What The Secure Act 2.0 Means For You

Secure Act 2.0

At the end of 2022, the Consolidated Appropriations Act was passed, which included a retirement bill known as SECURE Act 2.0. This law was built upon the original SECURE Act legislation passed in 2019. 

The SECURE Act 2.0 expands and changes the rules on saving for retirement, withdrawals from retirement plans, increases the savings thresholds and tax benefits for Roth IRAs, 401(k) plans and more. 

Ultimately, most people just want to know what parts of the Secure 2.0 Act apply to them. Here’s a summary of key provisions to pay attention to. 

 

High Wage Earners & Catch-Up Contributions 

Catch-up contributions allow folks 50 and older to save even more in workplace retirement plans.. For 2023, the catch-up contribution was raised to $7,500. This is in addition to the regular annual contribution limit of $22,500, meaning those  50 and above eligible to save $30,000 in total for 2023. 

Effective in 2024, people with wages (like w2 income) above $145k (which will be indexed for inflation) are only eligible for Roth catch-up contributions. Regular contributions may still be made with pretax dollars. The new rules apply to 401(k), 403(b) and 457(b) plans, not to catch-up contributions for IRAs. The IRA catch-up contribution limit will finally adjust automatically for inflation from its stagnant $1k cap in 2024 as well. 

Planning opportunities: You may be able to avoid mandatory Roth 401(k) catch-up contributions with income above $145k if you are self employed. Also, if you change jobs in the middle of the year, you may still be able to do pretax catch-up contributions even if you’re a high wage earner. 

 

Roth-Related Changes

If you’re an employee with an employer-sponsored retirement plan, you’ve only been able to receive matching contributions on a pre-tax basis. Employers may now offer the option to match and make non-elective contributions via Roth 401(k) accounts. Heads up: You’ll also pay taxes on these employer contributions. 

Beginning in 2024, employer retirement plan based Roth accounts like Roth 401(k) and Roth 403(b) will no longer require RMDs, similar to individual Roth IRAs. SEP and SIMPLE IRAs will now allow Roth contributions. 

Good news: One component that was not restricted or eliminated was existing Roth strategies, like backdoor conversions or mega-back-door Roth contributions. 

 

Additional Flexibility for 529 College Savings Accounts 

Beginning in 2024, it’s possible to move money from a 529 plan directly into a Roth IRA, and the transfers are not subject to income limitations. This comes as great news for savers who had concerns about potentially overfunding their child’s 529 plan. There are, however, certain conditions that must be met:

  • The Roth IRA receiving the money must be in the same name of the beneficiary of the 529 plan; 
  • The 529 plan must have been maintained for at least 15 years;
  • The annual limit is the IRA contribution limit for the year, reduced by any regular IRA or Roth IRA contributions made that year;
  • Lifetime transfer limit of $35k

Planning opportunity: If a parent contributed to a 529 account for their child, maintained ownership, and the child no longer needed the 529 money, it appears the parent may be able to change the beneficiary to themselves and then transfer the money to their own Roth IRA, subject to the conditions above. Note: Before doing so, please seek expert guidance. Some legislation interpretation still needs to be confirmed or rejected.  

 

Changes to Qualified Charitable Distributions (QCDs)

QCDs have been one of the best ways for people who are charitably inclined to give money directly from an IRA in a tax-efficient manner. The annual limit of $100k will now be indexed for inflation starting in 2024. 

It’s also now possible to use a QCD to fund certain types of charitable trusts. However, the maximum amount that can be moved is $50k. Given the time, expense and complexity that comes along with these types of trusts, this modest dollar limit may preclude most people from doing so. 

 

Changes to Required Minimum Distributions (RMDs)

RMDs are when you must take withdrawals from your retirement accounts, regardless if you want or need the money. The original SECURE Act raised the age for RMDs from 70.5 to 72. SECURE 2.0 pushes this out further:

  • Age 73 for folks born between 1951–1959 
  • Age 75 for folks born in 1960 or later
  • Turned 72 in 2022 or earlier? You must still keep taking RMDs.

The bill also decreases the penalty for missed RMDs from 50% to 25% of the shortfall, and providing the mistake is corrected in a timely manner, the penalty is now only 10%. 

Have a younger spouse? If they predecease you, you can now elect to be treated “as your deceased spouse,” which allows you to take RMDs based on their age rather than your own.

Planning opportunities: Pushing out the extra income created by RMDs age could mean additional years before the dreaded spike inMedicare Part B/D premiums and perhaps a few more years of Roth conversions. Please work closely with your advisor to see if this applies to you. 

 

Other Changes Worth Noting 

At over 400 pages, the legislation is long and cumbersome. While it’s impossible to include every component, we’ve focused on the items that are most likely to impact our clients. A few other items worth noting:

  • In 2028, some S Corp owners who sell shares to an Employee Stock Ownership Program (ESOP) may be eligible to defer up to 10% of their gain by taking advantage of a like-kind exchange; 
  • SECURE 2.0 expanded the list of 10% penalty exceptions for accessing retirement funds during times of need;
  • Beginning in 2024, employers can “match” an employee’s student loan payments by contributing an equal amount to a retirement account on their behalf. 

 

We’re Here to Help 

As we digest these latest changes and wait for important clarification on items that still remain ambiguous, we are already thinking proactively about which of our clients might be able to benefit. 

If you are wondering how these changes pertain to your situation and would like some professional guidance, please reach out, we’re here to help. 

 

Uplevel Wealth is a fee-only, fiduciary wealth management firm serving clients in Portland, OR and virtually throughout the U.S. 

Five Ways to Uplevel Your End-of-Year Finances

End of Year To-Do's

Visit any Costco or Target (two of our favorites!) and you’ll see that fall is officially over and the holiday season is upon us. Not to despair, however. With a solid nine weeks left in 2021, now’s a great time to run through some important “to-do’s” and finish the year with your finances in good order.

To keep things easy, we broke it into our top five categories:

 

Be Mindful of Deadlines Ahead

With only a few pay periods remaining in 2021, make sure you’re on track to maximize your retirement plan contributions, especially if your employer offers a match. You can contribute up to $19,500 this calendar year to a 401(k) or 403(b), plus an additional $6,500 if you’re over age 50. 

If you want to increase contributions before the December 31st deadline, reach out to your HR department or payroll provider ASAP. It’s also a great opportunity to get next year’s contributions set up, as the maximum contribution amount jumps to $20,500 in 2022, for a total of $27,000 if you’re over 50. 

 

Use It or Lose It

A Flexible Spending Account (FSA) or Dependent Care FSA allows you to save pre-tax dollars throughout the year and use those funds to reimburse yourself for out-of-pocket expenses like copays, prescriptions, or child care expenses. While these accounts are a great way to save on taxes, typical FSA accounts have a “use it or lose it” provision whereby the balance in the account needs to be depleted by the end of the year. 

Employers do have the discretion to offer wiggle room and allow for some money to be carried over, usually $550. Due to the pandemic, the government is giving employers even more leeway, allowing for deadline extensions and larger balance carryforwards, including up to the total balance in an FSA. 

Be sure to find out what deadlines and limits apply to your plan, as you may want to contribute less money next year if you can carry-over an existing balance. If not, now’s the time to use up remaining funds and schedule doctor visits or stock up on FSA-eligible items, a handy list of which can be found here. 

 

Tax Planning Isn’t Just for April

While impending tax changes have been rumored since President Biden took office (check out our past blog posts on proposed tax changes) nothing has officially passed as of this post. Despite the uncertainty, it’s still a good idea to take a look at your income and deductions in 2021 and how they might compare to 2022 and beyond. 

If you were part of 2021’s Great Resignation and left your job, a Roth conversion in a lower-income year could be of great benefit. Conversely, if you were fortunate enough to receive a significant windfall, such as Restricted Stock Units (RSUs) vesting, other stock options, or a large bonus, make sure you are paying enough in estimated tax payments to avoid penalties come tax time. 

 

Double Check Your Portfolio

Though stocks have been on a winning streak for the last year or more, it’s worth taking a peek at your portfolio to see if any holdings are currently at a loss. Those investments can be sold and their losses used to offset capital gains realized this tax year or carried forward to a future tax year until depleted. 

If you don’t already have capital gains, you can offset up to $3,000 in ordinary income with realized capital losses. A word of caution however – be sure to familiarize yourself with wash sale rules before repurchasing a security sold at a loss, or you may find yourself in a bit of hot water with the IRS.

 

Make a Difference

Helping friends and family or supporting beloved charitable organizations can happen any time during the year, but there are some timing considerations if you’re looking to maximize your giving. 

This year, you can give up to $15,000 to another individual without making a dent in your lifetime estate and gift exclusion. If you are married and file jointly, that amount doubles to $30,000. Limits for 2022 have yet to be announced, but there is speculation that this amount will increase to $16,000 for single tax filers and $32,000 for married couples. 

Giving to charities has its own set of financial benefits and strategies vary depending on your circumstances. If you find a bit of excess cash in your bank account, here are a few options to consider:

  • Cash donations – Congress extended a provision of the CARES Act that gives single taxpayers a deduction of up to $300 for cash donations to some charities and $600 for married filing jointly. This applies even if you claim the standard deduction.
  • Strategic Donations – In addition to outright cash contributions, there are other options available such as donating appreciated stock, funding a donor advised fund, or a qualified charitable distribution (for those ages 70.5 or older). We can help determine which option is best for you. 

 

Reach Out

In the coming weeks, as you trade Pumpkin Spice Lattes for Peppermint Mochas, don’t forget to take a few moments to check-in on your financial position to make sure you’re taking full advantage of all the options available to you. We’re here to help.

 

Trek to Retirement

In late March, I set out into the backcountry of central Oregon with eight other women, all on snowshoes or cross-country skis. We traversed more than 22 miles in the heart of the Oregon Cascades, breaking trail and staying in huts. The terrain was steep, the visibility was poor, the snow was deep and there was a stiff wind.

What does this have to do with investing? The trek was reminiscent in three ways:

Feeling inferior. I was among incredibly fit and experienced outdoors women. This was my first trip of this kind. The others were triathletes, competitive cyclists and expert mountaineers. If we were a sports team, I’d have been keeping the bench warm.

I suspect I saw myself as more amateur than my companions did. I can’t tell you how many competent, educated and bright women I meet who are reluctant to acknowledge all that they’ve done for their financial future or voice the insightful questions they have. They downplay their knowledge because they aren’t “experts.”

One of the best things about investing is that it doesn’t require expertise to begin. In fact, the quote of “80% of success is showing up” couldn’t be truer. Just getting started, by putting your money to work in the market, can be one of the best decisions you make. From there, you can always improve and adjust your portfolio, as you learn and grow along the way.

Constraints work. Our Oregon Cascades adventure was a last-minute trip, so I didn’t have time to do a ton of research or prep beforehand. This worked in my favor. I could only concentrate on what gear to pack, food to bring and the correct mapping software to download. I couldn’t overthink it.

The same approach can be helpful with investing. You can easily get sucked into the latest articles on bitcoin, the “next Amazon,” why you ought to buy gold and how to invest in today’s economy. But in all likelihood, you’ll fare far better if you stick with the essentials—a handful of mutual funds that give you broad diversification at low cost.

Start small. A few hours into the trek, we lost some gear and our physical map. The visibility was poor and it was snowing hard. An hour of backtracking failed to locate our lost items. Our 25-pound backpacks became heavier and our pace slower. We became concerned we wouldn’t make it to the first hut in eight hours, let alone by dark.

The experience gave new meaning to putting one foot—or snowshoe—in front of another. Our success depended on this simple approach.

Retirement can seem like an incredibly daunting and distant goal. There may be a house that needs work, daycare and education costs that seem to go nowhere but up, and aging parents to comfort and care for. There will be days when getting out of bed and dressing yourself seem like an accomplishment. And they are. Every action you take, every decision you make, toward your long-term goals are a step in the right direction, no matter what your pace. Remember, you’re human.

Taking action builds momentum. Before you know it, your regular savings toward retirement will compound and grow. Your eight-hour trek will seem like six hours. Conditions will improve and the wind will be at your back—and all that was made possible by taking those initial steps.

This article first appeared in HumbleDollar.