“The Times They Are a-Changin’” was one of my dad’s favorite Bob Dylan songs. The lyrics are a timeless reminder of our constantly evolving world. This admonition also applies to the financial realm and the need to keep up with fast-moving markets, as well as rule changes that impact your financial decisions.
Shortly after Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act in 2019, I wrote a whitepaper discussing one of the rule changes that may drastically impact your tax liability in retirement and in passing down your estate (the 10-year Inherited IRA distribution).
If you are frustrated with how the rule changes affect you, I completely understand. I’ve worked with several clients who will have more of their hard-earned retirement savings go to Uncle Sam rather than their beneficiaries. This rule change has greatly impacted some of the advice I have given to clients the last couple of years as we adapt their financial plan.
It is not all bad, though. Some rule changes have provided a lot of flexibility. Required Minimum Distributions (RMDs) used to begin at age 70?. The original Secure Act bumped that to 72, and the Secure Act 2.0 moved it to 73, while also signaling a future move to 75 in the year 2033. Many clients will be able to take advantage of these extra years by doing Roth conversions, which do not apply towards the RMD amounts.
One of the first questions some clients asked when the RMD age changed was if they still would be able to do Qualified Charitable Distributions (QCDs). Thankfully, the age you can begin making these tax-free distributions to charities has remained at 70?.
My own favorite new opportunity is the flexibility provided with 529 College Savings accounts. Many parents and grandparents of young children have expressed uncertainty over how much savings to direct into these accounts. Many of those fears can now be alleviated, as leftover 529 dollars can be directed into a Roth IRA (subject to contribution limits and a $35,000 lifetime max). This means that the child can have a head start on their own retirement savings in addition to the head start they received through a quality education.
If your employer provides matching contributions, it is usually a no-brainer to take advantage of this “free money.” However, some employees (especially young people just starting out) struggle to have any of their paycheck reduced, even if it means giving up that employer match, which they often regret. The Secure Act 2.0 allows employers to provide a 401(k) match based on their employees’ student loan payments. This helps new grads keep their full paycheck and get a start on retirement savings while time is on their side!
Congress certainly packed a lot into these new laws, and there are several topics I haven’t even mentioned. While it may seem daunting to keep up with everything, it is a good reminder of why it is so important to work with professionals. Your CPA, attorney, and financial planner have likely been pouring over various articles and sources so they can better serve their clients. I know I have. I can’t rely on the rules I memorized for my licensing exams and my CFP exam. As Bob Dylan reminds us, “your old road is rapidly aging. Please get out of the new one if you can’t lend a hand, cause the times they are a-changin’”.
To learn more about how the Secure Act 2.0 rules apply to your financial plan, reach out to our team at TruStone Wealth Management and we’ll happily answer any questions you have.
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