SECURE incentivized retirement saving but added tax implications

One of the largest assets Americans hold is their retirement assets. The passage of the SECURE Act in 2019 and SECURE 2.0 in 2022 incentivized people to save for retirement but added some tax implications that advisors and clients must consider when planning for the post-employment years.

Ann Hagerty, advanced sales counsel at Securian Financial, presented a webinar on recent retirement tax legislation for the National Association for Fixed Annuities.

Americans held an estimated $33 trillion in retirement assets as of 2022, the Investment Company Institute reported. But along with those assets comes uncertainty over the taxes that will be due when it’s time to tap into those assets, Hagerty said.

“At some point in time, individuals have to pay taxes on this money,” she said. “This is an even more significant issue for individuals in higher tax brackets.”

In addition, she said, the Tax Cuts and Jobs Act of 2017 contained several provisions that sunset or expire at the end of 2025. “The tax year of 2026 could come as a surprise to a lot of our clients,” she said.

One of the biggest changes that the SECURE Act made to retirement planning is that the law changes the retirement plan payout for beneficiaries, Hagerty said. She listed three tiers of beneficiaries and how the law impacts them.

1. Nondesignated beneficiaries. These are entities, and not people, Hagerty said, and include charities, estate and nonqualifying trusts. An individual retirement account holder still can distribute funds tax-free to a charity. An account holder’s estate becomes the beneficiary of the retirement account if a beneficiary has not been specified. A nonqualified trust is limited to pay out according to the five-year rule (death before the IRA owner’s required beginning date) or single life expectancy payments based on the decedent’s age (death after the IRA owner’s required beginning date).
2. All designated beneficiaries who do not qualify. These beneficiaries would be grandchildren, adult children and qualifying trusts. Hagerty said this group of beneficiaries is most impacted by SECURE because they are subject to the 10-year rule regarding an inherited IRA. Under SECURE, these beneficiaries must withdraw funds from an inherited IRA within 10 years of the original owner’s death.
3. Eligible designated beneficiaries. Hagerty listed them as: surviving spouses, minor children, disabled individuals, chronically ill individuals, and individuals not more than 10 years younger than the IRA owner. These beneficiaries are not impacted by the 10-year rule.

More opportunities for Roth with SECURE 2.0

Some provisions of SECURE 2.0 provide more opportunities for individuals to contribute to Roth accounts, Hagerty said.

The bill:

• Allows SEP and SIMPLE plans to be designated as Roth IRAs.
• Allows individuals to designate matching contributions, including student loan contributions, as Roth contributions.
• Allows 529 to Roth IRA transfers to be made tax and penalty free to a Roth account of the same 529 beneficiary if the 529 account was open for more than 15 years and the amount does not exceed lifetime Roth IRA contribution limits or a lifetime maximum of $35,000, effective Jan. 1, 2024.
• Eliminates required minimum distributions from Roth 401(k)s and 403(b)s, reducing the need for Roth IRA rollovers from these plans.
• Requires all qualified catch-up contributions to receive Roth tax treatment except for participants whose prior-year wages are $145,000 or less. This does not apply to SIMPLE or SEP IRAs.