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New Secure 2.0 Retirement Law & Planning Strategies for You

Every morning when I awaken, I wonder whether the politicians changed all the rules again. It happens so often that it is difficult to keep track of what was discussed versus what became law. I try not listen to proposed law changes so that I can focus on the laws that actually passed and the strategies worth deploying based on those laws. Late December 2022 was no exception: Secure 2.0, a major retirement plan bill, passed as a part of the $1.7 trillion omnibus bill. A lot of provisions that were discussed were not part of the final bill, and some new ideas were added and passed. This has given the team at the Consulate the opportunity to excel again and figure out how best to approach each provision of this new law for our clients. Let’s consider a couple of the new provisions and the benefits you may derive.

One provision moves the Required Minimum Distribution (RMD) age to 73 from 72.  First, we should be thankful they changed the previous age requirement of 70.5 to whole ages for the RMD, but the age for withdrawals without penalty is still 59.5, and the age for Qualified Charity Distributions (QCD) remains after age 70.5. Unfortunately, those who were born in 1950 were forced to take an RMD last year and this year, while those who were born in 1951 get no RMD until 2024. These tax law changes resulted in a litany of carnage on many people’s tax returns when they missed the new law by a hair. Where is the fairness in the tax law? The potential benefit of this change is that there is more time to do Roth conversions at relatively low tax brackets, if possible. RMD withdrawals may never be converted; therefore, having another year to wait until forced taxable withdrawals provides another planning year. Converting traditional IRAs to Roth IRAs requires strategic thinking; talk to your Consulate advisor to develop a strategy. I wrote an article two years ago called ” A Roth Strategy” and we now have an additional planning year to implement that strategy. This law is effective 2023.

Previously, if your employer matched your salary deferral, that match was automatically deposited into the pre-tax traditional 401(k) account. Per Secure 2.0, you can elect for your employer to deposit that matching contribution into your Roth 401(k) and have the match treated as income on your W-2. There are positives and negatives to making the election for employer matching contributions to be taxed and deposited in your Roth 401(k). If you are very charitably minded and intend to move from a high-income tax state to lower one in retirement, or if your federal adjusted gross income is between $100,000 and $500,000, then you may NOT want to do Roth matching. If you have total family income under $100,000 or over $500,000, then it may be beneficial to do Roth matching. These are simple general rules, however, and each person’s situation must be considered individually.  Talk to your Consulate Advisor to come to the best decision based on your family’s finances and plans. This law is effective 2023.

Two provisions of the law are particularly ill-conceived. First, if your salary was more than $145,000 the previous year, you can only do catch-up contributions in a Roth 401(k), and second, when you are between 60 and 63 years of age, you can withhold a larger catch-up contribution. These kind of law changes make one wonder why $145,000 and those four years from 60 to 63 were chosen. One quirky provision of this $145,000 law is that if the employer plan does not offer Roth contributions, then no one can do catch-up contributions, which seems a little extreme. These provisions do not create planning opportunities, but it is important to be knowledgeable about them. The first is effective 2023, and the latter is effective in 2024.

The last provision provides an opportunity for grandparents and parents to use college 529 savings plans more effectively. I have only encouraged 529 plans since 2001 when they were exempted from taxes for income and gains, when the objective was to pay for college. Secure 2.0 now creates a new reason I would like to change that recommendation, but no one ever predicted this change. In Secure 2.0, you can now transfer 529 plan assets of a beneficiary to their Roth IRA if they have earned income (work earnings) up to the yearly contribution limit of $6,500 (under age 50). The 529 plan must be in existence for 15 years, and there is a lifetime transfer per beneficiary of $35,000. The problem I have always had with a 529 is that if there are no college costs, then there is no way to withdraw tax-free, and it took planning to get the funds out and limit penalties. There is still some clarification to come, but it appears that with this provision, you will be able to move the funds to your children and grandchildren’s Roth IRA as a long-term strategy. This is great, because I could only put money in my children’s Roth IRA, growing tax-free for life, if the child had earned income. Now a grandparent can set up a 529 at birth with plans to switch it to their Roth IRA when they begin to earn income from work. The parent or grandparent that has a long-term goal of gifting assets to the descendants now have a unique tool. One other potential benefit of this strategy is for high-income parents. Roth IRA laws require your income to be under $228,000 to contribute in 2023. Some families have incomes far greater and are not eligible to contribute to a Roth IRA. The transfer from a 529 plan to Roth IRA is not subject to the income limits as the bill is currently written, so this may be a way for high-income families to contribute. This law becomes effective 2024.

Keeping up with the ever-changing laws is a full-time job. We are thankful to have a team of 23 that can help us effectively analyze and design strategies for new laws. This is what a professional advisor is supposed to do. With every major change, we shall be here ready to make it beneficial to you.

Financial Consulate aims to help lessen the worry and burden of wealth management and enhance financial wellness so our clients can pursue relationships and true fulfillment. Choose the professionals at Financial Consulate as your Certified Financial Planners™ (CFP®) to take advantage of our educational, ethical approach to financial planning. Our services are comprehensive, including tax planning, investment planning, retirement planning, estate planning, and more. We operate completely independently and offer fee-only services to keep your vision in line with our recommendations at all times. While we have offices in Hunt Valley, Maryland, Fernandina Beach, Florida, and Gettysburg, Pennsylvania, we serve clients across the nation. To begin your partnership with a trustworthy wealth advisor, please contact Financial Consulate today.

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