Ken Morris: Uncle Sam finally has some good news for retirement savers

Just before the new year, President Biden signed the Secure Act 2.0 into law. The primary intent of the bill is to encourage retirement savings and to clarify some of the uncertainties from the initial Secure Act of 2019.

The new bill increases the amount you can contribute into retirement programs for 2023. It also tweaked the "catch up" provisions that permit people over the age of 50 to save even more.

The new amounts are $22,500 for 401(k) programs and $6,500 for those with IRA accounts. That means 401(k) contributors can now kick in an extra $7,500 over the stated limits and IRA account holders an extra $1,000.

The big change in the bill that continues to make the headlines is that beginning in 2023 the starting age for Required Minimum Distributions has changed from 72 to 73.

Simply stated, you can now delay tapping into your retirement savings until you reach the age of 73. The one-year change may sound insignificant, but it could have huge ramifications for many retirees. That's because the lion's share of dollars in retirement programs is pre-tax.

This means when the account owner makes a withdrawal, income taxes need to be paid to Uncle Sam. For example, if your RMD is $10,000, that amount is considered to be ordinary income and is therefore taxable.

Depending on your tax bracket, you could get a check for $8,000 and Uncles Sam pockets the additional $2,000.

These mandatory withdrawals have the potential to negatively impact your Medicare premiums. Here's how. Most Medicare recipients pay a premium of $164.90. But if a married couple earns more than $194,000, their Medicare premium jumps to $230.80. In other words, a $10,000 RMD would be costly for a retired couple earning $190,000 because it pushes them into a new Medicare cost bracket.

A somewhat hidden, yet exciting provision in the bill is the ability to transfer up to $35,000 of unused funds from a 529 College Savings Program into a Roth IRA. In this day and age of ultra expensive college costs and the ongoing debate about student loan forgiveness, I think this is a welcome measure. In a nutshell, a 529 educational program is opened with after-tax dollars and grows tax- free.

Then, if the funds are used for education, the distributions are also tax-free. Another nice feature is that if you have a child that doesn't use all of their funds, the remainder can be transferred to another family member.

That being said, this provision allows for even more flexibility. The Secure 2.0 Act also states that in order to implement the transfer to a Roth IRA the 529 must be maintained for 15 years. As a financial advisor, I like this. I see it as a motivator to get that college savings account opened as soon as possible after birth. The ability to transfer remainder funds to a Roth IRA simply makes the program look even better as measured over a lifetime.

It's a fact that we are a society where the rules are constantly changing. Sometimes you may benefit from the changes and other times they can be costly. Wherever you may be in life's journey, you need to be financially flexible, adapt to changes, and maintain your awareness year in and year out.

Converting a traditional IRA to a Roth IRA is a taxable event and could result in additional impacts to your personal tax situation, including the taxation of current social security benefit payments. Be sure to consult with a qualified tax advisor before making any decisions regarding their IRA.

Email your questions to kenmorris@lifetimeplanning.com

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