Secure 2.0: How to Use New RMD, Roth Account Rules in Client Plans

Secure 2.0 created planning options for you and your clients, provided you know when to use them.

The recently enacted Secure 2.0 Act legislation — the Setting Every Community Up for Retirement Enhancement 2.0 Act — contains a number of provisions that change the rules of retirement planning.

Two areas that figure prominently in the legislation are required minimum distributions (RMDs) and Roth accounts. There are a number of planning options for advisors and their clients arising from these changes.

RMD Planning Opportunities Under Secure 2.0

One of the most publicized changes resulting from Secure 2.0 is the increase in age at which RMDs must commence. Beginning in 2023, the age to commence RMDs increases to 73 for those born from 1951 through 1959. Beginning in 2033, the age to commence RMDs will be pushed to 75, affecting those born in 1960 or later.

On one hand, many argue this change may serve to simply increase the amount of RMDs that need to be taken and the taxes paid over a shorter period of time. While this may be true, there are some planning opportunities here for you to consider with your clients.

Roth Conversions

Roth IRA conversions were already a solid planning strategy for many clients prior to the increased RMD starting ages. The added time to begin RMDs gives clients additional time to do Roth conversions and thus reduce the impact of RMDs on their traditional IRA and other accounts, if they so choose.

With the imposition of the requirement that most non-spousal IRA beneficiaries take a full distribution of an inherited IRA within 10 years under the original Secure Act, the use of inherited Roth IRAs continues to be a key estate planning tool for clients who will be leaving a substantial portion of their IRA holdings to non-spousal beneficiaries.

QCDs

The new law changes some rules for qualified charitable distributions (QCDs). These include:

QCDs are a means for clients who are charitably inclined to satisfy some or all of their RMD obligations by making a contribution to an eligible charitable entity. Though there is no tax deduction for using a QCD, the money comes out of the traditional IRA tax-free.

The Secure 2.0 legislation did not change the beginning age for eligibility to take a QCD, which remains at 70 ½. For clients who want to reduce future RMDs and don’t need some or all of the income the RMDs will generate, QCDs beginning at age 70 ½ are a good way to reduce the impact of future RMDs while making a tax-efficient donation to the charities of their choice. This can be a tax-efficient means of making charitable donations for clients who may not be able to itemize.

The ability to divert up to $50,000 to a charitable trust or charitable annuity can make sense for some of your clients. This is a way to get money out of their traditional IRA tax-free while benefiting a charitable organization as well as themselves or their beneficiaries.

Roth Accounts

Secure 2.0 made a number of changes to Roth accounts that could benefit some of your clients.

529 Rollover to Roth IRA

One provision of the new legislation allows for the rollover of up to $35,000 of money left in a 529 account to a Roth IRA. The Roth IRA must be opened in the name of the 529 account’s beneficiary. This can come in handy if the beneficiary doesn’t spend all of the money in the account on their education. Maybe they attended a less expensive state university or a trade school versus a pricier private college.

While there are other options for a 529 plan balance, such as paying off student loans or transferring the balance to the 529 account of another beneficiary, these options may not exist in every family situation. The Roth transfer option has been likened to a new backdoor Roth by some in the industry.

This can offer the account beneficiary a start on their retirement savings. While $35,000 is not a fortune, it will compound many times over the years if invested wisely. This can be a good start for your clients in their estate planning and their goal of encouraging their children to begin saving for their retirement.

Roth 401(k) Matching Contributions

The new legislation allows 401(k), 403(b) and other employer-sponsored retirement plans with a Roth option to offer matching contributions into the Roth account versus mandating they go into a traditional 401(k) or 403(b) account.

While this change is effective immediately, as a practical matter, it may take time to implement. Plan sponsors will need to update plan documents and administrators will need to update their systems.

The downside is that the Roth matching contributions will be taxable income to your clients in the year received. They will be nonforfeitable — in other words, not subject to a vesting schedule like other employer matching contributions.

For clients who want to accumulate a significant amount in a Roth account, this change helps clients build up their Roth balance a bit faster depending upon the level of their employer’s matches.

No More Roth 401(k) RMDs

Beginning in 2024, RMDs from Roth 401(k)s and other qualified plan Roth accounts will be eliminated. While the RMDs were not taxable if certain requirements were met, this change allows the money in these accounts to continue to grow tax-free without needing to withdraw it or roll it over to a Roth IRA.

Note that this change is not restricted to those who have not yet begun taking RMDs, but rather will apply to everyone when these rules commence in 2024.

Roth SIMPLE and SEP-IRAs

SIMPLE IRAs and SEP-IRAs can now offer a Roth account option. As a practical matter, it may take some custodians a bit of time to be able to offer these. Contributions will be after-tax so there is no tax break for your clients, but this is another option for clients who are looking to accumulate a larger Roth account balance.

Planning Implications for Advisors and Clients

While none of these changes to RMDs and Roth accounts are earth-shattering, cumulatively these changes and other aspects of Secure 2.0 offer a wide range of planning options for your clients based on their situation.

The ability to start RMDs at a later age can allow clients to build up their balance in traditional IRAs and other accounts subject to RMDs for a bit longer. However, this doesn’t necessarily mean waiting to take distributions from traditional IRAs and other retirement accounts prior to the commencement of RMDs is the best route for all clients. Rather you will want to look at your client’s retirement withdrawal needs, their tax situation and the balances outside of traditional IRAs and other retirement accounts in developing a plan for future RMDs.

For clients who want to reduce the impact of RMDs while also adding to their Roth account balances, the ability for employer contributions be matched into a Roth account in the plan is a welcome opportunity. These amounts would be exempt from RMDs altogether. This can lead to a larger amount that can be rolled over to a Roth IRA when they leave their employer.

As with any planning opportunity, advisors must take clients’ individual situations into account.

For example, Roth conversions may be appropriate in some years leading up to the commencement of RMDs in an effort to reduce their impact on some clients. But if your client has a significantly higher than normal year for income, you might decide to defer the conversion.

Clients who are working may want to take advantage of the new matching rules for qualified plan Roth accounts to increase their Roth account balances.

For clients who are self-employed, the added ability to contribute to a Roth SEP-IRA or Roth SIMPLE IRA can add planning flexibility.

In short, these rules and a host of others under the Secure 2.0 legislation expand the planning options available to you and your clients. Knowing when to use these options should become part of the review you conduct with your clients each year.

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