New SECURE Act: What You Need to Know NOW🔴

Welcome to We're Talking Money. Good to see everybody. We're talking about SECURE Act 2.0. We're going to be unveiling the benefits of this new legislation. There's a lot of good stuff here. We're going to take you through the latest changes to retirement planning, everything you need to know for 2023.

Well, no, retirement planning is as important today as ever, and the SECURE Act 2.0, at least some of it, it might help you improve your long-term retirement security. There is no shortage of evidence that shows people need more reliable access to investment and retirement funds. In this new legislation, SECURE Act 2.0, it attempts to address that very issue by making some key changes, both for individuals and employers who offer 401K plans and similar benefit packages.

But before we get too deep, I think it's worth mentioning that SECURE Act 2.0 is just one part of a huge omnibus bill that was pushed through Congress near the end of 2022. It contains thousands of pages, in fact something over four thousand pages, and only eight percent of this legislation pertains to retirement planning. That's roughly 350 pages. In other words, don't be surprised if revisions are made and you see those come into new law. In other words, this thing was probably pushed through without a whole lot of thought. I think some thought went into it, but probably not enough, so we could expect some changes, and I won't be surprised.

We've organized the information in what we think is the right order based on its effectiveness, meaning the years in which each part of this new legislation becomes effective. So this show is going to be dedicated only to the parts that became effective in 2022 and 2023. Now, you might be asking, why didn't we put everything in one show? Well, the obvious reason is it would take hours to go through everything, and I know you'd probably be asleep long before the end. The other reason, and more importantly, is why give you a lot of information that you can't use yet? Don't worry, we're already working on other videos that will provide the new rules which become effective for 2024 and 25 and so on, all the way to 2033.

So the SECURE Act 2.0, or Setting Every Community Up for Retirement Enhancement Act of 2022, may not be all things to all people, but it does provide some solid changes and planning opportunities. Now let's dig in.

First, there's two sections that became effective last year, meaning 2022, that might be worth mentioning. First is section 326. It's the exception to penalty on early distributions from qualified plans for individuals with a terminal illness. I think this is a well-written law. Under the old law, there was a 10 percent penalty tax that applied to early distribution from any tax-preferred retirement account. An exception to the law, or to the tax, in the case of distribution to terminally ill individuals is now in effect. That's a good change.

Section 202, for required minimum distributions. This is something that a lot of people don't know about, and it's called a qualifying longevity annuity contract, or a QLAC. Weird term, but that's what it is. Modifications to this part of the law allow individuals to purchase a QLAC to satisfy all of their required minimum distribution requirements up to two hundred thousand dollars, and that's going to be indexed after 2024. Now, prior to the new legislation, QLACs were capped at the lesser of 25 percent of the account balance or 125 thousand dollars.

A QLAC, by the way, they're generally deferred annuities that begin payment at the end of an individual's life expectancy, yet they were really difficult to get inside of a retirement plan because of the RMD rules. But these rules were relaxed under the new act, and so beginning immediately, up to 200 000 can go into a QLAC. These QLACs, be careful, they're annuities. They can be very complicated. If you decide to go with a QLAC, please get plenty of information. Do your homework.

Section 107 changed the required beginning date for RMDs. Now the required beginning date for required minimum distributions is now age 73. That starts this year. It's age 75 beginning in 2033, so boy, they've really thought ahead on this thing. So real, they're moving that age up. It used to be 70 and a half, then they moved it to 72. Now we're at 73, on our way to 75.

These changes are based on a hard cutoff associated with your birthday, and I want to explain what I mean by that. If you turn age 72 before this year, then your mandatory distributions started at age 72. If you turn age 73 before 2033, meaning over the next 10 years, your required distribution age will begin at 73 years old. And if you turn age 74 after 2032, your distribution age will become 75 to start. All right, hopefully that made some sense.

I want to say, though, naturally the policy behind this rule is to ensure that individuals spend retirement savings during their lifetime and they don't use it for estate planning purposes of transferring wealth to beneficiaries. Yet the SECURE Act of 2019 increased the required minimum distribution age to 72, and now we're up to 73, which started on January 1 2023, and it increases to age 75 by January 1 2033. So I'm not really sure this idea of increasing the required minimum distribution age. Uncle Sam might be suggesting that you have to work longer, because at one time they wanted you to get the money out sooner, not to mention the government needs more tax dollars. So I don't know where they're headed with this one. Stay tuned, more to come.

Section 201 removes RMD requirements for certain life annuities. Now this allows individuals to satisfy their RMD, a required minimum distribution, by purchasing a fixed annuity with a circumscribed set of features, such as increasing no more than five percent a year or providing for a death benefit that's equal to the amount paid for the annuity minus any distributions. All of this makes it easier to put annuities into retirement plans. It eliminates the actuarial test that commonly kept certain types of more complex annuities out of retirement plans.

I'm opposed to this type of planning. I don't like annuities inside of retirement accounts. Since I started my career in wealth management more than 30 years ago, insurance agents have railed against traditional retirement plans. They want you to opt for the more complicated and costly annuity because the commissioned product fattens their wallet, plain and simple. But despite my opinion, it starts in 2022, so it is in effect now.

Section 302. Next here is a reduction in the penalty tax on the required minimum distribution, and you talk about a confiscatory tax, this is it. Now, granted, some penalty is fine. I'm not opposed to all of that, but 50 percent, that's huge. This one makes me really, really happy, and it starts immediately. This outrageous penalty is reduced from 50 percent. 50, if you didn't take your RMD, you were facing a 50 tax on the amount that you should have taken. That's now been reduced to 25 percent. That's a huge benefit.

Finally, the tax is further reduced to only 10 percent for taxpayers who take the RMD before an IRS audit occurs or the second year after the year in which the excise tax was imposed. So a little forgiveness built into this one, although before, you could ask for forgiveness and there was no 10 percent tax, so it's a little more stringent now. But at least you have some language built around how to get forgiveness, and what you would do to go about asking for that forgiveness, and the timeline.

Now let's move on to section 113. This allows small immediate financial incentives for contributing to a retirement plan. First I have to say, you shouldn't have to pay your employees to want to be in something that they already need, and something where you're probably giving them a great match, which is free money. So employees, take advantage of that. Employers, you can give them a little something to sort of nudge them into the plan.

All right, section 312. This is employee certification of deemed hardship conditions. What the heck does that mean? Well, in simple terms, determining whether a distribution is due to an employee hardship, the plan administrator of any retirement plan, including 403 B's, 457s, 401ks, any administrator of those plans can rely on the employee's certification that the distribution is on account of some kind of hardship, an eligible hardship or emergency, and no alternative means to satisfy the need would exist. But I suspect there will be more to come on this new rule. Stay tuned. We've never been able to do hardship withdrawals in 401K plans just based on what an employee tells you. There always has to be a burden of proof.

Section 317 provides retroactive first-year elective deferrals for sole proprietors. So you business owners out there, sole proprietors, single business owners, even that of an LLC, if you're unincorporated, that's the key here. You cannot be incorporated. You can be a sole proprietorship, you can be an LLC, unincorporated trade or business, who is the only employee. Keep in mind, you cannot have employees of any such business. You may treat an elective deferral to your 401k plan made before the tax return due date, no extensions on this one, by the way, as having been made before the end of the plan's first plan year. That's the key. This is only available in the first plan year. So if it's a new plan, you've got this nice delay, if you will, that allows you to wait all the way up to the tax return filing.

Section 331. This is special rules for use of retirement funds in connection with qualified federally declared, key here, federally declared disasters. You can take up to twenty two thousand dollars to be distributed from employer retirement plans or IRAs for any affected individual. Now, these distributions are not subject to the 10 penalty tax. That's what makes this attractive. And you can take this income, as it relates to the taxable income nature, over three years. That's pretty cool. Let's talk about section 331 for just another minute. It is retroactive for disasters occurring on or before January 26 2021.

Section 112.

this is for public safety or military personnel. Small employer retirement plan eligibility. This is great, I love this one. I think it's a huge benefit. It's not huge in its size, I think it's just huge that we recognize that this is a need. This is for military spouses or public safety officers' spouses taking care of our military members. In my opinion, very important.

And so this change attempts to provide a little tip of the hat to military spouses by providing a retirement plan eligibility credit for small employers. Now, military spouses, the problem here is that they often don't remain employed long enough to become eligible for their employer's retirement plan or to vest in employer contributions. It's because their spouse is always getting moved around in the military. They're being shipped off to a new post, or maybe even overseas.

Under the new plan, a tax credit is provided to small employers who offer military spouses a retirement plan with enhanced eligibility rules and an accelerated vesting schedule. So the credit of up to five hundred dollars per military spouse would apply for the first three years of participation. That's two hundred dollars for eligibility, 300 for employer contributions.

Okay, on to section 307. This modifies the charitable distribution rules, QCD. If you've watched any of our shows, you've heard us talk about qualified charitable distributions, or QCDs. This is a big one. I love things that involve charity and ways of using retirement dollars for charity. Always a great opportunity in my book. So pay close attention to this one if you love giving, if you're charitably inclined.

Section 307 modifies the QCD rules, and first, the annual one hundred thousand dollar exclusion limit after 2022 begins an indexing, meaning it's going to start going up with inflation. So that hundred thousand is going to increase. The amount that you can give every year will be rising. That's a good thing.

Section 307 also expands the IRA charitable distribution provision to allow a one-time fifty thousand dollar distribution to charities through a charitable gift annuity. You can use a charitable remainder trust or unitrust, and all of those are permissible. But the one important part of this rule is for long-term givers. That limit of a hundred thousand per year, that was great, and now it's going to be indexed for inflation.

And for those of you that are interested, if you don't already know about this QCD rule, that hundred thousand dollars every year, you can send that from your IRA to your charitable institution of choice and it never hits your tax return. Folks, that is a huge benefit. So whether you want to do it or you know someone who's charitably inclined, this is a great way to eliminate a hundred thousand from your tax return. So don't forget this one, and now it's going to be going up, so you can give even more. Hey, what are you waiting for? This one's already in effect. Get out there and start figuring out where you want to make your next gift.

All right, section 3 22, all about some IRA changes here. This is limiting... this is a good one, by the way. Limiting the cessation of IRA treatment to portion of account involved in a prohibited transaction. Well, that sounded like a mouthful of gibberish, didn't it? This provision, though, is very important. It modifies the disqualification rules that have been in effect for a long time, and they apply when an owner of an IRA or beneficiary engages in a prohibited transaction.

What it says now is that only the IRA that is used in the prohibited transaction is going to be disqualified. Originally, all of your IRAs would be disqualified. So the best part of this change is now only the one with respect to the prohibited transaction, where it occurred, would be disqualified. That is a huge change. You can imagine if you had five IRAs, you made the mistake in one, now all five are disqualified, and all of that money across all five of those IRAs would come rushing out to you as taxable income. Feel free to make a prohibited transaction. Just kidding, don't do that.

All right, section 337, modification of the required minimum distribution rules for special needs trusts. Important one here if you have special needs people in your life. The SECURE Act places limits on the ability of beneficiaries of defined contribution retirement plans and IRAs to receive lifetime distributions after the account owner's death. So special rules apply in the case of certain beneficiaries, such as those with a disability.

Section 337 also clarifies that in the case of special needs trusts established for a beneficiary with a disability, the trust may provide for a charitable organization as the remainder beneficiary. It's a nice new language there. Section 337 is effective for calendar years beginning as soon as the enactment is signed. That's happened, so this one's in effect.

Section 601, for SIMPLE and SEP plans. Big news here: Roth is now permitted under this new provision. So a SEP and a SIMPLE IRA are permitted to be designated as Roth IRAs, so leveling that Roth playing field. Section 601 allows the SIMPLE IRAs to accept Roth contributions. Under the old law, you might already know this, plans could only accept employer money and not on a Roth basis. So the SECURE Act allows employer SEP contributions to be treated as Roth in whole or in part, up to you.

Always, always know your tax situation before making a decision like the one I've just talked about. Why? Well, if you elect to have employer contributions under Roth, these contributions will be taxable to you in the year they are made. However, we support using Roth for lower earning employees. I think they're great. Remember, no more tax on that money once it goes in. Roth, no required distributions, no tax. Huge. For the more highly compensated, you need to have a look at your situation. Just be sure that you're planning well before you make a decision that, again, you might regret.

Last but certainly not least, the next one is a huge win for savers. This has been a hot topic for several years, and now employers can make Roth matching or non-elective contributions. Huge change. Plan sponsors before the SECURE Act 2.0 were not permitted to provide Roth employer matching contributions inside of a 401k or 403 b or even a governmental 457 plan. Matching contributions, they had to be on a pre-tax basis until now. Section 604 allows defined contribution plans to provide their participants with the option of receiving matching contributions on a pre-tax or Roth basis, and it is effective right now. So lots of things here that you've heard about. Hopefully some of these will help.

Before we end the show, I want to talk about investment advice from experts on transitioning into retirement. All this new information, all these changes are very important, and they can make a huge difference in your overall planning and your success as it relates to retirement. But before you go seeking advice: transitioning into retirement is a highly anticipated step, and it's one that requires not just planning, but solid planning, accurate planning. It needs to be focused on you. It's important to consider both your short-term, long-term, all of your financial goals.

Retirement planning allows individuals to plan for and protect their future by developing a strategy it works for you. Now, this includes deciding how much money needs to be saved each month, selecting suitable investments for retirement savings accounts and other options, and considering when and how to start cashing out income from all of these accounts that you will be building. Knowing how much money will be available during retirement, that can help you set more realistic expectations about your post-work life.

Furthermore, if you or individuals that you know do not adequately prepare for retirement, I hate to tell you this, but you're probably going to experience significant stress down the road, maybe even to the point that you can't afford basic necessities or something as basic as health care coverage. So when you're picking an advisor, when you're selecting the person that you want to help you with all of these things, and these are important things, vet that person. Make sure it's someone that you know and you like and you trust. Be sure they can give you what you need for your success.

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