Secure 2.0 - what does it mean to you?
Congress just passed an update to the SECURE Act that has lots of good news for retirement savers. From the ability to postpone retirement plan withdrawals to increased catch up provisions to lots of new Roth accounts, there is good news for lots of retirement investors. We review the major provisions.
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Speaker 1 (00:07):
Welcome back to 30 Minute Money, Scott Fitzgerald with my friend Steve Wershing from Focused Wealth Advisors, giving you action-oriented smart money ideas in little bite sized pieces. And we are in beautiful, uh, Bushnell's Basin, Rochester, New York, and today we're gonna be talking about Secure 2.0. Yes. Sounds so cool. It
Speaker 2 (00:27):
even more secure, more secure than the first time. So, uh, the Secure Act was a law that was passed a few years ago, um, that had big, that made big changes to retirement plans. And the, uh, and Congress decided that they needed to update a bunch of those things and add a bunch of those things. And so they passed the next version of the Secure Act, secure two that we're nicknaming it Secure 2.0. Um, and it, it too has lots of opportunities for people saving for retirement. Lots of, uh, opportunities in retirement plans, and just a whole bunch of things that you may wanna know when it comes to saving for your retirement.
So, um, so let's start with, you know, the, the, the first big change is with required minimum distribution. So, um, if you save into a tax deferred plan, an ira, a 401k, a 4 0 3 [inaudible], something like that, um, you get to receive the compensation and not have to pay tax on it yet. It's pre-taxed the contributions and it grows without being taxed. And you pay tax on it when you pull it out in retirement. Mm-hmm. Now, for a lot of people, they save enough money and they have a frugal enough lifestyle that they don't necessarily need to pull very much money out of it. But there comes a time when the IRS says, okay, we've waited long enough, you have to start taking money out of that. Currently it's, uh, 72, so at 72 you have to start taking at least a certain amount of money out of that account.
Every year that's all taxable. Now, for a lot of people, that's a problem because, um, again, they don't really need the money and when they pull money out, it's taxable at their top marginal rate. And if they pull enough out, it can actually push them up into a new bracket. That's what we call the, the RMD time bomb is that I, I used, I had it, I, I used an a, um, an example of one of my clients, um, in a presentation, and then I met a new couple last month, and they've become my new poster children for, um, for this. They've done a great job saving. They, they had, they had, they were well paid, they were very successful, they put a lot of money away into retirement plans. They did great. They've got plenty of money for retirement. They also have a, you know, reasonably frugal lifestyle and they've got a, a lot of money in a taxable accounts.
So they don't really need to pull very much out of their retirement accounts to meet their household expenses or the things that they wanna do. We projected it forward. If they did nothing else, if they just pulled out what they needed and let the rest of it grow, when they turned 72, the two of them, they would have to take out required minimums that would push their income from about $90,000 a year to $325,000 a year. Wow. For those of you who keeping score, that's two tax brackets up. Wow. So, you know, so the, the, anything that we can do to prevent having, having to, being forced to pull money out of retirement plan is a good thing. So the first thing that Secure 2.0 does is it raises the required minimum distribution age. So starting in 2024, um, uh, the, uh, required minimum distribution age is 73.
And then if you're born in 1959, um, then the required minimum distribution age is 75. So born in 59 or later, you can put off minimum distributions until 75. So that's a very positive thing. What that means is if you're 72 in 2022, it's too late. The, you know, the, the old rules, the, uh, the old rules have kicked in and there's nothing you can do. Um, however, um, you can still make, oh, and let me think. You can still make, um, there are a couple other sort of twists on that. You can still pull money out before your required minimum, which if you don't need it, you wouldn't need it for income, but you can still pull money out before 70, 72 or 73 or 75 to do Roth conversions, for example. So sometimes there's a reason to pull money out even though it's taxable before you need to.
In fact, that's a lot of what we do in building up two retirement, is we wanna try to get as much money out of the deferred bucket into the tax free bucket as we can. And so as long as you're in a low tax bracket, we will pull money out of retirement plan so we can convert it to a Roth before you're forced to take it. Because that means when you are forced to take it, you're forced to take less. And so that, that works out well. But if, but one of the ways that you can pull money outta a retirement plan and, and not have to pay tax is to make a charitable contribution. You can do what's called a qcd, a qualified charitable DIS distribution, and that means that you can take the amount that would have been required and instead of taking it, you can send it to a charity.
And if you do that, it's not taxable. Hmm. You can still do, even though the, it used to be that that was at the RMD age, but, but the, uh, but the charitable distribution, um, opportunity stayed at the old 70 and a half, even though the RMDs have been pushed up and up and up. So even if you are born in 1960 and you don't have to take RMDs until you're 75, at 70 and a half, if you want to, you can start making qualified charitable distributions get money out of that tax deferred bucket and not have to pay tax on it. So that's the first big thing is those changes in the required minimums.
Speaker 1 (05:42):
Where do, excuse me, just curious, uh, where do they get these, these cutoffs and these ages from? Like what's the, what's the science? Is there a science behind 'em or is it just like throwing, throwing darts at the
Speaker 2 (05:55):
Wall? I'm pretty sure there's, there's some person in the basement of the IRS with a pointy hat that's just pulling these things. I have no idea. I have no
Speaker 1 (06:04):
70 idea three, maybe 74 . I dunno, I'm just, I'm, I was just thinking about that. You know what, it's gotta be based on some sort of like over time, the average age of the people who were doing, I have this.
Speaker 2 (06:16):
Yeah, I have no idea. Well, and you know, I don't know how they chose 72, 73, 75. I have no idea. What, what I really don't know is who came up with the idea that you could start pulling it out at 59 and a half and that you had to start pulling it out at 70 and a half a half. Really? You couldn't just round it up or down. I mean, seriously, but what, whatever. But it is what it is. , as I like to say, in all of my tax, we tax seminars, don't try to logic your way through it. It's the government . There is no reasoning your way through this. This is not physics. This is
Speaker 1 (06:49):
Speaker 2 (06:50):
Absolutely. This is the government. So who knows, um, a lot of what's in the, in secure 2.0, secure 2.0 is refr, we're thinking of it as sort of the ratification of everything, because, you know, some years ago they created the Roth IRA to go along with the traditional, so the traditional is you put money in and it's pre-tax, um, and it grows tax deferred, and then in retirement you're taxed on it. The Roth, you put in money after tax and it grows without being taxed, but when you pull it out, you don't have to pay tax on it. And that's such a great idea that we're spreading it to all kinds of other things. So a few years ago you could start doing Roth four Oh [inaudible] contributions of Roth 4 0 3 [inaudible] contributions in addition to your Roth I r A. So there was a new way to get money into that sort of Roth environment. With this new act, there's even more, um, there are, you, you, if you own a small business, there's now a simple Roth and a SEP Roth. So those are other kinds of small business retirement plans that you can now do in the Roth flavor of it. So if you think that you're gonna be in the same tax bracket or a higher tax bracket later, well now you can put money away for retirement in a Roth account through your business instead of the traditional way. Do
Speaker 1 (08:06):
They have, uh, I'm sure they do, but what are the rules for, for like the small business Roth or the SEP Roth mm-hmm. , what are the, what are the rules for how, is there a certain number where you have to put per paycheck or pay, you know, depend? Is there a minimum, like a minimum?
Speaker 2 (08:24):
It, it depends on the design of the plan. Most of them, no, most of 'em are sort of profit sharing plans. Um, but each, there are a lot of different design opportunities, a lot of different design change, you know, design options that you can choose. So really kind of depends on the plan itself. And that's, that's true of, of the SEP or the simple, even without the Roth thing, that each one has its own set of rules. And so it really depends on the facts and circumstances of your business. Um, and a lot of it has to do not only with, um, how much and whether you put money in, in any particular year, but if you have employees, how much you have to contribute on their behalf. So there are, there are even more rules around that. So that really kind of depends on it. But, but the, the point is that now you can do it either as a pretext contribution or you can do it as a after tax contribution, depending on what's gonna be the best way for you to pull it out later in retirement.
Speaker 1 (09:19):
So if I created a set Roth for, for my company, um, and it's just me mm-hmm. , I could do whatever I want for the most part, depending, you know, based in the, in the
Speaker 2 (09:28):
Rules with Yeah, with within, within guidelines. Within within guidelines. So,
Speaker 1 (09:31):
But then if I was, if I was to hire a part-time employee, does they, they have to be part-time or full-time, or does it matter?
Speaker 2 (09:37):
Depends on the plan.
Speaker 1 (09:38):
Okay. So it's all very much depending on the plan. Yeah. But either way I add, I add a full-time employee now by law I'm required to, or they, they have to opt into it.
Speaker 2 (09:50):
It de again, it's the, the, the rules are, there are lots of different rules. Okay. And you can do it a lot of different ways. So for example, you know, if, if you put in a simple and you say, you know, you're, you, you have to contribute on the employee's behalf somehow or other, but one of the ways you could do it is to say, I'm gonna give, I'm gonna match all your contributions up to a certain percent, which means that you can put a certain amount of money in, and if your employee chooses not to participate, you don't have to put anything in. If they do choose to participate, then you will be required to put money in along with them. Yeah. So there's, there's all different kinds of options for doing that. It really, it really depends on what's gonna be, you know, what, what your needs are. Gotcha. And the profile of your business. Um, so talking about Roth's, uh, they, they created, as I said, Roth 401ks, Roth 4 0 3 [inaudible], those kinds of things. But up until now, you could put money in to a Roth version of the account. But if the company matched it, like we were just talking about, if the company matched it, it had to go into a traditional account. I know it doesn't make any .
Okay. Say, say it with me, it doesn't make sense. It's the government.
Speaker 1 (11:02):
It's the government.
Speaker 2 (11:03):
Now with Secure 2.0, even the matching contributions can be Roth contributions. So that's a change. Um, and that's a positive thing. Um,
Speaker 1 (11:13):
So wait, go over that. Tell, tell me that
Speaker 2 (11:14):
Again. So it used to be, so let's say you're, you're, you're working, you're in a 401k and, and the, the, the rules of the 401k are that if you put in, if you start contributing money from your salary, that they'll match as an example, dollar for dollar up to 3%, and then 50 cents on the dollar for the next 2%. So if you put in 5%, they'll put in four. Now you might have elected to put your 5% into a Roth version, but the rules said that when they matched it, it had to go into a traditional
Speaker 1 (11:43):
Account. Oh, I
Speaker 2 (11:44):
See, I see. Now if you put in your 5% to a Roth option, the matching can go into Roth as well.
Speaker 1 (11:50):
Okay. All right. Yes, that is
Speaker 2 (11:51):
Good. So that's a change. Um, there are different, uh, uh, new Roth catch up provisions for, uh, for high wage earners, not for people who are self-employed, but in 401ks and things, if you're above a certain age and you want to catch up because you weren't contributing when you were younger, you can typically put in, uh, more than would normally be allowed. And those limits have all gone up and you can now do Roth Catchup contributions or you couldn't do that before. It used to be the catch up, you know, had to be traditional.
Speaker 1 (12:25):
That's really good news
Speaker 2 (12:26):
Right there. Yeah, exactly. That speaks
Speaker 1 (12:27):
To me because uh, I've got a lot of catching up to do. Right. Thankfully, thankfully my wife has been on the ball since day one. Uh, so I, you know, I married, well, I married up
Speaker 2 (12:37):
and um, um, and you know, again, one of the benefits is there is no required minimum distribution for Roth accounts. So doesn't really matter when it comes out as tax free anyway. Yeah. That's why there's no required minimum 'em. Right. Cause they don't make any money on it. Yeah.
Speaker 1 (12:57):
Speaker 2 (13:00):
So, um, another interesting, another interesting twist on this is that, uh, as a change to 5 29 plans now 5 29 plans or accounts that you save for children's education, right? And one of the challenges is that, you know, when, when a kid is a baby, you don't know what kind of education they're gonna need. You don't know what kind of scholarships they might qualify for, you know? So, you know, I, I got off easy. Both of my kids went to State University of New York, right? So the, the tuition was really manageable and we ended up with money left over in that account when they graduated. And so the question is, well what do you do with that money if you take it back? There's a tax consequence, which, so a lot of people just leave it in there, but the law sort of, it doesn't explicitly say it, but it does say that at some point it really has to be distributed.
And that's generally understood to be when the beneficiary turns 30. That's not a hard and fast rule, I don't think, but, uh, but somehow you have to get the money outta there. Now you can transfer that money to other beneficiaries in the same generation or in a lower generation. So if your daughter is brilliant and gets a free ride to Harvard and you don't really need any of that 5 29 stuff, you can give it to your son who's good, but you know, he still needs, you know, a lot of money to, to, to go to college cuz he's not as gifted as the daughter. Okay. Well, um, so you can, you can transfer it from, from one beneficiary to another in the same generation. Or if one of my kids goes to finish his school doesn't use all the funding and then has a child of their own, I can transfer it to, um, the, their, their child. My grandchild could be the new beneficiary on the account.
Speaker 1 (14:44):
Can you only transfer it once or can you continue to
Speaker 2 (14:47):
Transfer? No, you can. I mean you, no, you can move it all around, but those, but what, who you can move it to still those rules still apply. So, but with secure 2.0 there's a new option now. But wait, there's more. But wait, , if you deposit before midnight tomorrow, no. If under secure 2.0 if you have money left over in a 5 29 plan, um, you can now transfer it to a Roth IRA for the beneficiary. Oh, well that's very cool. Yeah, that's kind of a cool option there again, rules around it. But you know, again, if, if I put a lot of money away from my son, uh, for his in a 5 29 plan for his college education, he goes to college, he does well, he graduates, I still have money in the account starting in a year or so, I can now transfer whatever's left in that account to a Roth IRA for him.
And so I can, you know, use that money that we didn't use on education to sort of give him a headstart on retirement. Yeah. So that's kind of cool. Yeah, very cool. Um, there's all, again, all kinds of rules around it. You know, the, um, of course it's, it's to the beneficiary of the I to the Wild west Exactly. That, that we, we don't wanna jump into these things, you know, and the, the the 5 29 account has to, has to have been around for 15 years or longer. Um, it, um, you know, it excludes deposits and earnings in the past five years. I mean, you know, it just wouldn't be the tax code if it weren't complicated. So we can't just make this simpler anything . Um, but it's the government, but Exactly. But it, it is an option and that's kind of cool. Now, one of the, uh, let's go back to RMDs for a minute.
There is one of the things that is really unfair about required minimum distributions is that if somebody misses one, if somebody doesn't take it, the tax on it is horrific. If you'd, if you have a required minimum distribution that you don't take this year, for example, and you go into next year, the tax on the penalty for not taking it is 50% of the required minimum. Geez. So let's say your required minimum was $10,000 and here we are New Year's Eve, your in Time Square and you're like, oh my God, I forgot to take my rmd. When, you know, on July, on January 2nd when the, you know, financial advisor's office opens again and you have them immediately send it out, that's a $5,000 penalty. Yeah. So thankfully now there's a little more forgiveness on that part of Secure 2.0 is a reduction on that penalty.
Um, as long as you notify the IRS in a timely fashion, as long as you notify them before they found you, and you make that distribution in the year after it was due. So if it was due in 2022 and I missed it, as long as I notify the irs, Hey, I forgot to do this. And it's before they notified you, before you got a letter about it. Right. And you'd taken before the end of 2023, you're good. So thankfully, I mean, that was always a really unfair tax, um, especially when the RMDs started 70 and a half. Nobody knew how to figure that one out. . Um, but, but they've, they've given, they've, they've given a break on that, which is a really, a really positive thing. And are
Speaker 1 (17:56):
They quick? Are they quick about that?
Speaker 2 (17:59):
No, no. It, it doesn't turn up until, you know, they, they, the, you have to file your return and then the IRS's computer has to notice that there's no IRA distribution listed on the return and it, it, it takes a while. So it's, you've, you've, you've probably, if you've, if you missed it, but you know about it, you've probably got a little time
Speaker 1 (18:19):
And that just, and that that's an, that's the part of the secure 2.0 change. Yeah. And that starts when it already started,
Speaker 2 (18:26):
Starts, uh, I believe it's this here starts this year. Yeah. If you miss it, um, yeah, I think if it's, think of that starts this year. If you miss it, then you have those, those things apply. Um, there are some, there are some nice additions to, um, to the tax code. There are, uh, catch up. We talked about ketchup provisions before, um, uh, because of Secure 2.0, those catch up provisions will now be indexed for inflation moving forward. So when they first said, okay, you folks who are over 55, you can put some additional money into this retirement plan because, you know, to make up for whatever you didn't put in earlier in your career. Um, but they chose the number and then the number stayed the same for a long time. Now thanks to reco and now thanks to Secure 2.0, those catchup provisions will index a little bit.
So the catchup provisions will go up a little bit each year, which, which brings it into line with the contributions so that how much you can put into a retirement plan, what the tax brackets are, all of those kinds of things indexed with inflation. So it only made sense for the catchup provisions to index as well. They didn't before. Now they will. So if you're closer to retirement and you haven't put as much away as you really think you should have or you want to now, you'll be able to put more money away because they're going to raise the catch up provisions with inflation. Okay. There's a, a tax break, an additional tax break for people who are paying, uh, long-term care insurance premiums that's effective in 2026. It's complicated and it's technical and I won't go into it too much, but what I will say is that if you are paying for long-term care insurance, there's gonna be a little bit better tax treatment of that come 2026.
Um, there will be, it'll be easier to do that. And then, you know, we put money away for retirement, um, for, you know, planning income for down the road, but sometimes life happens and you need money and you know, before that, you know, we, we try not to recommend it because of what ha how it brings your plan off course. But, you know, if you hit a real emergency, they're just, sometimes you may need to tap into your retirement savings before retirement for financial hardship. And there are provisions for that under secure 2.0. Um, they've, um, they've relaxed those requirements a little bit. So it'll be, not that it's a good thing necessarily, but it will be easier to get money out of retirement plans and you'll be able to get a little bit more out of it, out of them. Um, and some exceptions are being, are being, um, expanded, especially for civil servants, for firefighters and, uh, corrections officers and other qualifying public service workers. There are gonna be some extra provisions for them to be able to pull money out of, out of retirement plans before retirement for, for financial hardship.
Speaker 1 (21:24):
So does that mean that they sort of reduced a little bit of the penalty and, and the tax burden for that kind of stuff, or? Yeah.
Speaker 2 (21:31):
Yep. Yep. Exactly. So again, last, it's, it's a, it's a, um, you don't want to do it, but it's a last resort rights.
Speaker 1 (21:38):
Speaker 2 (21:39):
Harsh now, it's not something that we recommend, but just, you know, sometimes there are those emergencies that come up and you need to get at it. And so the, the, uh, you know, there, it's gonna be a little bit easier to do that with Secure 2.0. Right. And then we come to the final thing, and I've saved this one for you, Scott. Oh, um, there are new tax credits for starting a retirement plan for your business. Oh. So do you tell if you start a retirement plan, um, for your business now Secure 2.0 creates some tax credits so that you can contribute to it specifically, you can contribute to it on behalf of your employees and you can get a tax credit for that. So actually the cost of having the plan, the cost of contributing, um, to the plan, especially on behalf of employees, has they've, they've now made it cheaper for the next few years because they want us, they want to, um, incentivize Yeah. More small businesses to do that. So if you have a small business and you don't have a retirement plan, this is the year to start one because you can get some really nice tax credits that will make it really less expensive for the next few years and help you get started on it.
Speaker 1 (22:46):
Love it. Can't believe that they actually did something like that for, for all of us. I
Speaker 2 (22:51):
Know right down here. There it is.
Speaker 1 (22:53):
Speaker 3 (22:59):
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Speaker 1 (24:25):
So we just went over all the cool things in the Secure 2.0, the Secure Act, the new version of the Secure Act. And Steve, now you have your 30 minute action list.
Speaker 2 (24:34):
I do. So your 30 minute action list is list your different retirement accounts and label them as either traditional or Roth. Uh, because there will be lots of new Roth opportunities and if a Roth is right for you, you wanna make sure that you know how much you have going into each kind of plan so you can make a good decision moving forward. So that's your 30 minute action plan.
Speaker 1 (24:56):
All right, sounds good. I, this one was really cool for me. I, I think I actually understood most of what you said. Awesome. So, uh, we're getting there. We're getting there. We're getting there. Thanks for hanging out with us in 30 minute Money. Don't forget, you can reach Steve Wershing at Focused Wealth Advisors by their website focusedwealthadvisors.com. And my name is Scott Fitzgerald from ROC Vox.com If you have any, uh, podcast needs reach out and we'll be happy to help you. We'll see you next time on 30 Minute Money.