When our leaders in Washington passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act in 2019, it marked a major change in retirement planning. In a sense, the government was codifying advice that many financial advisors -- including my team at Keen Wealth -- had been giving for years. The next generation of retirees is going to live longer, with more active lives than any before it. Very few younger workers are going to stay at the same company for decades and earn generous pensions. Very few older workers will automatically retire at 65. And for most folks, Social Security alone will not fund a safe, secure, and rewarding retirement.
In other words: folks have to start taking more personal responsibility for their retirement planning.
On today's show, we discuss the SECURE Act 2.0, which was included in the omnibus spending bill Congress passed at the end of 2022. Many of the changes in this sequel may seem like smaller tweaks compared to the original. But tracking these changes and using them to your advantage will be key to getting the most out of your nest egg and your retirement.
73 is the new 72.
SECURE Act 1.0 moved the age that seniors have to start taking required minimum distributions (RMDs) from their retirement accounts from 70 1/2 to 72. That's still the rule for anyone who turned 72 in 2022.
Going forward, seniors do not have to start taking RMDs until they turn 73. Starting in 2033 the RMD age will rise to age 75. That's a nice long runway for folks in their 60s to start working with their financial advisors on a long-term retirement spending plan that takes these new rules into account. One strategy that I suspect will continue to grow in popularity is for retirees to spend after-tax money first while also converting money into Roth IRAs that will continue to grow tax-free until they reach RMD age. Timing these moves correctly can also keep seniors in a very low tax bracket while they’re living comfortably.
A high penalty hurts less.
Speaking of RMDs, don't forget that the R stands for "required." Failing to take your RMDs, even if you didn't know you had to take them, subjects you to one of the most onerous penalties in the tax book. The SECURE Act 2.0 lowers than penalty from 50% of the RMD to "only" 25%, or possibly 10% if you catch your mistake "in a timely manner."
Figuring out how much you need to take out of your retirement accounts every year can be more complicated than it sounds, especially if you have money spread out in several accounts, or if you inherit an account from a family member. That's why RMDs are a big bold item on the annual checklists we work through with clients at Keen Wealth.
Catch up more.
Folks who are 50 and older and still working can make "catch up" contributions to their IRAs above the annual limits, indexed to inflation. SECURE Act 2.0 increases those contributions to up to $7,500 per year. Starting in 2025, workers between the ages of 60 and 63 will be able to contribute up to an additional $10,000 per year.
Keep in mind that if you automatically make contributions to your 401k or have an employer-match, you'll probably have to opt into catch-up contributions with your custodian or employer once you're eligible.
Flexibility for 529s.
Investing in 529 plans can be a good option for families who want to get ahead of the rising costs of education. The downside to these plans was that if the beneficiary skipped college or didn't need the full invested amount for school, your money was stuck in the 529 unless you wanted to pay penalties on withdrawals.
SECURE Act 2.0 introduces some welcome flexibility. Starting in 2024, assets in 529s that are at least 15 years old can be rolled into a Roth IRA in the name of the plan's beneficiary. The rollover is tied to the Roth's annual contribution limit, which is currently up to $6,500 per year, and the total amount that can be rolled over is capped at $35,000.
It's unclear if folks who've been funding these accounts will be able to designate themselves as the immediate beneficiaries for unused funds. But the tax-free rollover is an option that will make these plans a little more attractive for parents and grandparents who want to give their kids and grandkids a leg-up on the way to adulthood.
Let’s plan together.
Two SECURE Acts, the pandemic CARES Act, an up-and-down couple years for the markets, a new Congress ... no matter where you are on your financial planning journey, there's certainly been a lot to think about and plan around recently.
If you're feeling overwhelmed or uncertain, please don't try to navigate all these changes by yourself. Call up my team at Keen Wealth and let's talk about how we can help you attempt to secure your retirement.
Bill Keen is a financial advisor with nearly 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to Forbes, U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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