Financial Advisor in Raleigh NC: SECURE Act 2.0 and Wealth

At the end of December, the SECURE Act 2.0 was passed, aiming to assist hard-working Americans in restoring their retirement savings. The impact of this law is unclear, but it has some interesting and beneficial parts for wealthy clients.

Before delving into the notable provisions, it is worth noting that the SECURE Act has raised the required minimum distribution (RMD) age to 73 for the current year and will further increase it to 75 by 2033. Although this change has garnered significant media attention, its impact is not considered particularly substantial, except for the extended opportunity it provides for Roth conversions—an immensely valuable benefit. Therefore, it is crucial to capitalize on these additional years from a planning standpoint.

Rollover Unused 529 Plans to Roth IRAs     

Effective from 2024 onward, the legislation introduces a provision that allows for a tax- and penalty-free transfer of funds from a 529 account to a Roth IRA. Specifically, beneficiaries of 529 college savings accounts will be eligible to roll over funds from their own named 529 account to a Roth IRA in their own name after a 15-year period. 

However, these rollovers are subject to certain restrictions. The maximum amount you can transfer is $35,000.

This limit includes the money you have saved in the past 5 years. The rollover counts as a contribution towards the yearly limit for Roth IRA contributions. The current yearly limit for Roth IRA contributions is $6,500.

The rollover rule assists parents who have saved money in 529 plans. These parents often face high taxes when they withdraw money for non-education expenses.

Jamie Hopkins, a managing partner of wealth solutions at Carson Group, hailed this amendment as "one of the most intriguing provisions" within SECURE 2.0. He further explained that this change empowers parents and grandparents funding 529 accounts for their children or grandchildren to redirect surplus funds towards retirement savings if the beneficiary attends a more affordable institution, receives a scholarship, or opts not to pursue college education at all.

Matching contributions to a Roth Account for High Earners

SECURE Act 2.0 wants to generate tax revenue by making certain matching contributions on a Roth (after-tax) basis. After 2023, employees making over $145,000 (adjusted for inflation) must add extra money to their retirement plans on a Roth basis. Plans include 401(k), 403(b), and governmental 457(b). This mandatory Roth treatment for catch-up contributions applies to any plan that offers catch-up contributions.

Plans can let employees choose to put their employer contributions into a Roth account to make money. However, this provision only applies if the contributions are fully vested at the time they are made. This option will only apply to contributions made after SECURE Act 2.0 is passed. It may take a while for plan providers to offer it and for payroll systems to be updated.

In the past, matching contributions in employer-sponsored plans were made on a pre-tax basis.

However, with the introduction of Roth retirement plans, contributions are made after taxes, allowing for tax-free growth of earnings. This presents a significant advantage for individuals with higher incomes, as they have the opportunity to accumulate funds in tax-free accounts.

Ed Slott, a retirement expert from Rockville Centre, New York, described the catch-up boost as "the most significant aspect for higher-income individuals" within the legislation. He emphasized that it enables the ability to contribute more funds and benefit from various growth options for catch-up contributions.

Expansion of QCDs and Charitable Contributions 

Currently, Qualified Charitable Distributions (QCDs) are limited to $100,000 per year without annual adjustments. However, the SECURE 2.0 Act introduces a provision that allows for annual inflation adjustments to the $100,000 limit, rounded to the nearest $1,000. These adjustments will take effect starting in 2024. It's important to note that for donations to qualify, they must be made directly from an IRA by the end of the calendar year, and QCDs are not eligible for all charitable organizations.

Furthermore, starting in 2023, individuals aged 70½ and older can make a one-time QCD of up to $50,000 to charities through specific charitable remainder annuity trusts (CRATs), charitable remainder unitrusts (CRUTs), or charitable gift annuities (CGAs). This rule gives more choices to people who use trusts and charitable giving to possibly lower their federal taxes.

The new rule allows for a one-time gift, adjusted annually for inflation, to a CRAT, CRUT, or CGA. This provision broadens the definition of eligible "charities" that can receive such gifts.

Among these options, the CRUT stands out as particularly intriguing. It is an estate planning tool that provides income to a designated beneficiary during the grantor's lifetime, with the remaining trust assets directed to a charitable cause. Notably, the income received by the beneficiary varies based on a percentage of the trust's fair market value.

CRATs are suitable if the values decrease, while CRUTs are preferable when the trust's investments appreciate. However, these trusts tend to be costly to administer and are typically not utilized for smaller amounts.

Forbes addressed the tax treatment of these provisions in a recent article, highlighting some additional drawbacks. Normally, payments received from a charitable remainder annuity trust are partially taxable and partially tax-free. If a CRAT has capital gains from the sale of appreciated assets, the income is classified as capital gain income. The income taxation of a CRUT follows a similar pattern.

Under the new SECURE 2.0 rules, all payments received by the IRA owner or their spouse must be treated as ordinary income. Current charitable remainder trusts are unlikely to be used to receive IRA payments. This is because they usually do not receive payments that are considered 100% ordinary income. Additionally, SECURE 2.0 mandates that CRUTs and CRATs be exclusively funded by qualified charitable distributions.

A potentially more enticing option is the use of charitable gift annuities (CGAs), where the institution establishes the CGA, and the donation is made directly to the institution, such as a university endowment. With CGAs, donors may save on administrative costs and tax-filing fees.

Through the introduction of this new charitable giving opportunity, the act broadens the avenues for your clients to lower their tax liability by making a one-time gift. The act allows your clients to receive income. It also allows them to make a $50,000 Qualified Charitable Distribution (QCD). This can be done by including charitable trusts or CGAs in the definition of a charity.

RMD Options for Surviving Spouses Grow 

Existing rules govern when a surviving spouse must commence Required Minimum Distributions (RMDs) from an inherited retirement account. One such rule stipulates that if an account holder passes away before RMDs are required, and their surviving spouse remains as the beneficiary without changing that status, RMDs from the inherited account are not obligatory until the year in which the deceased account holder would have turned 72.

The SECURE Act 2.0 introduces a modification to this rule by permitting the surviving spouse, starting in 2024, to be treated as the deceased account owner for RMD purposes. This adjustment can enable the surviving spouse to postpone taking RMDs from the inherited account, particularly if they are younger than the deceased spouse.

To avail this treatment, the surviving spouse must make an irrevocable election according to procedures to be established by the IRS and notify the account administrator accordingly.

When RMDs begin, the surviving spouse will use the Uniform Lifetime Table. This will happen in the year the account holder would have reached RMD age. The surviving spouse will use this table instead of the Single Lifetime Table for beneficiaries.

If the surviving spouse dies before RMDs start, their beneficiaries will be considered the original beneficiaries of the account. This favorable treatment allows eligible designated beneficiaries to "stretch" distributions over their life expectancy, rather than being subject to the 10-year rule that would otherwise apply.

We are always open to greater flexibility in the starting age for Required Minimum Distributions (RMDs) when it is introduced by the government. This is especially significant when the surviving spouse is the beneficiary and happens to be younger.

Bottom Line

These four provisions are legitimately exciting and represent a bold change in the laws benefitting most Americans. Consider talking to your financial advisor or financial planner to see what the SECURE Act 2.0 has to offer for your financial plan.

Sources:

https://www.horsesmouth.com/4-exciting-aspects-of-secure-act-20-for-wealthy-clients

Disclosures:

This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. 

All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed.  All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.