What wealthy clients need to know about SECURE 2.0

SECURE 2.0 contains a number of provisions that advisors who work with wealthy clients need to know, said Robert Keebler of Keebler Tax and Wealth Education.

Keebler outlined what the new law means for both retirees and those saving for retirement in a recent webinar for Financial Experts Network.

Required minimum distributions

Under SECURE 2.0, the age at which required minimum distributions from retirement accounts such as individual retirement accounts and 401(k) must be taken increased from age 72 to age 73 in 2023 and to age 75 in 2033.

“Is deferring those distributions that for that long a good idea? Maybe – maybe not – it depends,” Keebler said. For clients who need to use the funds from their retirement accounts, advisors must help them figure out what tax bracket they will be in at age 65 as opposed to their tax bracket when they hit age 75. “If you’re going to be in a 12, 22, 25 percent rate on your journey to age 75, you probably should be doing Roth conversions along the way.”

Keebler said clients who are impacted by this change in RMD requirements fall into two categories:

1. The client who has been a good saver, who won’t need to consume this money and is likely to pass it on to their children. This client is more likely to benefit from a Roth conversion
2. The client who spends every penny they can get, they won’t have excess capital to draw from and will draw on their IRAs earlier.

“The question is, how do you avoid having your client fly into the eye of the storm and jump into a 30% or higher tax bracket at age 75?” he said.

Catch-up limits

Under current law, taxpayers over age 50 can contribute an additional $1,000 to their IRA annually. Under SECURE 2.0, that catch-up limit will be indexed for inflation beginning in 2024.

For taxpayers between the ages of 60 and 63 who have 401(k), 403(b) and 457(b) plans, SECURE 2.0 allows them to make increased catch-up contributions of up to $10,000 annually, beginning in 2025. All catch-up contributions are treated as Roth contributions, Keebler said.

Student loan payments

Beginning in 2024, student loan payments can be treated as retirement contributions to be eligible for an employer match, Keebler said. This is available for 401(k), 403(b), 457(b) plans and SIMPLE IRAs.

Employers will need to update their plans, he said, and plan administrators can rely on the employee’s certification.

Emergency expense withdrawals

SECURE 2.0 allows for a penalty-free distribution for family or personal emergency expenses, beginning in 2024. The distribution is limited to the lesser of $1,000 or the nonforfeitable account balance in excess of $1,000. This applies to qualified retirement plans, 457(b)s, 403(b)s and IRAs.

Distributions are limited to one every three years unless the previous recent distribution is contributed back into the account.

SEP for domestic employees

Beginning in 2023, SECURE 2.0 allows employers of domestic workers (for example, nannies) to provide retirement benefits through a simplified employee pension plan.

From 529 to Roth

Some clients may be hesitant to open a 529 plan for a child or grandchild because they are unsure of whether the child will decide to attend college. Now, SECURE 2.0 allows unused 529 funds to be rolled over into a Roth IRA. Keebler described this provision as “a powerful financial planning tool for most people.”

To be eligible for the rollover, the 529 plan must be maintained for 15 years prior to rolling over the funds. The rollover must be a direct, trustee-to-trustee transfer to a Roth IRA account maintained for the benefit of the 529 beneficiary.

Charitable gift annuity or trust contribution

SECURE 2.0 allows for a one-time election to fund a charitable gift trust or charitable gift annuity with an IRA distribution.

The contribution is limited to $50,000 and income interest must be payable to the account owner or spouse.

To view a replay of the webinar, go to: https://www.financialexpertsnetwork.com/webinars/sessions/decoding-essential-provisions-secure-20-bob-keebler

 

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected]. Follow her on Twitter @INNsusan.

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