If there is one constant with financial planning it is this: things change. At the end of 2022, a new law was passed which impacted many different facets of retirement planning. Several of the changes made are relevant only to people with a select set of objectives and circumstances. However, listed below are the changes I feel are most impactful to our clients. As usual, our advisors will be proactively reaching out to our clients with any updates or strategy changes as needed in response to this new law.
Changes to Required Minimum Distributions (RMD)
If you own a traditional IRA account or are a participant in a traditional retirement plan, you are required to make withdrawals from these accounts once you reach a certain age. This age used to be the year in which you turned 70 1/2, but then increased to 72 with the passage of the first SECURE Act. This new law increases the age once again. If you were born in 1951-1959, your new age to start your required minimum distributions is 73. If you were born in 1960 or later, then your new age to start RMD is 75.
This increase in age is great news for the majority of our clients since it expands the time frame we have for implementing tax planning strategies. It allows more time for Roth conversions, realizing gains at the 0% tax rate, and the ability to spread out other income while in a lower tax bracket because of the lack of RMD, which keeps income low. These are all strategies we employ for our clients, but they are personalized based on each client’s circumstances and sources of income.
The new law also reduced the severity of the penalty for not taking RMD. However, this provision doesn’t impact our clients much since we always ensure their RMDs are properly satisfied.
Postmortem Estate and Income Tax Planning
Starting in 2024, if you are married and own a traditional IRA or retirement plan and your spouse passes away and you are the primary beneficiary, there will be a new option available to you. You will be able to choose a more favorable option regarding RMD that will lower your income. Also, if your spouse passes away before they start RMDs then you will be able to choose a new option to allow your beneficiaries to be able to benefit from stretching out required distributions for the rest of their lives instead of the mandatory 10-year payout. This new option will be most impactful if there is a large age gap between spouses.
Qualified Charitable Distributions (QCDs)
A Qualified Charitable Distribution is a certain type of withdrawal from a traditional IRA. You are able to send money directly from your traditional IRA to charity and not have to pay any federal income taxes. QCDs count towards your required minimum distribution, so they are a great income and charitable giving strategy. To be eligible for QCDs, you need to be age 70 ½ or older. The age for eligibility did not change as a result of this new law. It is still not tied to the age for starting RMDs. The maximum amount of QCDs in one calendar year is $100,000. Starting in 2024, this limit will now be increased each year by the rate of inflation.
There is also a provision allowing for a one-time opportunity to use a QCD to fund a charitable trust or a charitable gift annuity up to a maximum of $50,000. However, there is a very limited set of circumstances where this would be the best charitable giving strategy.
Self-Employed Retirement Plan Changes
Are you a procrastinator? In the past, if you wanted to establish a solo 401k, you needed to do so before the end of the calendar year. This new law changes the deadline to allow self-employed individuals to create solo 401k plans for the prior tax year up to the tax filing deadline (including extension).
For those who created SEP or SIMPLE IRAs, you now have the option of making Roth contributions to these types of plans. Custodians (e.g. Schwab or Fidelity) will need to update their internal systems, so this may not be available right away, but it will be soon.
Retirement Savings
Starting in 2025, if you are age 60-63, you will have the opportunity to make larger catch-up contributions. It will be the greater of $10,000 or 150% of the regular catch-up contribution amount (since catch up contributions will now also be increased by inflation each year). Also, for those with incomes over $145,000, you will be required to have catch-up contributions be Roth contributions. We are setting up reminders for clients who are impacted by this to make sure they will contribute the max allowable to their retirement plans.
Employers will now have the option to make matching contributions as Roth instead of Traditional contributions. The important thing to be aware of here is that these matching contributions will be considered additional income to you, so your tax withholding will need to be adjusted.
Education Savings and Roth IRAs
One common concern I have heard from clients over the years regarding saving for college is “what if the money isn’t used for college. I don’t want to have to pay a penalty to get my money back.” Starting in 2024, this new law has incorporated a provision to allow money from a 529 to be rolled over into a Roth IRA. However, there are certain provisions that need to be satisfied to be eligible for rollover.
The Roth IRA receiving the rollover must be in the name of the beneficiary of the 529 plan
The 529 plan must have been around for at least 15 years
Contributions to the 529 plan in the last five years are ineligible to be moved to a Roth IRA
The annual limit to rollover to a Roth IRA is the annual IRA contribution limit minus any contributions already made to an IRA
$35,000 is the lifetime maximum amount of rollover to each beneficiary
This will be a great vehicle for those who have some money left in 529s. You can use the remainder to help kickstart retirement savings for your children and grandchildren. Having $35,000 in a Roth IRA by the time you are in your mid-twenties could easily grow to over $1,000,000 by the time they are ready to retire.
What Didn’t Change
This new law changed many aspects of retirement planning, but it is also important to note what didn’t change. In the planning community there was some concern that this new law would alter some existing planning strategies. However, there were no changes to restrict backdoor Roth contributions or the supermax Roth contribution strategy.
Conclusion
There are changes not listed in this article that may impact our clients but rest assured that we are aware of them and if planning strategy needs to change, we will be in touch.
If you have any questions, please feel free to reach out to your advisor at Novi and if you know someone who is worried about their financial plan due to the changes in the SECURE Act, please don't hesitate to reach out. We are always happy to let you know how changes in the law or markets impact your personal financial situation.
RYAN M. VOGEL, CFP® is the CHIEF PLANNING OFFICER, PARTNER at Novi Wealth