New Retirement Rules Passed by Congress

Key Points – New Retirement Rules Passed by Congress

New Retirement Rules from the SECURE Act 2.0
Reviewing the Inherited IRA Beneficiaries (Those Weren’t Impacted by SECURE 2.0)
A New Required Minimum Distribution Age
What’s New with QCDs?
A Roth 401(k) Match
The Latest on 529 Plans
10 Minutes to Read | 31 Minutes to Watch

Congress Passes the SECURE Act 2.0

It was just in November that Dean Barber and Bud Kasper talked about inherited IRA rules and the SECURE Act on America’s Wealth Management Show. Dean and three of our CFP® Professionals—Will Doty and Logan DeGraeve had just returned from the Ed Slott Elite IRA Advisor Group℠ conference in Las Vegas, where they discussed the SECURE Act and Required Minimum Distributions in great detail.

The SECURE Act became law on December 20, 2019. It has implemented new retirement rules that have had a major impact on retirees. Some of the most significant retirement rules have included pushing back the age of starting RMDs from 70½ to 72 and the elimination of the Stretch IRA, which has forced beneficiaries to withdrawal IRA assets within a 10-year window.

Well, nearly three years to the day of the SECURE Act becoming law, the SECURE 2.0 Act was signed into law on December 29, 2022. SECURE 2.0 reshaped retirement rules once again. We’re going to review some of those retirement rules and explain why they could impact you.

First, What SECURE 2.0 Didn’t Change

Before we get into some of the new retirement rules that are detailed in SECURE 2.0, we want to review the confusing inherited IRA rules that Dean and Bud talked about in November. They were hoping that SECURE 2.0 might make those retirement rules less confusing, but nothing changed.

The Three Different Types of Beneficiaries

There are three different types of inherited IRA beneficiaries—a non-designated beneficiary, a non-eligible designated beneficiary, and an eligible designated beneficiary.

Examples of a non-designated beneficiary include an estate, charity, or non-qualifying trust. So, if you have a trust as a beneficiary of your IRA, it needs to be a qualifying trust. If it’s not, it will become taxable before you know it. A non-eligible designated beneficiary, eligible designated beneficiary, or combo of those two in the language of the trust that is outlined very clearly.

Eligible designated beneficiaries include minor children under 21—but not grandchildren, surviving spouses, people who are chronically ill, disabled individuals under strict IRS rules, and those who aren’t more than 10 years younger than the IRA owner.

Non-eligible designated beneficiaries are designated beneficiaries who don’t qualify as eligible designated beneficiaries. Non-eligible designated beneficiaries are required to follow the 10-year rule and liquidate the IRA by the end of the 10th year after the IRA owner’s death. Should the IRA owner die after their required beginning date to take RMDs, a non-eligible designated beneficiary is required to take those RMDs and empty the account within 10 years.

One of the New Retirement Rules: RMD Age Pushed Back to 73

Once the SECURE Act became law, the required beginning date for RMDs was April 1 following the year that the IRA owner turned 72. Thanks to SECURE 2.0, it’s now April 1 following the year that the IRA owner turns 73. That new retirement rule went into effect on January 1, 2023, and will likely make a lot of retirees happy. And then on January 1, 2033, the RMD age will increase to 75.

So, if you turned 73 in 2023, your required beginning date to take RMDs is April 1, 2024. However, if you choose to go that route, you’ll be required to take two RMDs in 2024. For some people, it makes sense to do that form a tax planning perspective. For others, not so much. That’s why it’s so important to consult a CFP® professional who works alongside a CPA to get a better understanding on taxes in retirement.

These New Retirement Rules Are Noted on Our 2023 Retirement Planning Calendar

We’ve already noted these new retirement rules on our 2023 Retirement Planning Calendar, which outlines a multitude of crucial retirement planning dates. If you haven’t downloaded your copy of our 2023 Retirement Planning Calendar, you can do so below.

2023 Retirement Planning Calendar

But notice that we said it will make a lot of retirees happy and not all of them. If you’re already taking RMDs, this new retirement rule unfortunately won’t impact you. You must remain on your RMD schedule. We’ve had several clients ask us why the government is doing this. Well, this new retirement rule could convince many retirees to do Roth conversions, and the government gets an immediate pay day on those conversions.

A New Retirement Rule Regarding Qualified Charitable Distributions

While we’re on the topic of tax planning strategies, we want to touch on Qualified Charitable Distributions. QCDs allow those who are 70½ and older to take money directly from their IRA. If you’re charitably inclined, QCDs give you the opportunity to give to charity and eliminate Uncle Sam in your gifting. QCDs never shows up on your tax return. They can’t trigger additional Social Security to become taxed, Medicare premium increases, or tax-free dividends to become taxable.

“If you’re giving money to charity and you’re over the age of 70½ and not doing it through QCDs, it’s more than likely that you’re not getting the benefit.” — Dean Barber

Starting in 2023, there’s a new one-time only retirement rule with QCDs. You can take a $50,000 QCD and move it to a charitable gift annuity, charitable remainder trust, or charitable remainder annuity trust. Also, the QCD limit of $100,000 will be indexed for inflation starting in 2024.

Prior to this new retirement rule with QCDs, it was typically forbidden to put money into a charitable remainder trust from a QCD. A charitable remainder trust allows you to name a future charity of that trust. Whatever is remaining in that trust when you pass away will then go to charity. With a charitable remainder trust, you can invest the money. You can remain in control and receive all the income that the charitable remainder trust generates. Charitable remainder trusts can be a great tool for people who are charitably inclined.

An Example of a Charitable Remainder Trust

Here’s an example of a charitable remainder trust from Dean. Nearly 30 years ago, Dean was working with a physician who owned a building that he worked in. The physician was adamant about giving the building to his alma mater because he felt it was responsible for his success. Well, his wife didn’t see eye to eye with that. She wanted the building to go to their sons.

Dean showed them that the building could go to the physician’s alma mater and their sons through a charitable remainder trust. The building went to the trust and the sons could get the rent from the building as long as they lived. Dean suggested that the physician and his wife use part of the rent to purchase a life insurance policy so that when they died, their sons would get an amount equal to one-third of the building tax-free. All parties benefited.

So, if you have a charity that you want to give to and you want to still get income from that asset, a charitable remainder trust can work. You can do up to $50,000—one time only—as a QCD into a charitable remainder trust. Dean believes that the cost of getting a charitable remainder trust set up would be prohibitive if all you are going to do is that one $50,000 QCD. But if you have a charitable remainder trust already in place, this is an opportunity to get more money into it from your IRA without it ever being taxed.

Keeping Uncle Sam out of your life can feel really good. To learn more about how to pay as little tax as possible over your lifetime, download a copy of our Tax Reduction Strategies Guide below.

Download: Tax Reduction Strategies Guide

Changes in the Roth

As we shift gears a little bit with these new retirement rules passed by Congress, we’re going to talk about changes with the Roth. First, let’s look at the Roth 401(k), which is now offered by most employers. With the Roth 401(k), your money goes in after you’ve paid taxes on it and then all your future growth is tax-free. It’s also tax-free once it’s passed down to your beneficiaries.

A Roth 401(k) Match

In a Roth IRA, there’s no such thing as an RMD. However, if you were still working and of RMD age, you’re still forced to take RMDs from your Roth 401(k). That will no longer be the case, though, starting in 2024 thanks to SECURE 2.0.

When Roth 401(k)s came about, one of the biggest complaints about them was the pre-tax money going into them. The match has always gone into the traditional side of the 401(k). But another retirement rule that’s changing is that employers now have the option to offer a Roth match. That went into effect on January 1, 2023. This means that the business will pay tax on the contribution that goes into the Roth. Along with that being a win for the employee, it’s a win for the government because the additional contributions will be taxed before going into the Roth portion of the 401(k). It’s a way for Congress to get more money without raising the tax rate.

Simplified Employee Pension and SIMPLE Plans

There are a few other new retirement rules related to Roth 401(k)s and Roth IRAs. Simplified Employee Pension Plans (SEPs) are generally used at small companies. SEP contribution limits are fairly high and have never been allowed to be done in a Roth format. Until now.

Effective January 1, 2023, SEP and SIMPLE Plans can be done with Roth contributions. Both can be beneficial for small business owners. They don’t get a tax deduction when putting money into the SIMPLE or the SEP, but all the earnings are tax-free. It’s also tax-free when it gets passed down to the next generation.

Catch-up Contributions

There’s also a new retirement rule related to the Roth that involves catch-up contributions that will go into effect in 2024. If you’re older than 50, you can put more money into the plan than the typical plan contribution limits. The catch-up provision allows you to save more. Starting in 2024, if you’re doing a traditional 401(k) and are doing catch-up provisions to get more money into it, the catch-up portion of the contribution will be forced into the Roth. The government is tired of people over the age of 50 being able to deduct more.

What Could a SECURE 3.0 Look Like?

Dean isn’t a fan of this new retirement rule because it’s taking away the freedom of choice of how you want to save. He believes that an individual should be able to assess their situation and choose the best option of where to save to. Dean is also fearful that Congress could come in with SECURE 3.0 that could take away the ability to deduct anything that goes into a retirement account and force everything to go into Roth. Then, Dean fears that Congress could eventually change the retirement rules and make the Roth taxable.

For a couple of decades, there has been debate about whether the Roth will become taxable. It hasn’t been done yet. Dean thinks that the only way it will happen is if there’s a flat tax or tax based on spending.

529 Plans

Next up in new retirement rules within SECURE 2.0, there are changes in 529 Plans. With 529 Plans, you put money into the plan, you get an income tax deduction for the state that you live in, and all the proceeds grow tax-free to pay for higher education and some private high schools/secondary education.

If the beneficiary of the 529 Plan doesn’t use all that money for their education, SECURE 2.0 now allows them to move up to $35,000 to a Roth IRA over their lifetime of their own. As we’ve explained with the Roth, that money would accumulate tax-free. Now, there are some caveats. The 529 Plan needs to have been opened for at least 15 years. Also, you the annual rollovers can’t exceed the annual Roth contribution limit and the total lifetime rollovers can’t be more than $35,000. Still, if you have children and/or grandchildren, opening a 529 Plan as soon as possible and overfunding it could be very beneficial to them.

The Rothification of Congress

Bud wishes that 15-year rule wasn’t a part of the new retirement rules with 529 plans, but that furthers the importance of planning ahead. He also sees it as being a part of the Rothification of Congress. Congress is starting to realize the amount of revenue created on things like Roth conversions.

When we’ve completed a financial plan for someone, we also do a long-term tax projection for them. Our CPAs are also involved in that process along with our CFP® professionals. It’s our goal to help people understand that if you have or make money, taxes are a fact of life. So, how do you structure your assets to pay as little tax as possible, not just in one year but in your lifetime? And it’s not just your lifetime either if you’re wanting to pass money down to the next generation(s).

New Exemptions for the 10% Early Distribution Penalty

We’re going to begin rounding out this article on new retirement rules by discussing new exemptions for the 10% early distribution penalty. One of the exceptions involves federal natural disasters. It’s up to $22,000 and is retroactive to January 26, 2021. This isn’t a tax-free situation. You’re just avoiding the 10% penalty. If you’re younger than 59½ and need that money, you can get to it without incurring the penalty.

Starting in 2024, you can also take up to $2,500 from pension-linked emergency savings accounts without incurring the 10% penalty. There’s also a new $10,000 limit that can be taken out of your 401(k) or IRA without the penalty for domestic abuse. Also, in 2024, you can take out $1,000 for financial emergencies without incurring the 10% penalty.

“The one thing that I think is a little bit of a problem with that is if people start using these 10% penalty exemption rules to start pulling money out of their retirement savings, they’re losing the benefit of the compounded total that you’re trying to drive toward when you really need the money when you no longer have a paycheck.” – Bud Kasper

New Missed RMD Penalty

There’s also a few more retirement rules about missed RMDs. If you missed a RMD prior to 2023, you had been subject to a 50% excise tax. That’s been reduced to a 25% excise tax. If the missed RMD is corrected in a timely manner, the penalty is further reduced to 10%.

Now, just because there’s a lesser penalty doesn’t mean that you should procrastinate with RMDs. You can plan ahead with RMDs, so why cut it close and risk incurring any penalties for missing them?

Some of These New Retirement Rules Are Getting More Complex

While there are some benefits with these new retirement rules that Congress has passed, many aspects of SECURE 2.0 are just as complex at the SECURE Act, if not more so. That’s why it’s so critical to sit down with a CFP® professional and CPA at the same time so you’re not falling into any tax traps.

“What are you missing? That’s the question you should be asking yourself. Most of the time what we say is, ‘You don’t know what you don’t know.’ That’s why we’re here.” – Dean Barber

Do you have questions about some of these new retirement rules? If you’re a Modern Wealth Management client, reach out to your advisor so you can get some clarity about how they impact your retirement. If you’re not a client of ours, we have a few opportunities for you. First, you need to understand that a financial plan essentially serves as a permission slip to achieve your retirement goals.

You can begin building your financial plan with the same financial planning tool that we use with our clients. To access our tool at no cost or obligation, click the “Start Planning” button below.

START PLANNING

We also welcome the opportunity to answer any questions about these new retirement rules during a 20-minute “ask anything” session or complimentary consultation with one of our CFP® professionals. To schedule a meeting in person, virtually, or by phone, click here. We hope this review of the new retirement rules has been helpful to you and look forward to answering any questions that you may have.

New Retirement Rules Passed by Congress | Watch Guide

Disclosures and Introduction: 00:00
Congress is at it Again: 01:53
What the original SECURE Act Changed: 3:20
What the SECURE Act 2.0 Didn’t Change: 04:14
Changes to RMDs under SECURE Act 2.0: 05:44
QCD changes under SECURE Act 2.0: 07:09
Changes to Roth accounts under SECURE Act 2.0: 15:40
SEP & SIMPLE Plan changes under SECURE Act 2.0: 19:01
Changes to Catch-Up Contributions under SECURE Act 2.0: 20:07
529 Plan changes under SECURE Act 2.0: 23:09
New Exemptions for the 10% Early Distribution Penalty: 26:30
New Missed RMD Penalty: 29:00
Conclusion: 29:44

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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.