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Financial Planning > Tax Planning

5 Secure 2.0 Act Changes That Could Affect Your Clients' Taxes

By Roger Wohlner

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What You Need to Know

  • Tax time is a good time to review the aspects of the Secure Act 2.0 that will affect your clients now and into the future.
  • Many clients could have more opportunities for Roth contributions or conversions.
  • Several aspects of the Secure Act 2.0 are awaiting clarification by the IRS, which will determine the full extent of their effect on certain clients.

The Setting Every Community Up for Retirement Enhancement (Secure) 2.0 Act ushers in a number of retirement planning changes that could affect your clients. As retirement planning and tax planning are inextricably linked, many of these changes could have tax implications — and provide new planning opportunities.

Here are five provisions of the Secure 2.0 Act that could affect your clients’ tax planning.

1. QLACs

Qualified longevity annuity contracts, or QLACs, are deferred annuities that are purchased inside of retirement accounts such as IRAs and 401(k)s.

The Secure 2.0 Act increased the amount that can be used to purchase a QLAC from $145,000 to $200,000. It also eliminated the requirement that the QLAC premium could not exceed 25% of the account balance.

QLACs can provide a significant tax benefit. The money used to purchase the QLAC is removed from the required minimum distribution calculation until money from the annuity is distributed. There are no taxes due until the contract is annuitized.

Beyond the tax benefits, the increased QLAC limits can help your clients set up a substantial income stream for their later years in retirement. This income stream can also be there for a surviving spouse if needed. QLACs offer the ability to defer commencing the income stream and the RMDs on the money used for the QLAC premium out as far as age 85.

2. Increased Plan Catch-Up Contributions

The Secure 2.0 Act increases the catch-up contributions for employer-sponsored retirement plans like 401(k)s and 403(b)s.

For qualified retirement plans, the catch-up contribution limits will increase to the greater of $10,000 or 150% of the regular catch-up contribution amount indexed for inflation beginning in 2024. This change will be limited to plan participants who are 60 to 63.

For SIMPLE IRAs, there will be a similar increase in the catch-up limit for participants to the greater of $5,000 or 150% of the regular catch-up contribution level for SIMPLE plans, indexed for inflation.

This change provides both tax and retirement planning opportunities for clients in this age range covered by these types of plans.

The opportunity to contribute a greater amount to their retirement plan is a positive development.

From a tax planning perspective, there are several considerations. For clients in this age range who contribute to a traditional 401(k), SIMPLE or other plan, these additional amounts provide an added tax benefit in the year of the contribution. Many of your clients in that age range may be at the top of their career earnings, and an additional tax break can be useful.

Note that the Secure 2.0 Act allows for a SIMPLE Roth option beginning in 2023, something that was not available previously.

This also opens up the tax planning regarding Roth contributions. If a client’s current-year tax situation won’t be harmed by making additional Roth contributions, these added catch-up contributions might be directed to a Roth option in their plan. This allows them to reduce the amount of future RMDs and can be a factor in their estate planning to the extent that they intend to leave IRA assets to non-spousal beneficiaries.

One tax and retirement planning issue to keep in mind: The Secure 2.0 Act mandates that beginning in 2024, plan participants with wages above $145,000 based on the prior year will be required to make all catch-up contributions on a Roth basis. This does not apply to catch-up contributions for SIMPLE plans or an IRA.

This is something to factor into your client’s tax and retirement planning if they are affected by this rule. It may mean adjusting their non-catch-up contributions based on your suggestions for them in terms of Roth and traditional plan contributions.

3. RMD Age Increase

One of the most publicized Secure 2.0 Act changes is the increase in the age that required minimum distributions must commence. The RMD age rises to 73 starting in 2023 and 75 in 2033.

On a basic level, these changes delay the taxes that will be due on RMDs based on your client’s date of birth. From a longer-term tax and financial planning perspective, this change can have several potential implications for clients.

Prior to 2020, most clients now in their 60s were planning on beginning their RMDs at 70.5. The Secure Act increased that to age 72; the Secure 2.0 Act raises that again to 73. A client born in 1957 now doesn’t have to take their first RMD until 2030.

This should spur some tax and retirement planning conversations in terms of Roth conversions, qualified charitable distributions (QCDs) or at the very least looking at the timing of when to tap IRAs as part of your client’s retirement income strategy.

The change allows your client with money in traditional IRAs and 401(k)s extra time to allow their account balances to build up without having to take RMDs.

If it makes sense from a tax perspective in the years leading up to reaching their RMD age, this allows extra time to do Roth conversions to reduce the effect of future RMDs both on taxes and the depletion of their traditional accounts. As always, this decision should be the result of an analysis of taxes and other factors both before and after the commencement age for RMDs.

4. QCDs and Charitable Giving

The Secure 2.0 Act indexes the maximum amount of qualified charitable distributions, currently $100,000, to inflation beginning in 2024. The age of initial eligibility remains 70.5. There are no taxes due on QCDs taken from a traditional IRA. There are also no charitable deductions available for QCDs.

QCDs are an excellent tax planning tool for clients who are charitably inclined and who don’t need some or all of the money from their RMDs from traditional IRAs. QCDs taken prior to your client’s RMD age serve to reduce the amount of future RMDs, resulting in tax savings based on the lower distribution amounts.

Once RMDs are required for your client, QCDs can be used to cover some of all of the RMD. This serves to reduce their taxes in general as the amount of the QCD is excluded from adjusted gross income. It also helps reduce the amount of Social Security benefits potentially subject to taxes and the amount of any future Medicare IRMAA surcharges. The Secure 2.0 Act provision indexing QCDs for inflation means it can be used on an increasing level as needed as part of your client’s overall tax planning in retirement.

5. RMDs for Surviving Spouses

This rule does not go into effect until 2024, and there is a level of clarification needed from the IRS. But nonetheless, it is one to keep in mind for the future in the event of the death of a client’s spouse.

This rule will allow the surviving spouse to be treated as if they were the deceased spouse for the purpose of taking RMDs. This can have a number of tax planning implications. Perhaps the most significant being that the surviving spouse will be able to take RMDs from this account using the Uniform Lifetime Table versus the Single Lifetime Table to calculate the RMD amount, resulting in a lower RMD amount and a lower tax payment.

Conclusion

The Secure 2.0 Act offers a number of new tax planning options that could be beneficial for your clients in 2023 and beyond. Be sure to review the options discussed above and others to see how they fit into your client’s planning objectives.

Roger Wohlner

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