New rules and regulations pushed forward by the SECURE 2.0 Act might impact how you manage your money right now, and into the future. Here’s what you need to know.
This conversation about the SECURE 2.0 Act proves the point we make all the time: you have to build a plan that can flex and bend with changing realities. You don’t have a strong financial plan if it is dependent upon a set, concrete assumption.
Those “changing realities” can come from a huge range of sources:
- From you personally: maybe you changed your goals or shifted your priorities
- From some aspect of your life: perhaps you wanted (or needed) to change jobs or even careers
- From the unpredictability of the future: some kind of unforeseen event – good or bad, that you had control over or not – forced you to alter your trajectory
- From something external… and therefore, probably uncontrollable: like regulations or laws that went into effect, as with the SECURE 2.0 Act
That last point is what we’re going to dive into today, with this review of the SECURE 2.0 Act and how it may directly impact your financial life.
(A note for podcast listeners: Throughout this episode, we referred to the new set of laws as the “SECURE Act 2.0 – when it is the SECURE 2.0 Act. Apologies for any potential confusion this may cause!)
The SECURE 2.0 Act is a 1.7 trillion dollar spending bill passed by Congress in 2022. This legislation’s scope went far, far beyond “let’s adjust how retirement plans work.”
But the details within the bill did change many rules relating to retirement plans, and therefore, it changed the strategies you need to consider for managing yours as part of your overall financial plan.
Let’s walk through how you might answer the question, how the SECURE 2.0 Act impacts me now and in the future – and note that this isn’t an exhaustive review.
We focused on what we felt was most impactful for the type of clients we serve: high earners in their 30s and 40s looking to build wealth as they enjoy life today with their partners and families.
How the SECURE 2.0 Act Impacts Me Right Now
We’ll start with two aspects of the SECURE 2.0 Act that involve paying for college, for yourself or for your kids:
- Being able to pay off your student loans and save for retirement without having to choose between the two of them
- New flexibility for 529 plans
Pay Down Student Loans or Save for Retirement? Now, You Don’t Have to Choose
If you currently have student loans, you can pay those down and still get a matching contribution to your retirement plan for your employer.
You can tell your employer you are using the money you otherwise would contribute to an employer-sponsored retirement plan like a 401(k) to pay down your loans – and your employer will still provide their normal matching contribution into your 401(k).
For example: say you make $150,000. Normally, you’d put in 3% of your salary to your 401(k) because your employer offers a 3% match – and you know that’s free money on the table. 3% is $4,500 per year.
But you still have student loans to repay, so you take $4,500 and use that sum to pay down your loan balances instead.
If you report this to your employer, they still need to provide their normal 3% match to your 401(k) – they still need to contribute $4,500 to your plan even though you used your $4,500 to pay down student loans.
Nice, right?
Even better, it’s not a complicated process to get started with this. Student loan paperwork is typically a nightmare, but in this case… your word is good enough.
The SECURE 2.0 Act does not require that you have proof that you took what would have been your 401(k) contribution and applied it to your student loan balance instead.
Obviously, we recommend you (a) be honest and (b) maintain your own proof that you took what would have been your 3% contribution to your employer’s retirement plan and applied it to student loans.
The whole point of this episode is that regulations and laws change. There’s nothing to say that, in the future, a more stringent system will be put into place that does require proof.
Plus, if you cheat the system you can easily be caught and face fines or penalties if you’re ever audited by the IRS.
Get More Flexibility (and Potentially Roth Dollars) from Your 529 Plan
Initially, a 529 plan was designed for college savings only. You had to use the funds in the account for qualified education expenses with higher education – otherwise, you’d face taxes and penalties if you used the money for other purposes.
A few years ago, the rules changed so that families could use 529 plan funds not just on college costs but some private grade or high school expenses as well.
Now, if you’re asking how the SECURE 2.0 Act impacts me, one answer is that families have even more options with what happens to their 529 plan savings in the future.
You can still use 529 plan money for education expenses – and you have the ability to roll over some of those funds to a Roth IRA down the road.
If you have a 529 plan that has been open for 15 years or more, the beneficiary of the account can roll up to Roth IRA contribution limit into their Roth each year. (That limit for 2023 is $6,500, and this figure tends to increase over time to reflect inflation.)
So not only do you have more choice in how you can use 529 plan money, but you can still exercise the flexibility that was always available with a 529 plan: you can change the beneficiary.
That gives you the ability to roll money into multiple immediate family members’ Roth IRAs (so long as that family member has earned income reportable to the IRS).
There are limits on how much you can roll over into a single Roth IRA. Right now, you can only roll over up to $35,000 from a 529 plan into a beneficiary’s Roth IRA.
But again, you can change the beneficiary on the 529 plan – so if you were to hit that limit for one family member, you could change the 529 plan beneficiary and continue doing rollovers to a Roth for another family member with earned income.
This allows you to contribute to a child’s college fund, help jumpstart their retirement savings, or even catch up on your own retirement savings if needed down the road by rolling over 529 plan money into your Roth IRA.
How the SECURE 2.0 Impacts Me and Longer-Term Retirement Planning
Two quick hits to start us off on how retirement planning has changed:
- Business owners, solopreneurs, and freelancers now have a Roth option for their SEP or SIMPLE IRAs. Previously, you could only have a traditional SEP or SIMPLE. The SECURE 2.0 Act gives you the opportunity to opt for a Roth instead.
- Required minimum distributions from retirement accounts have changed.
Before 2020, it was 70 and 1/2 years old. The first version of the SECURE Act changed the RMD age to 72 from 70.5. The SECURE 2.0 Act says after 2033 and if you were born after 1960, your RMD age will be 75 years old.
On the surface, this is a good thing because it means you don’t have take out money from traditional IRAs or 401(k)s until a later date. This also gives your money more time to compound and grow.
The potential downside of that is, more money = more taxable income once that money is distributed.
So this isn’t necessarily bad, it just creates an important point to consider and plan for when looking at withdrawal strategies for your retirement.
This should be good motivation to do the work to understand what your true spending needs in retirement are likely to be, so you can create a distribution strategy that provides for the lifestyle you want without unnecessarily burdening you with taxes.
In terms of what we can do about this now, this brings us to another important point to consider with the SECURE 2.0 Act: fund more than just tax-deferred accounts to spread your tax liability over time.
Spread Your Tax Liability Through Time Thanks to Dropped Roth 401(k) Distribution Requirements
Roth IRAs do not have required minimum distributions; you never have to take money out of a Roth IRA if you don’t want to do so. However, Roth 401(k)s did have RMDs… until now.
The SECURE 2.0 Act eliminated the requirement to distribute from Roth 401(k)s at certain ages. The goal here is to make sure you’re not putting too much of your tax liability into the future by funding tax-deferred accounts like traditional IRAs and 401(k)s.
You want to balance out your savings, and diversify the taxability of your investment accounts.
If you don’t currently contribute to a Roth 401(k) but have the option to do so, it’s worth considering to make sure that you have money in a variety of “tax buckets” – ranging from income taxed now (Roth) to income taxed later (traditional).
Keep Catch-Up Contributions in Mind
You’ve always been able to put more money into retirement accounts once you hit age 50. The SECURE 2.0 Act changed the catch-up contribution limits in a few ways.
First, those annual contribution limits that apply if you are 50 or older are now tied to the Consumer Price Index (or CPI) to better ensure the numbers track the reality of inflation.
Second, if you’re 60 to 63 years old, you may be eligible to put even larger catch-up contributions into your retirement plan starting in 2025. The SECURE 2.0 Act will let you contribute up to $10,000 (growing by inflation) or 150% of the regular catch-up at the time, whichever is greater. That’s on top of the normal limit ($22,500 in 2023).
Third, if you are making catch-up contributions and you earn more than $145,000, those contributions must be put into a Roth account. You cannot put them into a traditional portion of a retirement plan.
Gain More Control Over How Your Employer Contributes to Your Retirement Plan
In the past, employer contributions have always been tax-deferred. The SECURE 2.0 Act now allows you to choose where that money goes: into the traditional tax-deferred plan, or a Roth.
This adds flexibility, but keep in mind that you will be taxed on that contribution amount in the year you receive it.
This may increase your taxable income over previous years, when the money went to a tax-deferred account and you were not taxed on it.
The SECURE 2.0 Act Changed a Lot; Your Plan May Need an Update to Keep Pace
We’ve seen a lot of regulatory change over the past 5 years that directly impacts anyone trying to save and plan for their financial future. If you don’t keep up with the new laws and regulations, you could miss out – or make a mistake based on outdated information.
This is why a financial plan cannot be a one-time event. It has to be an iterative financial planning process that you continually work through, update, and adjust based on how events unfold over time.
If you’re ready to check and see if your financial plan needs an update, join us in this conversation about what the SECURE 2.0 Act changed and how it affects your personal finances:
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