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Jeffrey Levine

Retirement Planning > Saving for Retirement > IRAs

Secure 2.0 Cements the Role of Roth: Jeff Levine

By John Manganaro

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What You Need to Know

  • More than 100 distinct provisions included in Secure 2.0 could affect a client’s retirement planning efforts.
  • The sheer number and scope of changes demand a refreshed planning perspective.
  • Advisory professionals should analyze their own book of business and attempt to focus on the most relevant provisions.

In the words of Jeff Levine, Kitces.com’s lead financial planning nerd and Buckingham Wealth Partners’ chief planning officer, the Setting Every Community Up for Retirement Enhancement (Secure) 2.0 Act of 2022 is nothing short of a behemoth.

In fact, according to Levine’s analysis, there are well in excess of 100 distinct changes made by the law that will have a direct impact on the work of financial planners and retirement advisors.

Speaking this week during the latest Kitces.com webinar, Levine suggested that advisors stand little chance of fully digesting and memorizing every little change made by the landmark law. Instead, he urged advisory professionals to analyze their own books of business and attempt to focus on those provisions that are likely to have the biggest impact on their particular stable of clients.

For example, those advisors with a lot of first-responder clients have a unique stack of changes to consider, while those with clients closely focused on legacy planning and charitable giving have another set to study.

That said, Levine used the webinar presentation to highlight what he considers to be the most widely impactful provisions of Secure 2.0 — the ones that can be expected to influence planning decisions for most clients.

While he believes no single change in the law will alone upend a given client’s financial plan, as was the case with the original Secure Act’s elimination of the stretch IRA, the sheer number and scope of changes demand a refreshed perspective.

Required Minimum Distribution Changes

As Levine pointed out, the age at which clients must begin taking required minimum distributions from their individual retirement accounts has been pushed back by a meaningful degree, with additional future extensions already programmed into the law.

“This change is one of the headline changes, in my view, because it impacts nearly every single client,” Levine said. “Unfortunately, for those who turned 72 or older last year, there is no change, but for those who will turn 72 this year through 2033, they are going to be able to delay RMDs until they reach 73.”

Starting in 2033, the RMD age is pushed back again, from 73 to 75, and no additional legislation or regulation is needed for this second extension to take effect.

Levine suggested this 10-year delay in pushing the RMD age back to 75 ties back to the way the federal government accounts for revenues and expenses in the budgeting process. If not for this quirk, he said, it’s likely that Congress would have just pushed the RMD date out to 75 in one fell swoop.

“The basic rule of thumb for financial planners is to understand that, if your client was born between 1951 and 1959, they will have an RMD age of 73,” Levine said. “If the client was born in 1960 or later, their RMD age will be 75.”

The Planning Impact of Later RMDs May be Mixed

Levine said the planning community tends to view extensions to the RMD age as being a universally positive thing.

“That is true in the sense that it adds flexibility, but this extension also has the potential to exacerbate tax issues,” Levine warned. “Any time an IRA owner waits to make distributions, that effectively means they will be squeezing future income into fewer years, and that can raise their tax bill.”

In Levine’s experience, most clients don’t appreciate this, and they often fail to understand that they are setting themselves up to have a smaller window for drawing income.

“The good news for advisors is that you can distinguish yourself by delivering advanced planning here to really help people make the most of their tax-deferred growth while also avoiding tax headaches,” Levine said. “Roth conversions are likely going to be a key part of this discussion.”

More Flexibility for Employer-Based Roth Accounts

Levine said another RMD-related change that is getting less attention from the planning community pertains to Roth-style accounts offered by employers, such as Roth 401(k)s or Roth 403(b)s. Beginning in 2024, these accounts will no longer be subject to RMDs.

Levine warned advisory professionals that this may seem like a minor or peripheral change, but it will actually have a big impact on things like rollover decisions.

“This matters to wealth advisors even if they don’t do work on employer-sponsored retirement plans,” Levine warned. “In short, this change will add significant additional complexity to the rollover discussion for these types of accounts.”

Historically, Levine said, the choice to move money from a Roth 401(k) into a Roth IRA was a “no brainer,” specifically because the Roth 401(k) would be subject to RMDs while the Roth IRA would not be. Until now, this additional flexibility for the Roth IRA generally was seen as enough to justify any additional fees or expenses resulting from the rollover.

“Now, that basic assumption has changed, and all of the rollover factors will now need to be looked at much more closely,” Levine warned.

According to Levine, Roth IRAs still have the advantage of being able to offer more tax-efficient withdrawal strategies. This is because Roth 401(k)s tend to allow only pro rata distributions, which can be less tax efficient.

“In any case, the Roth 401(k) rollover decision now looks a lot more like a traditional 401(k) to IRA distribution,” Levine said. “So, a proper evaluation is needed, especially given the stricter regulatory framework we are now operating under.”

The Role of the Roth Has Been Cemented

Generally speaking, Levine said, the Secure 2.0 framework is “very pro-Roth.”

“Many of the biggest changes open up new opportunities to use the Roth-type accounts,” Levine observed. “In fact, various provisions even require people to use Roth-type accounts in some circumstances, for example, if they are over certain income thresholds. This is a theme we have seen in recent years, and I expect it to continue.”

Levine said it is apparent that the current members of Congress “just love the Roth, and for good reason.”

“Pro-Roth policies look good on the budget today, and people in the public actually like them,” Levine said. “There are just very few other policy issues for which this is true, and I think that fact can give planning professionals a lot of confidence that the Roth is here to stay.”

Levine said a clear demonstration of this idea is the new capability for clients to make rollovers from 529 college savings plans to Roth IRAs. Before the adoption of Secure 2.0, families were penalized for withdrawing unused or leftover funds from their 529 accounts.

Under the new law, families have another option other than simply withdrawing the funds and paying the excise taxes should their child decide against pursuing a higher degree — or complete their education without using all funds in the account.

With Secure 2.0, there is a $35,000 lifetime limit on such transfers, Levine pointed out, and the 529 account will have to have been in existence for at least 15 years in order to qualify.

“Given this 15-year requirement, you should probably go ahead and encourage your clients to just open a 529 plan today and put 50 or 100 bucks in it,” Levine said. “That way they can just get that clock started, even if they have to name themselves as the beneficiary. You can always make a change later.”

A Slew of New Early Withdrawal Exceptions

Among his conclusions, Levine said advisors should study up on the many different early IRA withdrawal options included in the Secure 2.0 package.

As an example, he pointed to the expansion of the public safety worker exception, which allows for penalty-free withdrawals starting at age 50 in cases where the individual has separated from their job. Now, private firefighters are eligible for this exemption, Levine noted, as are those who have worked for a qualifying employer for more than 25 years, even if they are not yet 50.

Many other such exemptions are included in Secure 2.0, Levine said, and it will be important for advisors to understand which of these might most directly affect their client base.

John Manganaro

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