Money Puzzle Podcast: How does the Secure Act 2.0 affect RMD?
This week on The Money Puzzle we talk about the new Secure Act 2.0. some pretty significant changes were made and we wanted to highlight some of the more important ones.
Speaker 1 All right. Welcome to the money puzzle again. Just like last week. I’m Brian Ramsey. That is Douglas. And that’s Chris Vaughan right there in the pretty purple burgundy sweater. Purple, whatever color. Burgundy. I said purple. Burgundy.
Speaker 2 I’m Ron.
Speaker 1 Burgundy. Yeah, Ron Burgundy.
Speaker 3 There it is.
Speaker 1 Anyway, so today secured our 2.0. No. Secured 2.2 dato 2.0.
Speaker 2 Two points.
Speaker 3 I like.
Speaker 1 That. Yeah, whatever it is. So it was significant changes. So we thought we would do a podcast on it because it is is relative. I don’t know how many points there were there probably what 30 or something changes, but a lot of them don’t really apply.
Speaker 3 A lot of don’t apply to most people, correct?
Speaker 1 Yeah. So we thought we’d highlight some of the more important ones. Anyway, if you didn’t catch last week, make sure you tune in, go back to our website or go to YouTube and Google. Search us. Sorry. And just look at last week as we did a 2023 outlook. So before that, I think on our website, by the way, our website is not under construction but kind of is in the background, So we’ll be getting more detail about that. Yeah, yeah. Major change is coming. Pretty excited about it. And so that’ll be something we’ll look forward to all three, six months, something like that.
Speaker 2 This won’t be that well, okay, not that long, but it’ll be within the next two months.
Speaker 1 Next few months we’ll be rolling it out so we’ll get more information on that soon. So secure 2.0. Who wants to take the first one is kind of what we’re going to do is we’re going to round robin and say, here’s something that came out. We’ll talk about it here. Something else came out. We’ll talk.
Speaker 3 About it. Right. Well, I think the biggest one and you had referenced this, you were talking about people in their early seventies. This was a big impact is the age at which you have to start taking RMDs has changed now. Secure 1.0, what, 2017? I think they changed it from 70 and a half years old to 72, meaning at those ages you still have money in four one ks, IRAs, things that are pretax. Got to start taking that money out and reporting it as income. They’re now changing the starting age for that to 73. So if you are currently and you know, you were under 72, you hadn’t already kicked in, now you have you can wait until 73 before you start taking them. So that’s that’s a huge impact for a lot of people.
Speaker 1 In I believe in that Then they go to 75 and five.
Speaker 2 20.
Speaker 1 33, 20, 33 goes to 75. Right.
Speaker 3 Assuming that they don’t do this again, which I know they’ve had discussion.
Speaker 1 Yeah, yeah, yeah I know, I know they were talking about moving it to 74 like is a step steppingstone.
Speaker 3 So and quite honestly I fully expect they probably will continue to be changing that every few years. Yeah, they’ll bump it up another year or so. You know, by the time my producer gets to her retirement age, it’ll probably be, you know, 85 or 90, but.
Speaker 2 She will be live in 100 by then, right? Yeah.
Speaker 3 So and I think that’s part of the reason why they keep changing that is because people are living longer. That’s all that comes from.
Speaker 1 Yeah, they are. But also it’s interesting because they need revenue and you would think that they would lower the RMDs because make you start taking the money out sooner but they are delaying it so that that’s a good thing. It’s good thing for savers. Maybe not so good for the inheritors. Well it is good for the same.
Speaker 3 But in the same way you’re talking about, they want to make revenue. This is where, you know, the federal government is actually a little bit long sided. Theoretically, although 2022 was an exception to this rule, you are going to be able to increase the value of your your investments inside of four one K’s IRAs, things like that, a whole lot better than what the federal government can. So the longer you hold on to it, the bigger that tax burden is going to be. So it does if you look at it that way, it does benefit the revenue coffers of the government for you to wait a little bit longer.
Speaker 1 Well, they also made the change and we’ll we’ll go on to something else. But they also made the change with beneficiaries can’t take the distributions over their lifetime. It was that.
Speaker 3 That was a big change. That’s a secure one point.
Speaker 1 Yeah, exactly. Exactly. All right. What’s the next.
Speaker 2 One that’s going to affect probably the most people listening would be contribution limits to four for one KS and IRAs. So IRA contribution limits, including Roth contribution limits, have gone up to 60 $500 per year. If you’re under 50, if you’re over 50 at 70 $500 per year, up from six and 7000 for in one case or now up to $22,500 per year, that you can max out. And if you’re under 50. If you’re under 50, yes. If you’re over 50, you can contribute up to an additional 70 $500 per year. So $30,000 a year, that number is actually going to go up. The catch up contributions are going to go up in 2025 to an additional $10,000. So in theory, if they if they keep the contribution limits the same between now and 2025, you’ll be able to contribute 30. But if you’re.
Speaker 1 60 and older right now. Oh 50, that’s.
Speaker 3 50 that.
Speaker 2 Is there. No, sorry. You’re right. I’m sorry. You’re right. It’s 66 this year at 60.
Speaker 1 Starts at 60 and 60. 6160. There’s like a feasible. Yeah that’s.
Speaker 2 Right. Yeah. So that’s so that’s pretty cool too though. For those that didn’t really get started a little bit later, or they’re, you know, just trying to play catch up, Maybe they’re in their highest earning year because that’s kind of the reality, right? Your highest earning years. It’s always funny you talk to there’s a few people I’ve worked with over the last few years, especially during COVID, that we’re looking to retire, but put it off because they’re making more money than the late in their life. So they’re like, Oh, I’ll just hold on for another year. Yeah, but, but that’s probably one of the bigger ones that’s going to affect the most people listening is higher contribution limits. Yeah. Which of course is good for everyone if you’re able to take advantage of them.
Speaker 1 All right, What’s another one?
Speaker 3 Well, I’ll go back to the R&D thing. Hopefully this won’t affect you because this only affects you if you if you break the rules to go back to that R&D. If you fail to take out your RMD, then the penalty on that was 50%. I’ve been saying since the day I got into this business, it’s the nastiest penalty in the U.S. tax code. Right. So you don’t want to mess with this one, but they’re changing that now. Instead of 50, it’s only going to be 25%. So still a nasty penalty, but, you know, half as bad as it was. And if you get it fixed in a timely manner and we didn’t find a definition on what timely is, they’ll adjust that penalty from 25 to 10%. So if you do screw up and fail to take your R&D, it’s not going to be as painful. And it’s and if you fix it in a timely manner, it’s going to be even less painful. So that’s that’s another big change.
Speaker 1 Doesn’t have something to do with if you take all the distributions at one time. So if you fail to take it, you take next year’s and the the year.
Speaker 3 Previously doesn’t do that. But that does make sense.
Speaker 1 I think you read that somewhere. But yeah, no, that’s a big deal. Me And that’s one thing we do at the end of every year. We all sit down and say, Well, let’s make sure we go through these. R&D is every year something that we have discussions with clients that are approaching our R&D. 7273 Now every year we sit down, talk, we have to make sure we get this out.
Speaker 3 It’s one of the most common conversations that we have in November and December.
Speaker 1 Yeah, Yeah.
Speaker 3 Making sure that this is done.
Speaker 1 Oh yeah, yeah. Because it the penalties can be pretty.
Speaker 3 But the penalties are not quite as bad as what they were now. So Yeah. No but other big changes.
Speaker 1 Yeah. No, they’re better. Yeah. Yeah, that’s good. You know what’s next.
Speaker 2 Another cool one. But I really like 529 plans. So after 15 years. So this is especially relevant if you have kids that maybe got scholarship money or they have left over 529 money that they did not use through college, there’s always been a couple of different things you could do. One thing was just never spend it, roll it over to maybe grandkids or something like that. Change a beneficiary to a younger brother or sister. Well, now there’s the option to roll over a portion of your 529 assets into a Roth IRA for the beneficiary. So I think that’s actually a really, really cool way to really cool thing, really cool opportunity that’s available to obviously younger clients that didn’t use all their fat 29 money. The limits on that are a lifetime limit of $35,000. So if you have $50,000 left over, you can only do up to $35,000 total. But I think that’s a really cool opportunity.
Speaker 1 And I believe you have to transition over several years.
Speaker 2 Five years?
Speaker 1 Yeah, five years.
Speaker 2 Five years to do it. Yeah, yeah, yeah, yeah. So but but that’s a really cool opportunity that did not exist before for sure. Anything that, you know, encourages saving and more specifically tax free saving for retirement assets I think is just a fantastic opportunity. So. Well, I.
Speaker 1 Think what was happening was and I think you mentioned it in the whatever information we were getting this offer, what was happening was as people were not putting as much into 5 to 9 play and saying, I don’t want to overfunded because of overfunded. Then I got turned to pay penalties. And really when you do the math, it actually is more beneficial for you to over fund it if out, you know, because you get tax free growth, the penalty is only on the growth rate, only on the growth portion, not the entire amount. And there’s prorated versus, you know, how much you put in versus how much is growth. So it really is not that big of a deal. But perceptually, if that’s the word.
Speaker 3 Perception.
Speaker 2 Per se, nationally.
Speaker 1 Whatever, whatever the word is, that’s stuff.
Speaker 2 We’re not a word, but.
Speaker 1 Whatever the word is, the perception of investors was that they were going to have to pay this massive tax bill or penalty when in reality that wasn’t the case. So by doing this, I think what they’re saying is now now we encourage you to continue to fund user account like you should be using it. And if you have left over money, you can roll it over and do something with it without pay taxes. So I think that that that’s a I like it, but I still think people are not using in on planes like they should anyway because they you know, a lot of people look at it, they say, well, it’s just for college or just for the it’s no, it’s not anymore. You really need to look at it for the account type in the taxation of that account type. Not that those dollars are specifically earmarked towards college or, you know, private school or whatever it really should be looked at is the account type. And I think that’s where. There’s there’s that that disconnection that we try to make. But it’s it’s not often made.
Speaker 2 Conceptually by the way.
Speaker 1 They are their you know what I say perceptually.
Speaker 2 You said perceptual.
Speaker 3 Back and listening.
Speaker 2 Is that perceptual. Yes, it’s it’s conceptual but you ain’t your subject, by the way, on those Roth conversions from the Fab 29 to the Roth contribution limits. So 60 $500.
Speaker 1 That’s why it’s over a five year period.
Speaker 2 Yeah. So just want to add that in.
Speaker 1 So I guess automatic enrollment.
Speaker 3 Yes, this is a big one. So the concept here is and let.
Speaker 1 Me say automatic enrollment. What are you talking to?
Speaker 3 We’re talking about into 401k, So first things first. If you are already employed and you’re not changing jobs, you are grandfathered out. This does not count for you. It’s for people who go to work for a new company. Or if you leave your current job, go to a new one, you will be automatically enrolled into there for one, K for three, B for 57. Whatever plan it is that they have, it’s automatic unless you choose to opt out. So you’ll have to actually make that selection on the paperwork. You will you’re going to start at at least 3%. There’s some vagaries a minute.
Speaker 1 That’s where that’s.
Speaker 3 A real word, though. I’m sure vagaries are some Viguerie.
Speaker 2 So I can’t confirm that one.
Speaker 3 But that one is a real word. There’s some vagaries. That’s the plural. On whether the starting amount could be higher than 3%. And we’re still looking into that. But at least 3%, you’re going to be automatically enrolled. And then for each and every year after that, unless you opt out, your contribution will increase by 1%. And those are percentages of your your gross income. So those are automatically going to for one case, it does cap out at as high as 15%. Once again, there’s some there’s some issues there with exactly how that works, but that automatic enrollment is a huge deal. What will happen with that is you get young people who choose the reason. You know, Eric, you were talking about the catch up contributions they didn’t save when they were younger and now they have the opportunity to put in more when they get over 50. This is designed to kind of force people into saving for their own future early in life when they tend not to. That’s the that’s the concept behind it. So that that is a really, really big deal.
Speaker 1 Yeah, that’s a good one. I actually like that one too. Yeah, well, we work with great idea. Yeah, we work with plan sponsors all the time and we talk about putting automatic enrollment in and automatic increase. Depends on their, depends on their employee base whether they do that or not. But a lot of employers are starting to get involved in that and say, yes, I’ll, I want to enact that provision in my plan. So but that looks like it’s sort of that’s the way it is moving forward. So that’s a good thing that.
Speaker 2 It’s sticking with workplace retirement plans. They’re adding a provision now because previously employers, whenever they made a match to a 401. K so if you contribute, I don’t know, 5% and you get a 5% match, right? The 5% match could never go into the Roth option within the 401k plan. That’s actually changing now. So now employers have the option to be able to elect that. However, whatever portion or you know any or all as a possibility could potentially go towards the Roth option within their employees accounts versus just traditionally the pretax side. Now obviously, this has to be a part of the plan itself that’s administered by the employers. So kind of like the Roth 401k, we still see far too many plans that do not have the Roth option embedded into the 401 K plan themselves. So I imagine that until we have more widespread adoption of that feature, first, we’re not going to see widespread adoption of this change in the law. But I think it is a pretty cool opportunity that hopefully within the next five or ten years we’ll be able to see more of the matching contributions from employers go towards the Roth account.
Speaker 1 And I hope I doubt, but I hope that they’re going to have to make the tax implications different because when you make it on a pretax basis, it’s it’s deductible by the employer on an after tax. I don’t think it would be so.
Speaker 2 Yeah.
Speaker 1 So you got employers, they’re saying, hey, if I can make a, you know, X amount of contributions on a pretax basis and get it deducted versus do not post-tax where I start to pay tax on, I’m not sure they’re going to opt for that.
Speaker 3 That’s what I was wondering about that one is what’s the motivation for the employer to want to do that? The match is a huge deduction to companies. Well, so that’s I’m not sure how that’s going to play out to your point.
Speaker 1 Well, yeah, and it very well could be that you as an employee get to elect how you want it. That would be kind of cool. But but again, employers are going to do anything to save a buck and and they’re going to do it on a pretax basis unless they change the tax code that says any contribution is deductible. Right. And that’d be really cool. Yes, it would, because you would see a lot of participants, if they’re smart, say put that in my Roth bucket, not in my pretax bucket. So, yeah, that’s cool. Anything else? We are. Let’s do it. Let’s do like one or two more.
Speaker 3 One more like. Once again, it’s a little bit vague. I want to read up a little bit more on it, but there’s going to be in this does not start until 2024. So we got to wait a year. When employees are making student loan payments, the employers will have the option to match that, but pay it into their 41k so you can still in a way be saving even while you’re still paying off student debt. Like most young people after they go to college, they typically are going to have some doubt. Yeah, they can be paying that off and still saving for retirement. And you know, assuming they don’t make any changes in the tax code, the employer is getting another tax deduction by making that match. That’s going to be a big one, too.
Speaker 2 I think I find it interesting. This is just me going back to the cost of college in general, instead of instead of trying to fix the root problem, which is the cost of college in the first place, they’re trying to fix ways to to cover the debt for yeah, student loans. But that’s that’s a whole other policy. So we’ll go down that rabbit hole some other time. Yeah. Yeah.
Speaker 1 So yeah. Then we can also do the cost of college versus the growth of foundations and see how, you know, tuition continues to go up. But still the foundation where what do they do with the money? That’s my question. Now we know what you did. They bought land and water, you know, but they’re their trustees out of financial problems. That’s a whole different story. But when they did.
Speaker 2 Coach, coach buyouts and things like that, Yeah.
Speaker 1 But it just it just makes sense that, you know, well, that’s a whole different story.
Speaker 3 So that’s actually that’ll be a good part.
Speaker 2 Yeah, I’m actually very passionate about that topic, but that’s once again, another, another another topic. But one more one more real quick. Okay. Is qualified charitable contributions starting this year because they’re raising the age for required minimum distributions, you can’t actually do a qualified charitable distribution until you are of armed age. So with them raising the RMD age, they’re actually lowering. So starting at 70 and a half this year, in 2023, you can make up to a one time election for for a qualified charitable distribution of up to $50,000. What a CD is, if you’re not aware, is that you can take a distribution from your IRA or any other qualified account, take that and then have it contributed directly to a qualified charity. So you’re making a qualified charitable distribution and you don’t have to pay tax on that.
Speaker 3 And to add to that, they made another change on the Q CD. Traditionally, the Q CD had to go to a charity a501c3 charity. Now there include including charitable remainder trusts, and a couple other things are falling in there too. So it does give you when you do hit that armed point in time, there are more options on the table now.
Speaker 1 Yeah, and you can it just for clarity, you can still make a contribution to a charity out of your IRA. Absolutely right. And you still make a direct it’s just when you’re younger than 70 and half, there is this potential you got to you still may get taxed on some of that because you still have to meet certain yeah, you still have to meet certain parameters within your tax filing whatever to get that deduction, whereas a cookie is automatically deducted. So yeah, but you can still do it. I mean, we still encourage clients, like you.
Speaker 3 Said, the big thing there is that it satisfies that R&D requirement. We’re going to be charitable anyway. You need to do it that way. It’s just much more tax efficient.
Speaker 1 Yeah, and that whole dollar amount is deductible. Yeah. Whereas opposed the other way. It’s not, it may not be. You’d have to check with your CPA. All right, listen, there’s way more in this secured to 2.0.
Speaker 3 We pull in this one apart for months.
Speaker 1 You are. Everybody is right. I mean, we’re all trying to digest what it all means. And there’s lots of components in there that, you know, from a tax standpoint, we don’t we’re not hundred percent sure how it’s going to affect everybody. And I’m sure government had never thought about this until later, which they never do.
Speaker 2 Well, they didn’t read the bill.
Speaker 1 They didn’t read the bill either. And so I guess follow us, you know, over the coming months and we may come back and we touch on this. But anyway, that’s it for another week. Make sure you tune in each and every week. And and by the way, if you missed our last podcast, I think I mentioned at the top of the show we did sort of a prediction for 2023. Make sure you go back and look at that. Just go to our website, which by the way, is changing. We’re under it’s under a little bit of construction right now, though. We’re in the background. We’re going to roll it out here in a couple of months. But you can also go to the YouTube now go to YouTube, not the YouTube. Go to YouTube.
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