One of the hardest parts about tax planning is keeping up with a tax code that is constantly changing.
On December 29, 2022, President Joe Biden signed into law the Secure Act 2.0, which has significant changes affecting many aspects of tax planning and retirement planning. Among those changes are Required Minimum Distribution (RMD) ages, rules surrounding traditional and Roth IRAs, charitable giving strategies, and much more.
Here are just a handful of the major takeaways from the newly signed law:
Changing RMD Ages
In 2019, the Secure Act changed the RMD age to 72. Secure Act 2.0 has several different RMD ages.
- Those born in 1950 or earlier have to start RMDs at 72, except those who turned 70 ½ before 2020. Those individuals will continue RMDs as normal.
- Individuals who were born between 1951 and 1959 will start taking RMDs at age 73.
- Those born in 1960 or later will begin taking RMDs at age 75.
The new RMD changes can be a double-edged sword.
On the one hand, delaying the inevitable tax explosion that RMDs so often create means compressing the problem into fewer years. This exacerbates the problem because more income will be forced onto your tax return–income that you didn’t necessarily want or even need.
On the other hand, a few more years of delaying RMDs gives investors the flexibility to help remedy the tax hemorrhaging that RMDs often create. Roth conversions are probably the most impactful way to prevent the problems that come with RMDs—taking chunks of pre-tax assets from traditional IRAs to convert into Roth money. The conversion counts as income, but whatever is converted now grows and can be distributed tax-free. The traditional IRA is also smaller in value, meaning less RMDs in the future.
Rollovers from 529’s to Roth IRAs
With any type of investing, there is a risk. One risk common to investors using 529s to save up for their children’s higher education is whether or not the child even decides to finish college or go to college. Since the money can only be used for qualified education expenses for the beneficiary or otherwise may be subject to penalty taxes, the account owner takes on the risk that the beneficiary will go to college.
Part of Secure Act 2.0 introduces the ability to roll over a maximum of $35,000 from a 529 to a Roth IRA in the beneficiary’s name. There are several important things to note here. Here are a few:
- These changes begin in 2024
- To be eligible, the 529 must have been open for at least 15 years.
- The most that can be rolled over in a single year is limited to the Roth IRA maximum contribution limit during that given year ($6,500 in 2023). No more than $35,000 can be rolled over in total.
- Contributions from the last five years are ineligible for a rollover.
It seems that this was written into law to also help younger individuals get a kick start on retirement savings. The 529 can be a way to begin tax-free savings for a child much earlier without the need for the child to have earned income, as is the case with a Roth IRA. This can also allow parents or grandparents to begin gifting tax-free assets to their heirs.
Qualified Charitable Distributions
Qualified Charitable Distributions (QCDs) are a powerful way to accomplish charitable giving goals without having the consequences of increasing your income for the year. Individuals can begin making QCDs at age 70 ½ and are capped at $100,000.
QCDs can also be used to satisfy the RMD requirements. With the standard deduction as high as it is, most families are forced to take it and cannot deduct their charitable giving. QCDs are a way for individuals to still have a tax benefit from charitable giving while taking the standard deduction.
Since they were introduced when the Pension Protection Act was signed into law in 2006, there haven’t been any changes to the limits regarding QCDs. Starting in 2024, the $100,000 limit will be tied to inflation, and adjustments will be made likely annually to account for inflation.
Catch-Up Provisions
The Secure Act 2.0 introduces new catch-up provisions for different retirement plans and retirement accounts. Some of the language in the newly signed law will need further clarification from lawmakers, but in general, these are some important changes to take into consideration:
- IRAs: Previously, only IRA regular contributions were indexed for inflation. The catch-up provisions remained the same. In 2024, the catch-up amounts will begin to increase with inflation. This is an important provision as those above 50 can really start to pack away savings and increase those savings along with inflation.
- Employer plans: In 2024, participants in employer plans (401(k), 403(b), etc.) that are aged 60-63 will have the ability to make catch-up contributions of the greater between $10,000 or 150% of the normal catch-up contribution limit. This amount will also be indexed for inflation.
These changes will certainly help savers combat inflation and help those closer to retirement pack away more savings than was previously available to them.
Although no law is perfect, it seems lawmakers were able to come to a consensus on some very sensible, practical, and useful changes that will hopefully help more people prepare for retirement. While the future is uncertain, one guarantee is that tax laws will continue to change in the coming years. With professional help, you can be sure that you can navigate the complicated tax code efficiently and effectively over time.
TrueNorth Wealth Is Here to Help
TrueNorth Wealth can assist you with navigating the Secure Act 2.0 and creating a personalized investment portfolio that aligns with your financial objectives. As a trusted fiduciary CFP® professional, we are dedicated to helping our clients achieve long-term wealth while enjoying their money.
We are a top wealth management firm in Boise, Salt Lake City, Logan, and St. George. Our team is passionate about serving families in the region and helping them attain financial freedom and flexibility. Reach out to us to schedule a free consultation and learn more about our services.
