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On this episode of The Financial Commute, Chris Galeski is joined by Wealth Planner and estate attorney Brian Standing to discuss Secure Act 2.0.

For those who are 64 to 72 as of 2023, the age to start taking RMDs (required minimum distributions) will increase to 73 in 2023 and 75 in 2033. The penalty for failing to take an RMD has been reduced from 50% to 25%; if it was not intentional and is corrected in a timely manner, the penalty decreases to 10%.

The Act also included changes to education funding: if the beneficiary of a 529 plan does not use the money in their plan for school, a certain amount of those assets may be rolled over to their Roth IRA. However, this policy does not start until 2024, the rollover amount has an aggregate lifetime limit of $35,000, the 529 account must have existed for at least 15 years, and the rollover money must have been in the 529 for at least 5 years to permit the transfer. Therefore, Brian encourages listeners to consider opening a 529 account for their children as soon as possible, even if they may not need the money for school.

Furthermore, people who have been contributing to the Roth option of their employer-sponsored 401(k) or 403(b) are no longer required to roll that money to an IRA to avoid RMDs (starting in 2024). Employer-match contributions can also go into a Roth IRA. The benefit of Roth accounts is that taxes are paid today so that the money is not taxed when it is later taken out for retirement.

Brian highlights another part of Secure Act 2.0 that helps employees who may not be able to afford retirement contributions because they are paying off student loans. The provision allows employers to make matching contributions to an employee's retirement plan based on their student loan payments beginning in 2024.

Chris and Brian encourage listeners to schedule time with an advisor to discuss how Secure Act 2.0 may impact them if they inherit a retirement plan from a deceased spouse, as there are new options and details may be more complicated based on one’s individual situation.

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Hello, everybody, and thank you for joining us for another episode of The Financial Commute. I’m Chris Galeski, your host joined by wealth planner and practicing estate attorney Brian Standing. Brian thank you for joining us.

My pleasure. Exciting. First time.

Yes. First time, might not be invited back.

I want to be your new law correspondent.

Okay.

Well, when stuff changes, I want to come in and talk about it.

I'm glad that you're excited about it, because at the end of last year, at the very last minute, Secure Act 2.0, some really big pieces of legislation got put into play. And there are some timelines where a lot of these phased in. We're not going to hit on all of the different components because some of them don't phase in for a couple of years. But, you know, let's talk about Secure Act 2.0.

Are you saying I memorized a 1400 page bill for this and we're just going to touch on a couple.

Yeah. But mainly like pages 1100 to 1200.

It was ridiculous, by the way, and it was dropped at the last minute. Here's all the new laws and yeah, had to go through it. Yeah. And hopefully we can pull out some interesting bits.

So from your standpoint, Secure Act 2.0. High level. What is it and what are some of the key pieces that kind of got put into play?

Well, I mean, high level, it's hard for me to just make immediate sense of it. Obviously, we know that the overall goal is encourage retirement. Yeah, that's a good thing. Right. But, you know, as you know, people who need their retirement plans take the money out and they pay the tax and they live their life. People who don't need to take the money out, well, they get a benefit now that we can talk about, which is they don't have to take it out as soon. They get to wait and so, they get to save tax money.

But to me, you know, I mean, that's good for them. I'm happy for, you know, our clients and others who can delay paying income tax. But, you know, the overall goal, I don't know how that meets our overall goal of helping people retire.

What I take away from that high level perspective, so takeaways is how it affects clients that have to take the required minimum distribution, people that are saving towards retirement and potentially some additional Roth contribution options for them. If you have saved money towards a 529 for your kids, there’s potentially a way that you can move money from that plan into a Roth IRA for them to help sort of jumpstart their retirement savings if you don't need to use all of them for college. There's one of the biggest things in there is now employers can actually amend their plan sponsor 401(k) or retirement vehicle to allow for employer matches to pay off student loans. There's some interesting components.

Yeah. And we can talk about all of those- any of those, of course, as we go through this.

Let's start with the required minimum distributions. So if you were not 72 by December 31st of 2022, you had not already turned 72, your new age for when you have to start taking a little bit of money out, your minimum required distribution from your retirement plans is now age 73.

It will be for people who are 64 and older. So basically 64 to 72. Yeah, as of this year. Then, you can wait until you're 73. So if you turn 72 this year, you would have otherwise taken it and now you get to wait an extra year. And if you are, you know, 64 or above, that will be your age, 73.

So you can plan for that. And if you're below 64 years old now, then it’s 75. You push back even more.

So I'm horrible with trying to remember what age I am, but I do remember the year that I was born. So if you were born between 1951 and 1959, you have to take required minimum distributions at age 73. If you're in 1960 or later, it's now age 75. Right.

That sounds right. But are we going to do mental...

No, no, I think I think I'm good.

I think we both said the same thing two different ways.

We did. That's why I wanted to do it, it’s perfect. One of the other interesting things is oftentimes people forget to take their required minimum distribution or they've got IRAs at different places, and so they maybe miscalculate or forget to do something. The last few years have been a little bit wacky. In 2020, you didn't have to take any requirement of distributions at all.

Now, the penalty for not taking the appropriate amount out has been reduced from 50% down to 25.

Yeah. So I mean, 50 was pretty harsh, right, to miss the distribution and there was no like good faith exception. It wasn't like, you know, we didn't do this on purpose, you know, so I didn't get a specific notice. And so can we get a break? It was 50%. Yeah, now it's 25. But even better, if it wasn't intentional, you can show that there was some issue and you sort of timely make it back up, it’s 10%.

So that's a lot more.

That is reasonable and I think that some people like that. So the biggest takeaways from there is that you know your required minimum distribution age may have changed. A few years ago, it was age 70 and a half. That got pushed to age 72 now. It's potentially age 73 or age 75. And then the penalties for not taking your required minimum distribution has been reduced.

Let's talk about 529 plans and some of the changes there. You want to kind of talk high level about that?

Sure. Sure. So a lot of our clients, a lot of people who have children and grandchildren want to contribute to education for family members. Right. And a common way to do that is through these 529, you know, educational accounts and the purpose there is you make a transfer to this account. And while the assets are within this 529 there's no tax, right? income growth.

You can grow, there's no tax on the account. And ultimately you can use that money for almost all levels of school. This could be primary, secondary, college graduate and use it for any kind of school. And if you use it for qualified school expenses, you don't pay that filtered income tax. Right. Which is really nice. So that's kind of a background and it's very important for a lot of our clients.

What may happen is we have a child, a grandchild, someone who maybe they have a full ride, it gets paid or they don't go to college or whatever the case is. And we have this money sitting in a 529 and if we just pull them out now, we're going to pay all the tax, right? Potential penalty. So our goal with this new law is to sort of look at do we have 529s that are unused and rather than paying a penalty or trying to just hold them for the next generation and hope we use them, you can roll a certain amount of that money to the beneficiary’s Roth IRA.

So in other words, give them a jumpstart with a Roth IRA because they didn't need their educational funds. There's some limitations we can talk about some key points.

This doesn't start until 2024, right? The maximum amount that you can move over in a given year is up to $6,500 or whatever the annual contribution to a Roth IRA is. That cap is at 35,000 total.

Right. And there's some timing, right? You can't put a bunch of money into a 529 and then next year say, all right, rolling into my my child's Roth IRA.

It's got to be in there for what it proposed right now is, what, five years?

So, the money that you roll over has to be in there for five years. But the account has to exist for 15 years. And so what we're looking at is potentially opening accounts, whether we think we're going to do this or not do this, we can open the account. Throw a dollar in there, something right? Now, it has the seasoning period.

It just has to be open. Yeah, we still have to worry about the five years of putting money in, but at least we can do the 15 year easily if we just open 529s for the kids.

What's going to prevent higher earners from opening up 529 plans for their spouse and say you're 45 years old and you open up a 529 plan for your spouse, you put in $10,000 in it, and over the next 15 years it grows from 10,000 to 35,000. And then you can move that into a Roth IRA. What's going to prevent people from doing that?

So nothing specifically in the law.

So there are some unique strategies that you can begin to get in.

There's even a question which is not addressed, which is, well, the time is about the account being open, not about the beneficiary. So what if you have this 529 for a beneficiary? You don't want that person to have a Roth, you just change the beneficiary on the 529 next day. Roll it into that person's. Yeah. What about making yourself the beneficiary and now you add to your Roth. Who knows?

We'll see and this is what happens when you pass a lot of new provisions all at once. They don't think through all the iterations.

What was it, 1500 pages there towards the end of the year that you read through the entire thing.

Right? Oh, yeah. You know, my family, we like to gather around the tree in the holidays and look at the budget for the upcoming year and see like who's naughty, who's nice.

It's fun. I do love gray area, though, because I think from a planning perspective, the gray areas where we get to have a lot of fun and look at some ways that we can add value to clients’ lives, whether it's proactively or reactively. Maybe you've got kids that are now in their mid to late twenties and they've already gone to school and they just have some leftover dollars in their 529 plan.

There are some really cool things that we can…

Yeah, yeah. No, I think it's a good change. I think anytime we can encourage both education and potentially retirement savings at the same time, yeah, it's a win.

Some other things that don't start until 2024 is that if you've been saving into your employer sponsored 401k or 403b and you're contributing to the Roth option and you are subject to required minimum distributions, you no longer have to roll that money over to an IRA to avoid required minimum distributions. You can leave them in the employer sponsored plan, that's changed too, right?

I mean yeah, remember I mean the whole goal with that Roth is you don't have to take it out, right? And if you don't, it can grow tax free. And so the challenge was if you had the Roth plus a regular plan, as soon as the RMDs come in on your regular plan, it was like, okay, you also have to take out the Roth.

What if I don't want to take out the Roth, right? And you would have to take it out, put it in an IRA if you could. And so now you don't worry about that extra complication, you know, so maybe other planning opportunities to discuss, but that's kind of a nice, you know, benefit.

Yeah. Everybody's situation is different. We need to make decisions based on that. But one other thing that sort of starts in 2024, qualified charitable distributions. So people taking part of their requirement distribution and instead of receiving that and spending that they make a donation directly to a charity. It allows them to avoid having to realize that income, right? That limit was set at $100,000 for the year.

Yeah, but some changes to that number.

Yeah. So it's they're just indexing it so effectively 100 but the value so it kind of increases over time. Obviously over the many years it's been in existence, hundred thousand is not what it used to be. And so it's just starting now, we're going to scale it up with the cost of living. So, you know, if that's the right move for a client, we can do a bit more every year.

Yeah.

On the charitable.

So we've spoken about a lot. We've spoken about changes in ages for required minimum distributions, talked about a 529 plan, the Roth strategy, a little bit with regards to qualified charitable distributions. What are some of the things that kind of caught your eye with regards to Secure Act 2.0?

Yeah, I think I think you mentioned at the beginning, one of the interesting things is with respect to contributions to a plan for younger individuals who have a student loan, the challenge is your employer says, look, we'll match your contribution. We can't make one because by the time you pay the rent and you, you know, pay off your student loans and your car, whatever else you've got, you're not making a contribution.

Right. And so the employer now, starting in a couple of years would be able to say, okay, you've made X dollars toward your student loans. We’ll match that. So we can as an employer now put in some money for you. So you're getting some retirement planning along the way. I think that would be attractive to a lot of people coming out earlier in their careers.

Yeah, we need to do this to pay off loans.

I think it'll be really interesting. I assume a lot of employers will adopt something like this or amend their plan documents to account for this. It's still subject to certain vesting requirements, other things. So we'll have to pay attention to that. One other change that that looked like was employers being able to match contributions to either the student loans or even to the Roth portion of somebody's retirement plan.

Right now, if I'm contributing to the Roth 401(k), my employer contribution goes to the pretax but Secure Act 2.0 changes that if I'm contributing to the Roth the employer match can go into the Roth portions.

Well yeah, yeah. There's kind of a theme just when you go through all of this sort of like Rothification, you know, is what they call it like they really like that. I mean, part of that may be just when they're putting these budgets together, they also need to show revenue coming in, right? You can’t just spend money. You have to also have bring it in first.

Yeah, more or less. And so this encouraging Roth is encouraging people potentially to pay their taxes now rather than later so they have revenue.

Yeah. So just to recap for those of those of our listeners that aren't fully aware, a Roth component of a 401(k) or an IRA, all that means is you're paying the taxes today for the benefit of allowing that money to grow for many, many years. And then later on in retirement, when you take that money out, you don't have to pay the taxes.

So by being able to make these changes and show adequate value right away, they're able to say, hey, we made these changes and guess what? Our tax revenues went up. And so we've got a balanced budget. And they can justify.

Yeah, exactly right. And then to answer your previous question, the other thing I would mention is that the rules around inheriting retirement plans, those were complicated before any of the secure acts. They were supercharged complication. After the secure act, a couple of years ago. And now we've just added more complexity without any news clarification. And so the bottom line is, if you were to inherit a retirement plan, you probably need some advice on what to do with that.

There are new options for spouses that were recently put in here, and the easiest way to explain it is that if you had a younger deceased spouse, in other words, the younger spouse dies, there's more option now for them to delay taking the money out and paying tax.

The person who inherited.

The person who inherited, the older spouse. Before there was this weird math we had to do where you could wait until your spouse would have been 72. But then you have to take it out faster. Now you get to wait until your spouse would have been 70- well now, three or five and take it up slower. So you kind of get the best of both worlds.

So that's new. And then the disappointing thing for me is we have beneficiaries who are non spouse beneficiaries. And so as many people may know, we're dealing with this ten year rule, which is the time for which the money must come out when the taxes are paid. And we got no new guidance for a beneficiary on how fast they need to take it out.

Do you need to take it out at all? Do they need to wait until year ten and they can take it all out? We don't really know. But my best reading for now, and this is subject to everyone's specific circumstances, is that if the person who you received the inherited IRA from, if they were taking distributions, we would have to do it over ten years.

Right. And there's a weird formula. It's not exactly equal. If they hadn't started taking it, you have until ten years. In other words, you can keep it in there, take out if you want. It just all has to come out. This is to be determined, I’ll keep you guys updated on this craziness, but it's complicated.

Again, I love gray area, but at the end of the day, some major changes and some things to be planning for, especially starting in 2024 for many of our clients or kids that have 529s or whatever. So I encourage everybody to reach out to their advisor, schedule some time to talk to them, to see how, you know, inheriting an IRA or a retirement account may affect you.

What it means with regards to retirement required minimum distributions, and then some potential saving opportunities, which if you've got 529s, or if you're still saving towards retirement, have student loans or have kids or grandkids that are doing that. Brian, thank you so much for joining us today.

You're welcome. I hope we do it again. Of course.

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Disclosures:

Information presented herein is for discussion and illustrative purposes only. The views and opinions expressed by the speakers are as of the date of the recording and do not represent the views and opinions held by Morton Wealth. These views are not intended as a recommendation to buy or sell any securities, and should not be relied on as financial, tax or legal advice. You should consult with your attorney, finance professional or accountant before implementing any transactions and/or strategies concerning your finances.

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