Episode 39: The SECURE Act 2.0

Isaac Wright: Well, welcome back to another episode of Wright Money Tips. As we’re making our way through the early stages of 2023, I think it’s important to talk about this because in the world of laws, regulations, and your retirement, there have been some changes on that front that you may have read about, maybe have heard some terminology around.
We’re going to focus on what’s been called the SECURE Act and a recent revision now called the SECURE Act 2.0. So, basically a couple of changes that are going to be significant to retirees and pre-retirees. And today, we have Kevin on our program. Kevin is a CFP® professional and one of our lead advisors here at Financial Dynamics.
We’re going to talk about some of the high-level things that we’ve noticed with clients that have called, or people that we have served. And hopefully this will parlay into some things that maybe if you have questions about, we can help you as well. And you can always reach out to us. But Kevin, glad to have you.
Kevin Buenvenida: Yeah, thank you so much. Appreciate the opportunity as always to talk about another interesting topic here.
Isaac Wright: Yeah, this is. Obviously when people look at their retirement and they look at their retirement dollars, maybe it’s a good thing to start off by talking about this new regulatory change, the SECURE Act 2.0.
Let’s talk about it for people that are retired, first. We’ll talk a little bit about pre-retirees in a minute. But let’s start with maybe the largest change for people that are going through retirement, especially when they start hitting their early seventies and what’s called the required minimum distribution. That’s probably been the biggest change for a retiree.
Kevin Buenvenida: Absolutely. So, just as a refresher here, when you reach a certain age, the government makes you take out money from your qualified accounts, whether that’s a 401(k) or traditional IRA. And the most notable change with the SECURE Act 2.0 is that they pushed back the required beginning date or the first year that you’re supposed to take out your required minimum distribution.
So, if you turned 72 in 2022, or you’re older than that, you’re already subject to the rules that were in place to start taking out required minimum distributions. Basically, with the updates that got enacted earlier this year, some individuals are going to be eligible to start taking required minimum distributions at age 73.
Isaac Wright: So, in other words, if you’re not 73 as of January 1st of this year, you’re not going to be required to take a minimum distribution. And the old rule was 72, and of course before that was 70 and a half. So, for all of you listening, just know if basically you were not 73 this year, you’re not going to be on the hook for having to take a required minimum distribution, which is a percentage of your money sitting in all of your qualified tax-deferred accounts. That’s a big deal because you do want to understand, it may make sense for you to still take money from your retirement accounts, but you’re not required by the government basically to do so. Anything you want to add to that? I mean, again, there’s been so many rules and regs, but I just think it’s good to talk about.
Kevin Buenvenida: So, if you’re young enough, is anybody born 1960 or younger? Your required minimum distribution date also gets pushed. By a few more years to age 75. And when you think about the dynamic of what the government has done, not only have they pushed back requirement in distribution ages, but it introduces other ways that you can advantageously take advantage of tax planning or maybe adjustments to your allocations. So, that when you do actually have to start taking out monies, you’ve done it in a manner where you potentially could lessen the effect of taxes and how that might impact the other parts of your financial plan.
Isaac Wright: So, it is kind of crazy when you think about all these years that you have to now consider because basically minimum distributions are going to be grandfathered. This is roughly 10 years, but basically, it’s going to move from 73 to 75. So, people are living longer today, and people are working longer. The government really wants to have that flexibility for somebody to be able to continue to accumulate money on a deferred basis even though they probably could use the tax dollars. They understand long-term that it’s probably in their best interest to be able to have people that are not going to run out of money. So, anything you wanted to talk about outside of that, other than RMDs for retirees?
Kevin Buenvenida: So, when you think penalties associated with not taking a required minimum distribution, it’s always been a bad thing to skip or miss an RMD. So, if you are subject to a required minimum distribution, always important to make sure you satisfy that required minimum distribution before the end of the calendar year.
Previous to the SECURE Act 2.0 law, if you missed a payment, you would’ve been hit with a 50% penalty and still had to pay taxes on that RMD amount. With the new laws though, that penalty has been reduced down to 25%. And if you’re timely in correcting the issue, which is basically making sure you take out the RMD with a certain amount of time and you follow through the needed steps to correct the issue, that penalty could get reduced down to 10%. While it’s still not a good thing to miss an RMD payment, the impact has just been less than just a little bit by the government.
Isaac Wright: You know, nobody wants to pay any penalties when it comes to their money because they’re already going to be paying enough in taxes. Well, those are all great things.
Maybe let’s switch gears here. For those that are watching the program today, listening to us, for pre-retirees, what’s maybe been the top one or two things again, I know we can’t cover it all, but what are top one or two things that you’ve noticed for the pre-retirees that this act has really made some impact?
Kevin Buenvenida: Saving for retirement has been dramatically made more possible through a lot of different avenues, one is the catch-up provision. So, if you’re participating in your work’s employer plan, 401(k) for example, and you’re age 50 or a little bit older, you’re afforded to put a little bit more money each year into that 401(k).
It’s called a catch-up provision. And so right now, if you’re age 50 or older, in a 401(k), you could put up to an additional $7,500 on top of the max annual contribution. Now, what the government has done with the SECURE Act 2.0 is they introduced a little bit of a window where you could put in a little bit more money.
So, between the ages of 60 and 63 starting in 2025, you’ll be able to put up to $10,000 or up to 150% of what that $7,500 annual catchup contribution was into your retirement plan for that year. Now, just be mindful though, when you think about saving for retirement and that window, they define that window from 60 to 63. So, our assumption here is that at age 64, they roll back to the original catchup contribution.
So, you want to be mindful of the, I’m going to put it this way, the different phases leading up to retirement and how much money you could max out when it comes to a retirement plan, like a 401(k).
Isaac Wright: Let me stop here because if I’m listening or watching, the dates, the time, the age, the amounts, and again with the moving parts that you just mentioned, if you have any concerns around your retirement money, how you’re going to put money into your plan, how you can distribute money from your plan, what’s required from your plan, and all the above, there is a litany of rule changes and I don’t want you to make a mistake.
So again, reach out to our office because a lot of the things that we’re covering here, in my opinion, based on some of the things that are going to sunset, maybe some of the things, like you said, they’re going to kind of revert back to what they were, it is going to be easy to make a mistake. And as you already heard Kevin say, maybe they’ve reduced some of the penalties, but none of you want to pay penalties on your money.
I guess it gives us good job security if you will. But for all of you listening, I think it’s important to know when it comes to the SECURE Act 2.0, if you’re a pre-retiree and putting money into your plan, whether it’s a 401k, IRA, distributions. Kevin, anything else before we wrap up today?
Kevin Buenvenida: So, the SECURE Act 2.0, like I mentioned earlier, has introduced some new outlets where financial planning from both an investment management savings rate as well as tax planning, all start to converge. You have these unique windows of opportunity where you can take advantage of qualified charitable distributions for RMD planning or use of advanced annuity concepts, like a qualified longevity annuity to help mitigate RMD taxes down the road. And then if you’re, put it this way, coming out of college, you’re entering the workforce with a way the government has structured some of the 401(k) rules. If you’re paying off your student loans, there may be an opportunity for your employer to match in your 401(k), the amounts of student loans you’re paying off.
So, it should incentivize all of us to really think hard and long about taking advantage of putting more monies in and saving for retirement and they’ve opened up windows where again, taxes is always going to make part of the conversation, but we can help mitigate some of that.
Isaac Wright: I think financial planning and our planning in general, a lot of these moving parts obviously add some credibility to things that we do. And by the way, before we wrap up the program, I also want to make sure people understand that if you also have a 529 plan for college education or educational purposes, there are going to be some rules now where you may be able to roll that money into a Roth IRA and let that be able to grow tax free.
So, a lot of good things coming up out of this act. So just know that if you have any concerns about your retirement, retirement dollars, where the money’s being allocated and all the above. Kevin, I think we’ve kind of laid out enough for today, but feel free to reach out to us here. For Wright Money Tips, Kevin and I look forward to talking to you again soon.
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