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What You Need to Know about the NEW Secure Act 2.0

Secure Act 2.0 was passed on December 29th, 2022, and it contains many changes to retirement account rules. In this Coffee with Brendan, Brendan goes over the highlights of the changes brought about by the new law.

Here is a FREE resource that complements this video: The Top 10 Provisions of Secure 2.0. You can download it here.

Topics Discussed:

  • Gifting Limit Increase

  • IRA Contribution Limit Increase

  • RMD Changes

  • Catch Up Contributions Increase

  • 529 Education Account Changes


Hi, and welcome to the first 2023 Coffee with Brendan. And today's topic is going to be on a piece of legislation, pretty big piece of legislation that was just passed on December 29 2022. While we're all reading in the New Year and kind of not paying attention to what's going on in Washington, it does make some pretty big changes to some retirement things. And most of these things will impact you at some point in your life. So this is a good, this is a good coffee with Brendan to tune into.

So let's start right out of the gates with some of the changes that have been made just normally from 2022 to 2023. Outside of this new piece of legislation, by the way, the new piece of legislation is called the secure act 2.0. There was a secure act 1.0. That was passed in 2019, which changed when you had to take required Ira distributions and when you inherit a and when you inherit an IRA from someone who's deceased, how long you have before, you have to take out the entire amount that was back in 2019. This is the 2.0 version. So an enhanced version of that secure Act, which again was just passed a few days ago, I'm shooting this on January 5. And so this was literally just passed at the end of last week, right before the new year.

So again, just to start with the expectations, the normal changes that were made to our tax laws that I think impact most of my clients are as follows. So let me start sharing my screen. The first let's start here with annual gifting. So a lot of people still feel like the annual gifting amount is $10,000 a year, it's actually now up to $17,000 a year, what that pretty much means as you can gift, anyone that you want to $17,000 without having to realize any income for you, the recipient of the gift to realize anything there. And you don't have to file any kind of gift tax return. If you are married, you can gift away $34,000 to whoever you want. And again, this literally could be as many people as you want. So if you have an estate tax issue, literally just keep giving away 17 and $34,000. And you'll get under that threshold pretty quickly. So that's the first thing that has changed.

Another thing that's changed is the contribution limits for retirement accounts. And so one that most people are impacted by is IRAs and Roth IRAs, which is up here. If you're under the age of 50, you can make now $6,500 To contributions and if you need to catch up from age 50 or over, it's actually $7,500.

And then the final one that kind of impacts my clients, mostly our 401 K's 457 plans 403 B's - 22,500 is now what you can put in if you're age 50 or over, you can actually put in $30,000. So let's just set level expectations there.

So gifting $17,000 per year, Roth IRAs, and IRAs 6500 or 7500, if you're age 50, or over, and then 401 K's 22,500, or 30,000 if you're over the age of 50. So let's start there.

Now let's shift to the secure act 2.0 Top 10 provisions this was something put out by LPL I'll put a link into the newsletter that will allow you to download this because this is a client friendly piece. And I'll do very, very high level so one one big caveat to this right before I start, I want to make sure that I that you're all paying attention here. These are very preliminary. I'm going to show you the skeleton and, generally speaking, what's in the plan, but just that there's a lot of ambiguity here and people will slice and dice these till their heart's content. So I'll get into a little bit of that type of stuff where you know, there's there's an explanation needed to further break down some of these things. But with that said, just know that these rules are not set in stone as we sit here today, on January 5 2023. And there will be more notices from the IRS clarifying some things. So big disclaimer with what I'm about to present to you. So this is kind of hot off the presses what we're looking at right now, let's go back to this.

So So one of the big things that will affect a lot of my clients is this year. So required minimum distributions before secure act 1.0. Everyone had to start taking required Ira distributions from their IRAs or 401, K's before age seventy and a half. Now, there were a couple exceptions to that. But for the most part, when once you turn 70 and a half, you needed to start taking withdrawals from your retirement accounts. That change to age 72 with that 2019, secure act 1.0. But now they're changing it a little bit more so that if you so it all comes down to when you were actually born. So that's pretty much what's shown being shown here. So in 2023, and 2033, that age that you need to actually start taking your distributions changes from 72, to 73. And from 73, to 75, and 2033. So again, this is something that will be phased in, it all comes down to when you are born. So there's a little bit more detail to this.

Another thing that's important is, you know, one of the things that we've always really hammered clients on who are older and have to take these required minimum distributions is that if you don't take your required minimum distribution, you're hit with a 50% penalty, well, now they're actually changing it. So that's, that's not 50. But it's 25%. And if you correct it and take the distribution, then you will, you will be able to reduce that to 10%. Now, again, the specifics associated with that is, is challenging. So I'll just say that. But long story short, the, the penalties have gone down.

Another piece of this. Another another element that I think impacts a lot of my clients is those catch ups. So in other words, I had mentioned that with the 401k, there's a $7,500 Catch up, if you are over the age of 50, they now have this, this catch up, which says that if you're between the ages of 60, and 63. So oh, so between 50 and 60, you're still at that 7500. But if you're would between 60 and 63, then that catch up actually goes up to $10,000 or 150% of the regular catch up, which would be about 11,002 50. So you have 3, 4, 4, technically four years where you can actually even put in a little bit more than the catch up. But that's where we are right now.

Let's see what else is in here. There are some tax benefits for starting up a 401 K, if you're a small business owner, so again, you can get into that when when you click on the link below.

Let's see what else another big one that I really, really like. And this is going to be something that I talked to a number of my clients about, is this right here. One of the big questions that I get from a lot of clients is when it comes to 529 education accounts, what if a child goes to school and gets a ton of scholarship money goes to a military academy, or just simply doesn't go to school whatsoever, and you have this big giant 529 plan that you've been saving all through their life while their babies up until today. And they don't have the money to or they don't distribute all the money out of the 529? Well, one of the things that is a new a new item here is that if the plan has been in place for 15 years, and the child is making money, so has wages, you can start rolling money out of the 529 and into a Roth IRA for that 529 beneficiary. So long story short, let's say that when your son was born, he started contributing to a 529 and it's grown to $100,000. By the time that your son is 18 becomes clear that he is not going to be going to school. So you have $100,000 plus whatever earnings there are. What this rule is pretty much saying is that as long as your son has earnings Every year, you can actually start taking out whatever the amount of money that they can contribute to the, to the their Roth IRA out of that and roll it over until you get to 35,000. So in other words, the rollovers are subject to a per beneficiary lifetime limit of $35,000. So that's a huge one that that that addresses a lot of clients concerns when it comes to excess money in a 529 account. And also, because Roth IRAs are so favorable from a tax standpoint, this is a very, very attractive piece.

So as I mentioned, there are a number there are literally 100 different changes. In the in the rule, I listened to a hour and a half podcast on this just yesterday, there's a ton in here, there's matching contributions for student loan payments, there's auto enrolment and auto, they call it escalation for for 401 K's you now can make simple and SEP IRA contributions on the Roth side of the equation, not just the traditional side of the equation. So again, another big benefit that hadn't been hadn't existed with other plans. And then there's also emergency provisions so that you can avoid that 10% penalty, if you take it out before age 59 and a half. And then again, coming back to the Roth IRA, they're definitely very thorough Roth IRA in this, they're pretty much allowing matching contributions to go in on our Roth. On the right side of things, not just the traditional side of things. Now, again, there's the you don't get a free lunch here, it would be considered compensation to you. But before it always all your matching contributions were made with traditional 401k money, not Roth 401 K money. So again, some some nice improvements in iterations there.

So all of these things, for the most part, are positive. The secure act 1.0 was very negative in the sense that when you inherit an IRA, you were able to distribute that over your lifetime. And if you're young, if you're in your 40s, for instance, you could potentially take that strike do they actually called it a stretch IRA, and distributed out over your lifetime, which could be 50 plus years, if you live long enough, but secure Act does the you know, reduces it down to 10 years, so you have to withdraw the money from the IRA within 10 years. So that was secure act 1.0. For the most part, there aren't too many negatives with this secure act 2.0. But there's a lot in there. And again, you'll they'll it'll give, give me a lot of things to talk to my clients about. But also I'm sure there'll be new stories about these provisions and all sorts of things when it comes to this.

So more to come. But I did want to just you know, give you some highlights on some of the changes that are being made just basic ones from 2020 to 2023, with some of those contribution limit changes, but then some of these bigger legislations changes that have come through the Secure act 2.0. That's all I got for today. If you have any questions. After reading through some of that stuff, I'll answer it to the best of my ability. But again, caveat, a lot of this stuff is brand new, and there will be lots of questions and lots of recalibrations of some of the benefits that are listed here. Thanks so much, and I look forward to our next Coffee with Brendan. Take care

Brendan is the Managing Director for Waymark Wealth Management. He has extensive experience in comprehensive wealth management. His focus includes retirement planning, behavioral finance, investment portfolio construction, education funding, insurance & risk management, taxes, charitable giving, and estate planning. Brendan has an ability to take clients' complex visions and distill them down to simple action plans, helping them move from where they are today to where they want to be tomorrow.

Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.

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