little bit to drink. We're going to have a few extra desserts were maybe going to skip the gym a couple of times.
And those new year resolutions are going to fade right away. And so what we don't want to happen is for things that are really important from a financial standpoint, For those resolutions to just become like all the other resolutions that we make and fade into the background and not actually be helpful for us. Long-term. And so our solution for that is the new year's resolution that you should make to kill all the other financial new year's resolutions that you've ever thought about making is to automate your saving and investing.
And what we mean by that is instead of creating a resolution to save a little bit more each month, or spend a little bit less, let's just pay yourself first. So if you work. At a larger company, that's got a 401k plan. Just increase the amount of your 401k contributions. They go into your 401k before you even get paid. The money never goes into your checking account. It's simple as easy to do.
And it's way less tempting than hoping you're going to have a little bit leftover at the end of the month. The same is true if you're not working for a larger employer and you're saving every time your paycheck comes into your account, you can either have that. Paychex split up between two different bank accounts and wanting to savings and one into your checking account.
The other thing that you can do is just have automatic withdrawal and the first of the month into an investment account or into a savings account. So use the tools that are available to automate your saving. To help you actually accomplish your financial goals as you head into the new year, as opposed to getting stuck.
In, I'm hoping that you're going to fulfill your news resolutions. And then if you're like me, you make them, and they're really good for like three months. And then they're, they fade in the background and you make them again in 2024. So automate, instead of just hoping that you're going to be successful.
All right. So. Let's move on and talk about the secure act 2.0 and what it means for your retirement plan. A lot of you may be asking what do the changes in the secure act mean for you? As I mentioned in the show opening, there was a omnibus government funding bill that was passed at the very end of 2022. And that included language known as the secure act 2.0. You may have seen reports about required minimum distribution changes or 401k contribution changes.
But I think the question for a lot of folks is instead of just a list of what all's in the bill what everybody really wants to know is what does it mean for them? And so we've published a piece on our website about this as well, but we broken all the changes down into categories that have distinct impact for professionals that are saving for retirement for current retirees. And then also for business owners that have employees that are in retirement plans.
And so. If you're a professional that saving for retirement. There's really a few things that are in the bill that are important for you to think about. And the first is actually something that's not in the bill. So a lot of folks thought that there would be provisions that limited Roth conversions or backdoor Roth funding which is something that a lot of higher income folks use to move money from 401k plans and IRAs into Roth accounts.
That was not the case. There's no provisions in the secure act 2.0, That create any limitations for Roth conversions or for back so-called like backdoor Roth funding or any of those strategies. So if you were planning to do those you can continue doing those into the foreseeable future. What is in the bill is changes around three areas. Catch up contributions. Changes for unused 5 29 plans and the changes around Roth 401k, a matching contribution. If you are between age 60 and age 63 the bill increased the amount of catch-up contributions that you can make to $11,250. So it's only up about 1200 bucks over last year, but it means you can put more money into a employer sponsored retirement plan. So that's your 401k, your 403 B. You can save a little bit more money and defer the taxes this year.
Then you could. Last year again, if you're between age 60 and 8 63 for a lot of folks that are professionals, you've also got kids that are going to college. And you're trying to figure out, Hey, how do I save on my 5 29 plans? How do I say for school? And how do I also say for retirement? Well, one of the things that they did in the secure act 2.0 is that they they set out a plan to transfer unused funds from 5 29 plans to a Roth IRA.
So that means that perhaps when your kids are done going to college, you can take what's left in the 5 29 plan and you can move it into a Roth. Which is actually really great. I think there's, there's a couple of impacts that I think that has to. Folks that are saving both for education and for retirement. So the first is that you don't have to be shy about contributing to 5 29 plans anymore.
And worry about what we're going to do with the leftover funds. Does it go into an IRA? There's now a really tax efficient option to use leftover funds in a 5 29 plan. So you can fund those 5 29 plans fully. And then if there's a little bit leftover at the end, you'll be able to move it into a into a Roth IRA. And it's even more true for younger children.
If you have younger children you know, you can start funding those 5 29 plans and then they can move. The balance into Roth accounts once they start working, the catch on that provision is there's a $35,000 lifetime maximum. And on any, in any given year, you can only move 6,500 bucks. So.
This is not an opportunity for like a more mega backdoor Roth conversion type situations where you say, Hey, I can get a lot more money into my Roth IRA. And so I'm going to start with a 5 29 plan and really fund that thing. Way more than we need for education and then put it into a Roth. That's not how this works, the limits that are there. There's also some restrictions around holding time periods, how long the money has to be there. So it's not really a great opportunity just to increase your Roth IRA.
Funding level, but it is a good way to use excess education dollars that you had saved up in that 5 29 plan, a way to put those to work in a tax efficient way. So if you have unused 5 29 plan funds, or you're thinking about how do I fund a 5 29 plan? How much should I put in there? And how much should I save for retirement?
Now you can fully fund that 5 29 plan. And then when you're done paying for education, you can move anything that's left over to a Roth IRA. So that's a good change. So the third change for professionals that are saving for retirement. Is related to matching contributions. For Roth 401ks. So in 2022, before this year, The only contributions that you can make Roth elections for in a 401k plan or your own. So if you had employer matching contributions, those had to go in the standard part of a 401k plan. You didn't get to pay the taxes now and then have that longer term.
Tax deferred growth and then tax-free withdrawals. Now, both your contributions and your employer's matching contributions are eligible for Ross' status. And that's really important because if, especially if you're earlier in your career, even in the middle of your career where your income tax bracket is still lower, perhaps than where it's going to be towards the middle or end of your career, or even in retirement, you can make Roth elections in your 401k.
You can pay the taxes now at a lower rate. And then you can have those those assets grow tax-free for retirement. So that's, that's a really good change for professionals that are saving for retirement. So more catch-up contributions. An opportunity to better use 5 29 plan funds and then Roth 401k matching contributions for your employer. So those are the three important changes for professionals that are saving for retirement.
Now let's talk about current retirees and I call this section current retirees or for those over 70 who still joyfully work.
So just because you're maybe not retired, if you're still working, this still applies to you. The biggest, I think, headline around secure act two. Point oh, is obviously required. Minimum distributions. Those now begin at age 73. So if you haven't started taking requirement of distributions, yet those will start at age 73 and they go out further to age 75 and 2033.
The one caveat there is, if you turn 73 this year in 2023. Talk to an advisor, there's a drafting error in the law. You would think Congress would get all this stuff. Right. But they don't, they weren't really sure with the date table that they put in there, they put the wrong dates in the table, or maybe they just decided that no one should start making required minimum distributions in 2023.
I don't know. But the impact was that no one is required to start. RMDs in 2023 and that's probably not what they intended. So we think that might get corrected. So consult your advisor if you turn 73 in 2023, but if you're 70, 71 72. And you're not going to turn 7 73 in total, at least 2024. No, that you've got that extra time before you start taking required minimum distributions.
They've eliminated required minimum distributions for Roth 401ks starting in 2024. So that's a little bit further down the road, but that brings broth 401k plans in line. With the distribution requirements for Roth IRAs. And so if you've got Roth money, just know, Hey, I don't have to pay taxes on the money. And I also don't have to take the money out of my account on any preset schedule. So that's really good, especially for passing that money.
On to your kids potentially down the road. Now the, the caveat from a planning perspective is that. Required minimum distributions aren't necessarily the government's version of the most tax efficient distribution. Generally taxes deferred do represent a benefit to you as a retirement saver or as a retiree. But as those required minimum distributions, keep getting pushed further and further and further out.
. It's really important that you consider the planning implications. Of those required minimum distribution ages. So in the past, I think the, the right attitude and, and this has been correct mathematically as well has been, Hey, I'll just put as much money into an IRA or 401k as I can, and I'll just defer it as long as the government will let me defer it and that'll be good.
And that has been true up until now, but now that we're pushing that out to age 73, and then again, to age 75, the law. Delayed the beginning of required distributions, but what they didn't do when they passed the new law was changed. The life expectancy tables that they use to determine how much you take out every year. So every year that you defer an IRA withdrawal,
The annual withdrawal requirement increases because what the government says is we expect you to live a certain number of years. And so we're going to basically take the account balance that you have and divide by the number of years we expect you to live. And so just the way that the mechanics of that work means that if you, you know, if you were taking distributions at age 70, now you go to age 73, the distribution you're required to take at age 73 is going to be a larger amount than it would have been.
If you had started taking them at age 70, and then this gets even more impactful when you get to age 75. And so if too much money. He is deferred and you have to withdraw it over a shorter period of time that actually increases the tax rate that you're paying on those withdrawals every year. And so it's, it's important to just run the analysis and look and see, Hey, do I really want to wait all the way till I'm required to take money out of an IRA?
Or does it make sense to spread those distributions out over more years? So don't assume that the required minimum distribution date is the best date for you to start taking distributions from an IRA or a 401k. So just put that in the back of your head. And then the last thing for current. Retirees is qualified, charitable distribution.
Qualified charitable distributions. So qualified charitable distributions were indexed to inflation. So if you're not familiar with what that is, if you give money to charity every year and you are retired. And you have an IRA. You should be using your IRA as the source of funding for those charitable distributions, because you can take money out of the IRA that would otherwise be taxed, give it to charity. And that income does not count as income or those withdrawals do not count as income on your taxes.
So it's a really good tax planning opportunity for retirees. That amount of money that you can withdraw has been limited to a hundred thousand dollars since they created. The qualified charitable distribution laws early in the two thousands. And so what they did is they came back and said, Hey, we're going to index index that to inflation's. So now the amount of money that you can withdraw in any given year, it goes up a little bit.
So just to recap, the benefits for retirees or those who joyfully work over age 70. The required minimum distribution agents going out, but it's important to really consult with your advisor and talk about whether deferring your IRA or withdrawals makes the most sense for you from a tax planning perspective
so let's move on to the secure act 2.0 for business owners. So I want to break this section into two parts. The first is. For business owners saving for their own retirement. And then I also want to talk about benefits that you can offer to your employees that you couldn't have offered prior to the new rules to change in December. So the first, and I think the most important change for business owners is funding solo 401ks for the prior year.
So if you're a business owner, do you know that your income is highly variable? Each year. And so maybe difficult for you to know ahead of time, what kinds of retirement plans you're eligible for, what you can fund, what your cashflow is going to be, all those kinds of things until you get to tax time. You know, the next year. So.
In March, April of 2023, you'll actually know what the results were for 2022. And then you'd say, man, I wish I had made changes to the way I funded my retirement plans last year. So the new tax rules allow business owners to establish and fund solo 401k. So there's a 401ks that are set up for you, the business owner taking yourself employment income.
And, and saving that for retirement and deferring the current tax bill. And you can do that based on the income from the previous calendar year. so you could wait until tax them for this year and decided what makes the most sense.
To use. To fund your own retirement and defer your income from the previous year. So that's really, really important. And solo 401k is by the way, have the highest funding limit for deferred tax plans of any of the plans that are available for business over $66,000. So they're a really useful planning tool.
And now you've got some additional flexibility in how you determine what to put in there. So really important. The next set of considerations, there's really three items that you can use to beef up your benefits package that you're offering to employees. And the job market may not be white hot anymore, but it's still pretty red hot. And so continuing to have really competitive benefit offerings is key to retaining employees.
The first is that the secure act 2.0 established Roth simple and set plan options. So for those of you that use those, a simple plan is really useful for businesses that want to offer retirement account. Contributions as a benefit to a small number of employees. So maybe you're going to pay folks a salary, and then you're also going to contribute to their retirement on their behalf. And that's what a simple plan is for. And the set plans are typically for businesses that want to offer matching contributions to incentivize employees, to save for themselves.
And so both of those types of plans now have Roth style options where the employee can pay the taxes now and save the money, let it grow tax-free and be distributed tax free in retirement. As well as the more traditional IRA offering. So new Roth options for simple and SEP IRAs. That's a, that's a good thing.
The next thing is the businesses can match 401k contributions on the Roth side of employee accounts, just like they were able to match standard 401k contributions historically. So now as a business owner, you can match those Roth 401k contributions or Roth K contributions, just like you could, the standard 401k contributions, that's a good offering for your employees.
And then lastly, the secure act two point I've spent a lot of time creating a better emergency savings funding for employees. And I think the most. Important thing, there is 401k linked emergency savings accounts. And so for employees that have emergencies, these accounts can be set up. They're tied to their existing 401k program. And instead of them having to take those penalized early withdrawals out of a traditional portion of a 401k plan, they can put money in this linked emergency savings account.
This, there are limits there's $135,000 compensation limit, and the account can only have 2,500 bucks in it. So it's really for wage earning employees where you want to really continue to enhance their financial security. And if you have places in your business where you see lots of early retirement withdrawals, then this might be an opportunity for you to add to your benefit plans. So for business owners, just to recap, more flexibility around determining when to fund solo 401ks for yourself, that's really good.
And then a new Roth style, simple and set plans for your employees. You can match those Roth K contributions, and then you can establish 401k linked emergency savings accounts, free employees. So some more offerings that you can use for your talent retention and to grow your business. So some really exciting stuff in the secure act, 2.0 hopefully that makes it easy.
For everyone to understand what's going on in the secure act and what it means for you, whether you're in one of those. You know, professional saving for retirement categories, current retirees, or a business owner category. So with that we'll sign off and we will talk to you all down the road.