SECURE 2.0 Act of 2022 made simple

Episode 13 -

Title -  The SECURE 2.0 Act of 2022 made simple

*Sorry for any grammatical errors as this description was generated using AI

In this episode of the Money PIG podcast, host Reid Trego and Rory Glatt, CFP® professional, discuss the Secure Act 2.0, a $1.7 trillion omnibus bill that includes changes to retirement accounts and contributions. They specifically focus on changes to Required Minimum Distributions (RMDs), catch-up contributions, and 529 plans. RMD ages have been pushed back, which can potentially put individuals in higher tax brackets later in life; however, there are planning opportunities like Qualified Charitable Distributions (QCDs) that could help lower taxes paid on RMDs. Catch-up contribution limits have also increased for both IRAs and 401(k)s/403(b)s starting in 2024. Lastly, they talk about how 529 plans can now be converted into Roth IRAs for children but only if the plan has existed for at least 15 years with guidelines set by the government surrounding this change.

Reid and Rory discuss the rules for converting a 529 plan to a Roth IRA, including limitations on contributions and beneficiary requirements. The maximum lifetime transfer limit is $35,000. Further changes are coming in 2023-2025, such as companies offering retirement plans being required to enroll employees at a specified contribution level and making accounts more portable when changing jobs. 

If you would like to connect with an advisor on our wealth management team to discuss the implications of the SECURE Act and how it could potentially affect your retirement plan,  please schedule a free  intro call here. 

The Money PIG podcast is hosted by Reid Trego. Goodwin Investment Advisory is a Registered Investment Advisory firm regulated by the Securities and Exchange Commission in accordance and compliance with securities laws and regulations. Goodwin Investment Advisory does not render or offer to render personalized investment or tax advice through the Money PIG podcast.  The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.

Transcript

Welcome to the Money Pig podcast, brought to you by Goodwin Investment Advisory, where our mission is to lead people to financial peace, independence, and generosity. And I'm your host, Reed Tree. Go. Today on the show, we're joined by my friend Rory Glat, certified financial planner, professional, for a discussion about Secure Act 2.0. Welcome, Rory. 



Thank you for having me, Reed. 



It's awesome for you to join me again because I like to get smart people in the room with me, and when we talk about this kind of stuff, I need extra help. So he will be very helpful today. 



Yeah. 



Awesome. 



Let's do it. 



All right. Good. 



So the Secure 2.0 act was passed in December of 2022, december 29, right between Christmas and New Year's when nobody's paying attention. Very busy season of life passed by Congress. It's a $1.7 trillion Omnibill omnibus bill just to fund the government. So it's controversial, but they do this kind of stuff because actual budgeting isn't really effective for them anymore in Washington or something like that. But they passed a secure 2.0 act. Do you know what Secure stands for? 



I had to Google it again just to make sure. Setting every community up for retirement enhancement. 



Okay. 



And there was actually a lot of great stuff that came through it. 



There actually was, yeah, as much as it was complicated and giganormous, some good things came out of here, and so we're going to take on something very complicated today, Rory. We're going to take something complicated and try to make it simple. And that's tough because the government makes the rules, and they don't keep things. 



Very simple, and it's sometimes in very complex language, too. And we won't discuss every change or update because that would be a very long episode. So we'll just review and answer the ones that clients have frequently asked us about. 



Absolutely. That's what we want to do, because we see clients, and we see them ask these same questions, and these are the big ones. So let's start with number one. Recently, you and I did an episode on IRAs. Like traditional IRAs versus Roth IRAs. And the Secure 2.0 act does have effects on RMDs. 



They do. 



So tell us what RMDs are, first of all. 



Okay, so RMDs, they stand for required minimum distributions at a certain age, which recently has changed. The government forces you out of your pre tax accounts or certain accounts to take money out and pay taxes on that, and you have to do that every year once you hit a certain age. 



Awesome. So those accounts where you were able to contribute and get a tax deduction, then later on, when you withdraw them, you're going to pay taxes on it. So they want you to withdraw that money a little earlier than you might even want to. 



Exactly. 



Okay, so what is the change to this RMD age? How does this work? 



So, previously it was 70 and a half. Now, it was 72 in 2022. And as of 2023, the age rose again from 72 to 73, and that'll be until 2032. And then again, it'll rise in 2033 to 75. 



They make it simple. How can this be bad? 



Okay, good. 



So between 2023 to 2032, if you're 73, you have to take RMDs starting at 2033, it'll be 75. 



So for you, because you're still half my age, you won't have to start taking your requirement of distributions until you're 75 years old. 



As of current yeah, I should do. 



The math and see when I have to start. 



Okay. 



All right, good. 



Because of it being delayed later in life and everything, that could potentially put you in the highest tax bracket of your life. And how that works is because you have to start taking this money out of your accounts that require you to take that require RMDs, you have a shorter time span to start taking money out. And so between the age that they require you and however long you live on this planet, you have a shorter time horizon start pulling this money out. And so the RMDs are essentially larger because you're paying taxes on it. It could be a very large amount. 



Okay. 



So it could put you into a higher tax bracket. Plus, we're letting this money sit in these accounts longer before we require it to be pulled out. So the accounts potentially are bigger and growing, and they're still growing. So that kind of puts you in a I would call it a tax crunch. 



Yeah. 



Which is also a Baskin Robbins ice cream flavor. 



The tax truth. Yeah. 



Okay. 



But that's not what we're talking about here. 



And there's awesome planning opportunities around that, too, with because you have to take these RMDs at a later age, there's a way to lower how much you'll end up paying in taxes later in life. And one of those options is a QCD, which stands for a Qualified Charitable Distribution. And at 70 and a half, which is funny, it's still 70 and a half. 



Okay. 



That didn't rise. 



Okay, that didn't but at 70 and a half, they increased that amount that you could distribute. And that'll be starting to be indexed for inflation starting in 2023. But you could send that to a qualified charity, and that would lower how much you would pay in your armies, because they would exempt that from you paying taxes on that. 



Okay. 



Got it. And that's where it starts to get complex. 



It does. 



So this is the kind of thing you definitely would want to have a conversation with an advisor or a CPA. But an investment advisor usually can help you with these kinds of things. And a CFP like you who understands these things. 



Yeah. Good. Okay. 



Another thing that changed were RMD required minimum distribution penalties? Yes, there are penalties if you don't take your RMDs on time. Talk to me about how this works. 



So previously, if you didn't take your RMD, you'd have to pay a penalty of 50% on what you were supposed to take. So let's say your RMD was $10,000. If you didn't take it, you'd have to pay a penalty of 50%. So $5,000. 



Ow. 



Yeah. 



So now that's down to 25%. And I think they're actually going to be previously, they didn't really enforce that much, but I think they're actually going to enforce it more. I don't know for sure. But another thing that you could do is if you take your RMD by the end of the second year after it was due, you'd only have to pay 10%. 



Okay, well, that's nice. 



Yeah. Okay, good. 



But just keep it there. 



Yeah, that would better. Let's just take it when you're supposed to. And that's exactly if you have your retirement accounts with a broker or whatever, an advisory like ours, we're always going to let people know when their RMDs are due. Wonderful. Now, there are other types of accounts that can have a Roth flavor. 



That's true. 



And they've added a couple of new ones here in 2023. 



As of 2023, you can now start to have a simple or Sep IRA that has a Roth portion and also for your employer contributions to a qualified plan, meaning like A, they could start contributing to those accounts as Roth. So the employer portion used to always have to be pre taxed, but now it's Roth, which is awesome, but they don't have to do it. It's optional. And usually there's some fees that are incorporated into that and takes a little bit of time to take into effect. 



Yeah, because when employers are sponsoring a remember doing it for a company I owned years ago, it was pricey to set it up. And then I imagine to make any change like this in the way it's administered, there's a fee with that, too. So it'll take these companies a little while to adjust and implement these things. But like a Simple IRA, that's also an acronym that I don't remember right now. I just know that Simple IRAs are not simple. The Sep IRA, the self employed pension IRA should be called a Simple IRA, but it's for self employed people, and it's a great savings tool for retirement. So that's great now that people can contribute to that on a Roth basis. Yeah, so that's wonderful. 



It gives them more options. 



Okay, so let's talk about what changed regarding catch up contributions. First of all, what are catch up contributions? 



So catch up contributions are essentially, when you hit a certain age, you're able to contribute more to your retirement accounts so you can accelerate that process. So in case you haven't saved enough or you want to start saving more, they give you an option to put a certain dollar amount. 



Okay. 



So you can catch up. So this is named very appropriately. 



Right. 



Okay, so give me some other examples here. 



So a lot of these are starting in 2024. And for an IRA, for example, this is an awesome thing that the catch up contribution is $1,000 still, but now it's going to be indexed for inflation. It should have been done before. 



That's true. 



So what that means is somebody who's under, say, 50 gets $6,500 a year. They can put to an IRA as of 2023. 



Yeah. 



And $22,500 a year, they can put in a 401. Correct? 



Yeah. 



And even more than that, into a sep sort of there are always so many factors that go in. But if you're over 50, your contribution on an IRA is increased by $1,000. 



That's your catch up. Yes. 



And on 401K, it's like a catch up of like, $7,500 more. 



Correct. Yeah. 



That's amazing. 



Yeah. 



And then for 401 KS and 403 B's, those qualified plans, the catch up contributions, for those that for an employee that makes over 145,000 indexed, they must be Roth. So that's another thing that came out and that'll start in 2024. So yeah, lots of different things. And there's even more to add to the catch up contributions that you could talk about with your advisor. 



Yeah. Or tax professional or whatever. There are a lot of different rules about this. Like I said earlier, it's very complex. So one final thing we want to talk about is this whole thing about 529 plans. Clients come in, I talk to them, you talk to them. They want to stay for their child's college, but they're concerned about contributing money to a 529 because they know they can only be used for qualified educational expenses, which is usually college. Now, over the last few years, they made it available for some private school tuition. Yeah. Other certification programs, not just colleges. So this is really nice that they've relaxed that rule, but now they've actually relaxed it even a little bit more. I don't know if it's relaxed. They've changed the rule. 



Changed it, updated it. 



So what are the rules now? They've given us 529 can now be converted into a Roth IRA for that child. But tell me some of the rules around it. 



Yeah, so there's definitely some guidelines that they put for this. So the first one is the 529 has to have existed for at least 15 years. And I don't know if that means it just has to have at least, like a dollar. Like, you just have to have an account and put a small amount in there, and it's got to exist for 15 years. Kind of like a Roth IRA. You have to have it for at least five years. It's also limited for the contributions to $6,500 a year for 2023, based on the year that you want to convert your 529 to the Roth. The owner of the Roth has to be also the beneficiary of the 529 plan. But they have to have compensation, like a job earned. 



Yeah, earned income. 



Exactly. And the max that they could put into that is based on the Roth contributions for that year. So, for 2023, it's $6,500. 



I wonder if you, like, had a 529 and you were the beneficiary, but it just sat there until you were 70 years old, and then could you make $7,500 conversion to a Rod? 



Never mind. 



I had never thought ridiculous. 



I just did for some dumb reason. All right, what's the next rule about this? 



So, contributions from the past five years and their earnings can't be converted to the Roth, as well. And I kind of touched on this in the second point. But it must go to the beneficiary of the 529 plan. It can't go to the owner's spouse. It has to go to the beneficiary. And there's probably some weird things, and I'm not 100% sure, to be honest, how it works if you change the beneficiary. So that's something that they might need to provide extra guidelines on. 



Okay, so, as a parent, I set up a 529 for my child. My child goes to college or doesn't or whatever or has some leftover and doesn't use it all, then that money, if it's going to be converted to a Roth IRA, it must go to that child. I can't just take it back. 



Exactly. Okay. And then the last thing to mention about this is that the max lifetime transfer limit is $35,000. 



Okay, good. 



So, man, that is great to know. Okay, so, we talked on a high level about changes coming for 2023 and 2024. There are more coming. Like, in 2025, companies offering 401 KS and 403 B's will be required to enroll employees at a 3% contribution level and make those accounts portable more easily if they change jobs. Because what happens is, a lot of times, people that lower income folks that change a job just cash out of just sets them way back. So if it's more portable and more easily transferable to their new plan, that is way better. But more details on that later on. Rory, we're about out of time. Thanks for joining me today. 



Yeah, thank you for having me again. 



As financial advisors, we manage and rebalance portfolios, but the real value is that we work to understand our clients individual goals so we can have these types of planning conversations that are so personal and unique to each individual. Thanks again for joining us. We'll see you next time. 



The Money Pig podcast was hosted by Rtrego. Goodwininvestment.com Advisory is a registered investment advisory firm regulated by the securities and Exchange Commission in accordance and compliance with security laws and regulations. Goodwin Investment Advisory does not render or offer to render personalized investment or tax advice through the Money Pig Podcast. The information provided is for informational purposes only and does not constitute financial hacks, investment, or legal advice. You close.