Secure Act 2.0: Later RMDs, 529-to-Roth Rollovers, and Other Tax Planning Opportunities - Cravitz Financial & Insurance Solutions

Secure Act 2.0: Later RMDs, 529-to-Roth Rollovers, and Other Tax Planning Opportunities

Congress recently passed SECURE Act 2.0, which will bring several changes to retirement account rules. In this video we break down the big takeaways, including:

*RMD Age Increase

*RMD Penalties

*QCD Changes

*529 Plans

Keep in mind, when you delay those Required Minimum Distributions, it will lead to larger account balances at death, which could create a significant tax burden for your beneficiaries, which is why proactive tax planning is so important.

Full Transcript:

Erin: Hey, Ryan. It's good to see you. We have some big news. Secure Act 2.0 finally passes. This will bring about a lot of changes to retirement account rules. And we're breaking down some big takeaways, including some unique opportunities and some changes to tax planning. I feel like we've been hearing about the Secure Act for years now. So, what's new here? And who's affected?

Ryan: What's new? There's a ton to unpack with this. That's the first thing. But the key thing to know is that nothing in it is extremely groundbreaking. It's not like three years ago when the OG Secure Act, the original secure Act, was passed. They got rid of the stretch IRA. This, there's just a lot to it.

Erin: Right.

Ryan: So, this will give a chance to go through some of those things.

Erin: Right. So, let's talk about some of those headlines. And first on your list, because this is a big one, a new RMD Age Table. What do we need to know?

Ryan: Yeah. So, this is important. So, about three years ago, they extended, or instead of age 70 and a half being the RMD age, that got pushed out to age 72. And so, now it's either age 73 or age 75, depending on the year you were born. So, first thing to know here is that if you had to take an RMD last year, then this doesn't apply to you. You have to continue taking out your RMDs. The other thing is that if you're 72 now this year, you don't actually have to take your RMD. Instead, taking a look at the chart here, you'll see that if you're born between 1951 to 59, your new RMD age is 73. And if you're born 1960 or later, it's age 75.

Erin: Now, you mentioned something though because when we delay taking those RMDs, we're left with a larger account balance at death. And as you just said, Congress stripped that lifetime stretch IRA rule. So, now almost all beneficiaries must drain the entire account within 10 years. That is quite the tax burden.

Ryan: It is. And what a lot of people don't think about is that we all think about, okay, we love the tax-deferred growth. We don't have to pay taxes on this money each year. And now, if you're born 1960 or later, you don't have to even take out RMDs till age 75. However, let's say you pass away, and this money now goes to your beneficiary, perhaps your child. And for many people at the age that children inherit the money, they're in a high tax bracket. Typically, they're earning good amounts of money at that time, and now they receive this IRA money that they have to now withdraw over the course of the next 10 years. And so, if they have to take it out now in a much shorter period of time, which causes them to potentially have to pay a lot more in taxes on that money than they may have had to do otherwise if they would've planned a little bit better.

Erin: And we're going to talk about some strategies in regards to that in a second. But first, I want to hit on a couple other big takeaways. RMD penalties. These are changing, and this one actually sounds like a good change.

Ryan: This is a good change. It used to be that the penalty, if you didn't take out your RMD was 50%.

Erin: Yeah.

Ryan: Now it's been, and it's the biggest penalty that I'm aware of anyways-

Erin: Right.

Ryan: ...in the tax code. Now, it's being reduced to 25%. And also, they're saying if you take care of it within a timely manner, it could be 10%.

Erin: Okay, that's not too bad. Okay, next on our list here, some QCDs will be expanded. What are these?

Ryan: So, QCDs, qualified charitable distributions. Right now, if you want to, you can transfer up to a hundred thousand dollars over to a qualifying charity. It has to be a 501C3 organization. And what's changing is that, in 2024, is that this limit, this hundred thousand dollar limit, is going to be indexed for inflation. So, the amounts that you're going to be able to contribute are going to continue to climb.

Erin: Okay. And then, this next one. I really was interested in this since I'm a young parent. So were you, though. 529 plans, some interesting changes here. What do we need to know?

Ryan: Yeah, this has gotten a lot of press. That's for sure.

Erin: Yeah.

Ryan: But the one thing I'll definitely say is that you definitely have to read the fine print on this. It's good, I would say, but it's probably not as good as I think it's getting hyped up about. And the thing is that you can now transfer up to 35,000 from a 529 plan over to a Roth IRA. Now, again, there's some rules and parameters around this. One of them has to be that, or is, that the plan beneficiary has to be the same as the Roth IRA owner. And the 529 plan has to have been open for at least 15 years. And you're also subject to the contribution limits. So, for example, in 2023, the maximum you can contribute to a Roth IRA is $6,500. So, there's a lot of rules and stipulations around this.

Erin: So, then let's get back to that tax planning. These are some very significant changes. How do we incorporate that into our long-term tax planning strategy?

Ryan: I think the first thing, when we go back to the RMDs, a lot of people look at this as a good thing, that I don't need to take my RMD until maybe age 73 or 75. And don't get me wrong, having that flexibility is a nice thing. But it doesn't mean that you should necessarily wait until you're 73 or 75 to start taking them because you're going to have to pay the taxes anyway. So, maybe it makes more sense to start taking some money out sooner, maybe incorporating some Roth conversions into the mix. And by doing this, you may be able to pay taxes at a lower tax rate on some of that income, and that might put you in a better position financially.

Erin: You and possibly your beneficiaries, as well. So, that's an important consideration. Ryan, of course, there's no cookie cutter answer for anyone, but if they'd like to learn more about anything that we've covered today or Roth conversions, what's the best way to reach you with questions?

Ryan: I'd say there's two best ways. One, website, CravitzFinancial.com. Go to the contact page there. And the other way would be the telephone. So, (714) 462-9155.

Erin: All right. Ryan, thank you.

Ryan: Thank you.

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