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

What You Need to Know

Many of the provisions of the Secure 2.0 Act will impact retirement planning.
Increased ages for starting RMDs offer an added level of flexibility for clients.
There are a number of additional opportunities surrounding Roth accounts.

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:

Beginning in years after 2023, the current $100,000 limit on QCDs will be indexed for inflation.
The legislation includes a provision allowing for a one-time election to make a QCD of up to $50,000 to a split-interest entity such as a charitable remainder unitrust (CRUT), a charitable remainder annuity trust (CRAT) or a charitable gift annuity (CGA).

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.