Close Close
Sign In
Newsletters
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards
Podcast Center Video Center Webcasts Resource Center Events
About ThinkAdvisor Contact Us Advertise With Us Asset & Logo Licensing Sitemap Terms of Service Privacy Policy Copyright © 2024 ALM Global, LLC. All Rights Reserved.
ThinkAdvisor
RMD - required minimum distribution

Retirement Planning > Spending in Retirement > Income Planning

Secure 2.0 Act RMD Rules Open New IRA Planning Window

By John Manganaro

X
Your article was successfully shared with the contacts you provided.

What You Need to Know

  • As the RMD age is raised, retirees have a longer opportunity to take advantage of a lower tax bracket, Jamie Hopkins and Christine Benz say.
  • Clients with ambitious inheritance goals should consider carefully timed Roth conversions.
  • Optimal spending strategies must balanced with the lifestyle the client wants to live.

Speaking on a recent webinar hosted by Carson Group, Jamie Hopkins, the firm’s managing director of wealth solutions, suggested the new extension of the required minimum distribution age to 73 is a key conversation starter for advisors and their clients in 2023.

Hopkins was joined on the webinar by Christine Benz, Morningstar’s director of personal finance and retirement planning. The pair spoke for nearly two hours about the ins and outs of the recently passed Setting Every Community Up for Retirement Enhancement (Secure) 2.0 Act of 2022.

As Hopkins and Benz pointed out, the legislation features more than 100 individual provisions collectively aimed at modernizing and improving key aspects of the U.S. retirement planning system. Some of these include the expansion of automatic enrollment in employer-sponsored retirement plans, two separate increases in the RMD age, higher catch-up contributions above age 60, and newly permissible rollovers from 529 college savings accounts to Roth individual retirement accounts.

During the discussion, Hopkins and Benz took a substantial amount of time to zoom into the topic of RMDs, suggesting this is one of the changes to the law that will have the broadest impact on clients.

According to the duo, financial advisors can do a lot of good for their clients by bringing helpful RMD information to the front of planning conversations this year, including for clients who are still some distance away from their anticipated retirement date. While a later age for RMDs will be useful for many clients, the pursuit of optimal outcomes will take a well-considered financial plan that is put together years in advance, Benz and Hopkins say.

Why Roth Conversion Conversations Matter

As Hopkins points out, the original Secure Act included many provisions that have helped retirement savers grow and protect their wealth more effectively, but the law’s elimination of the “stretch IRA” has created some challenges. In short, the original Secure Act legislation instituted a rule that requires most non-spouse beneficiaries who inherit an IRA to draw down the full value of the account within 10 years.

“What the result of this change has been is that we have a lot of Americans who are passing away in their 80s or 90s today, and they have kids who are in their 50s who are inheriting actually quite a lot of wealth,” Hopkins says. “Broadly speaking, we know the typical client’s 50s and early 60s are going to be their highest earning years, so these required inherited IRA distributions tend to push these folks into the highest tax brackets.”

This dynamic is one of the reasons why conversations about proactive Roth conversions are so in vogue right now. Put simply, clients who own significant wealth in their traditional IRA that is likely to be passed to an heir or another non-spouse beneficiary should consider paying the taxes up front via a Roth conversion, to avoid the beneficiary facing the aforementioned tax bracket issue.

“If you collaborate with a great tax planner or an estate planning attorney, they can bring some really good insights to the table about what taxes should be prepaid via conversions or other strategies,” Hopkins suggests. “Post-Secure 1.0 and 2.0, RMDs and conversions are an important conversation, and they are especially relevant for higher net-worth clients.”

Low Tax Bracket Opportunities

As Benz points out, it was not long ago that clients had to begin taking RMDs from tax-advantaged accounts, such as IRAs or 401(k)s, at age 70 1/2. Now, clients can plan to wait until age 73, and that age ticks up again to 75 for individuals born after 1960.

“Seeing the RMD age move from 70 1/2 all the way up to 75 significantly enlarges what was already a really attractive window to do tax planning and retirement distribution planning,” Benz says.

Assuming a client is planning to retire in their mid-60s, the current rule framework opens up essentially a full decade in which a client can achieve great efficiency in terms of drawing income from tax-advantaged accounts and minimizing the lifetime tax burden.

“To put it simply, the early retirement years now have the potential to be some of the lowest-taxed years at any phase of retirement, because you have no taxable income from work, no RMDs until age 73 or 75, and, ideally, no Social Security income, because you are delaying until age 70 in order to maximize that benefit,” Benz says. “If you have the right liquid resources and after-tax assets in place, you can really do a lot to maximize your wealth via holding onto your traditional IRA.”

The use of traditional and Roth IRAs can be coordinated in some very powerful ways, Hopkins points out.

“If you do have those liquid assets in place to meet your immediate spending needs, you can seek to make Roth conversions during these low-tax years and get those conversions done while remaining in a really low tax bracket,” Hopkins says. “Another big opportunity is to conduct what you could call tax-gain harvesting while you are in the lowest capital gains tax levels given your overall income. All in all, this is such a rich field for planning.”

Retirement Planning vs. Reality

As Benz emphasized during the discussion, there is a big difference between the first step of developing a highly efficient retirement income and inheritance plan and the second step of actually carrying it out.

“This is where we need to bring up some of the great behavioral finance research from the likes of Wade Pfau and David Blanchett,” Benz says. “What their research has shown is that people often do not plan effectively for this period, but even when they do, they often don’t really follow their plan. Basically, people spend a whole lot in the early retirement period, so all the carefully planning we just spoke about is disrupted.”

Hopkins agreed with that point, noting that the “go-go years” of early retirement often see people having to (or choosing to) draw more taxable income than they planned.

“So, on paper, they have this wonderful plan to have no RMDs and no working income, and to have this stable, steady income and spending pattern that protects their wealth for the full retirement journey,” Hopkins says. “The reality often turns out to be a lot different. They may decide they want to travel more or they just spend a lot on discretionary things.”

“This is definitely a challenge to keep in mind,” Benz agrees. “In a given situation where you are serving a client, the best outcome is going to be about balancing the spreadsheets and analysis with frank discussions about quality of life and lifestyle expectations, so that a sustainable balance can be struck.”

(Image: Shutterstock)

John Manganaro

NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.