The Securing a Strong Retirement Act of 2022 (also known as Secure Act 2.0) passed the House on March 29th by a majority vote of 414 to 5. It is currently taken up in the Senate and, if the overwhelming majority in the House is any indication, momentum on this bill could carry it through the Senate rather handily.
Before we highlight the key provisions of SECURE Act 2.0 and its related planning opportunities, let’s first start with a refresher on the main provisions of the original SECURE Act, which passed in December 2019:
- The required minimum distribution (RMD) age was increased to age 72.
- The age limit on making IRA contributions was eliminated.
- The “lifetime stretch” on inherited IRAs was eliminated for retirement accounts inherited starting in 2020. In its place stands a 10-year withdrawal period for most beneficiaries. Some beneficiaries, classified as “Eligible Designated Beneficiaries (EDB),” can still benefit from stretching distributions over a life expectancy calculation (Note: in February the IRS released proposed Treasury Regulations in an attempt clarify treatment of post-2019 inherited retirement distributions. Stay tuned for more details from Inspired Financial on this once the regulation is finalized!).
SECURE Act 2.0 builds on the original SECURE Act’s core provisions in the following ways:
- Proposes to increase RMD age to 75 in phases over the next 11 years; the RMD age would increase to age 73 in 2023, then age 74 in 2030, and finally age 75 in 2033. These age tiers do not apply to individuals who are already RMD age.
- Qualified Charitable Distributions, which have been set at a max $100,000 per person since passage of the Pension Protection Act of 2006, would now be indexed for inflation.
- Roth and traditional IRA catch-up contributions, currently set at $1,000 per person, would also be indexed for inflation.
- Catch-up contributions would be increased to $10,000 for 401(k)s and 403(b)s for employees ages 62-64. Employers could also match contributions directly in Roth 401(k)/403(b) accounts.
- Roths galore! There would also be Roth versions of SEP and SIMPLE IRAs.
This list is not exhaustive, the House version of SECURE Act 2.0 also includes provisions ranging from a reduced penalty for missed RMDs to additional assistance for student loan borrowers.
If the SECURE Act 2.0 passes as is, we would double down on two of our favorite planning opportunities, including:
Roth conversions. Any pre-tax IRA dollars that an account owner converts to Roth dollars can have a powerful effect on many fronts. For one, if you take advantage of Roth conversions in early retirement years when your gross income is low (no Social Security, pension, or RMD income yet), you will be filling up “cheap” tax brackets now and mitigating (or, fully eliminating!) RMDs later. Secondly, if you file jointly with your partner and anticipate that one of you will outlive the other for several years, Roth conversions now at joint tax brackets will save the future widowed spouse from having to pay for large RMDs at single filer tax brackets. Lastly, Roth assets are one of the best gifts you can leave a beneficiary, especially in this post-2019 SECURE Act world. Yes, a beneficiary of a Roth will still have to take distributions (either over a 10-year timeline, or their lifetime if they’re an EDB), but the distributions are all tax-free. Regardless of what passes under SECURE Act 2.0, we will continue to leverage Roth conversion strategies for clients, as appropriate. And, if it does pass, we will take advantage of those delayed RMD years and “fill up” low tax brackets with Roth conversions over an even longer period.
Qualified Charitable Distributions (QCD). For those who are at least 70 ½ and charitably inclined, donating from a traditional IRA in the form of a QCD is a tax efficient way to give. QCDs tend to be most popular with taxpayers who are RMD age. This is because a taxpayer can take their RMD as a distribution directly to a 501(c)(3) charity, effectively eliminating taxable income related to the RMD. While often overlooked, QCDs are a great opportunity between 70½ and RMD age, too. For individuals who are heavily allocated to IRA money, giving through the form of a QCD is a way to fulfill philanthropic passions while also decreasing the burden of future RMDs. As with Roth conversions, the arbitrage between QCD age and RMD age only gets better under the tiered RMD ages under SECURE Act 2.0.
These two planning opportunities are not our only focus when it comes to planning under the SECURE Act; we also look closely at how a client’s beneficiaries are structured to ensure assets pass fairly and most tax efficiently to the individuals and organizations they care about.
Interested in learning more on how we’re thinking about your financial plan under SECURE Act 1.0 and 2.0? Please email us!
And watch for a deep dive on SECURE Act 1.0 from our guest blogger, Curtis Kaiser, on May 17th. (now published)
“I believe in fostering a relationship with your personal finances. Once you begin to understand what deeply matters to you, the way you put your dollars to use becomes an expression of those values. When you can orient yourself to view your spending as a reflection of who you are, you’re able to exercise control over how your money moves; there is great power in that.”
