The SECURE Act 2.0 of 2022 contains over 100 retirement and tax-related provisions that may affect you and your financial plan for the future.
In this webinar, Pure Financial Advisors’ Tax Planning Manager, Amanda Cook, CPA, JD reviews some of the most immediate changes that will impact your retirement planning and tax strategies, including:
- Required minimum distribution (RMD) ages and early withdrawal penalties
- Qualified Charitable Distribution (QCD) rules and limits
- More tax-free Roth account savings options than ever before
- Retirement saving incentives
- IRA RMDs and catch-up contributions
- Student loan payment match
- Emergency savings and withdrawals
- 529 plan savings for college education
FREE GUIDE | SECURE Act 2.0 Guide
SECURE Act 2.0
Andi: Now, please welcome Amanda Cook. Amanda, thank you so much for joining us. The SECURE Act 2.0 is making a lot of important changes to retirement and tax planning. You’ve got a lot to talk about today.
Amanda: I do. Yeah. So welcome everybody. We’re here to talk about the SECURE Act 2.0. So let’s talk about, you know what it is. Let’s start there. So this is a follow-up Act, Act 2, if you will, 2.0 to the SECURE Act, which passed in 2019. For those of you who remember when that passed, it made a bunch of changes to- to the ways that you can save for retirement, the amounts, how long you take RMDs for, which is required minimum distributions. And what happens to these accounts after you die. Specifically, this became law in January, 2020. And it made a couple of different changes to IRAs, for example. It allowed anybody at any age to contribute to a traditional IRA. Previously you weren’t allowed to contribute if you were over a 70 and a half. So that was one of the big changes. It eliminated the stretch IRA. So the stretch IRA was a provision that allowed a beneficiary of an IRA to stretch the required minimum distributions over their lifetime. Because of that change, we no longer have that provision allowed. So now most beneficiaries have to distribute the entire account within 10 years. So that was a really big change for a lot of people. Makes the tax burden on beneficiaries much higher than it was previously. And it also increased the required minimum distribution age from 70 and a half to 72. That all along was a point of contention, and almost immediately when this law passed, they started renegotiating to make more changes in what would subsequently become SECURE 2.0. This law failed in Congress a couple different times to get out of committee, to get onto the floor. And finally at the end of last year, on December 29th, two days before the end of the year, as part of the huge omnibus spending bill that funds the whole government, $1,700,000,000 last year. They tucked the SECURE 2.0 Act into the verbiage of the giant spending bill that funds the government.
So a lot of changes made in this law. There’s over a hundred retirement and tax-related provisions that may affect you. So let’s talk about some of them. These changes are gonna come in over time. Some of them were immediately effective at the end of 2022. Some more come into effect now, 2023, and then there’s more for ‘24, ‘25, ‘26, and even ‘27. So we’re gonna see these incremental changes to retirement plans over the course of the next several years. But some of the immediate changes, the biggest one for most people is required minimum distribution age. So last year in 2022, if you had already turned 72, your required minimum distribution age remains 72 based on the original SECURE Act. If you turn 72 this year, so you were born in 1951 or- or later. , your RMD age will begin at 73. For those born 1960 and later it will be 75. If you were born in 1959, there is actually a drafting error in SECURE 2.0, so there’s a little bit of a question whether it will be 73 or 75 for those born in 1959 specifically. The law was written that if you turn 73 one year, your age will be 73. And if you turn 74 the next year, then it will be 75. That is expected to be resolved in the way that we have outlined here. So 1951 to 1959, age 73. 1960 and later, age 75.
RMDs are a big deal. They’ve always been a big deal. But previously the penalty for not taking your RMD was 50% of the amount that you were supposed to take. So just half right off the top, over to the government, and then you still had to take that required minimum distribution and pay the tax on it. So it was a sizable chunk of required minimum distribution of your required minimum distribution that you missed, that you would have to pay over to the IRS, Because of that, there were a lot of exceptions. It was relatively commonplace to be able to ask for a waiver and then receive a waiver of that 50% penalty just because it was such a big penalty. Under this rule, the penalty is now reduced from 50% to 25%, so it’s halved. And if you correct the mistake within the correction period, which generally means within the next year or two and before you’ve been contacted by the IRS about it, then that penalty is as low as 10%. So this is really good news for anybody who would’ve been subject to the penalty, but it’s bad news for those who would’ve received a waiver. The inference from this reduction in penalty is that these penalties are likely to be more enforced than they were previously. So it’s really important that you’re keeping track of when you’re supposed to take required minimum distributions, how much they’re supposed to be, and that you actually do it.
Andi: We got a couple of questions about RMDs right off the top. “Just to confirm, do you take the RMD the year that you turned 73 or the following year?”
Amanda: You have until April 1st, the following year to take your very first RMD. And then every year after that, it has to be in the year. So if you wait until April 1st of the year that you will turn 74, you’ll have to take two RMDs that year. So it’s a tax planning opportunity. It’s definitely something that you’ll wanna weigh the pros and cons, if you should take it one year and then the next year, or if you should defer as long as possible and end up taking two that first year.
Andi: Okay, and then another question, this is a bit of a strategy thing. Somebody says, “Do we think that the penalty being lowered will actually hurt us? I heard that nobody really received the penalty of 50%, but now do we anticipate people will really be getting these penalties thus be worse off overall?”
Amanda: Yes, that is the expectation. Anytime that there’s a procedural change with the IRS you can guess, that there’s an enforcement priority behind that and you’re absolutely right. As a matter of course, the 50% penalty was being regularly waived and therefore had very little impact on enforcement. And so this reduction to the penalty and this opportunity for a correction window is expected to mean that, that 10% for sure, and possibly that 25% penalty is much more likely.
Andi: And then another question- as a reminder, if you do have questions throughout the course of this presentation, hit Q&A and go ahead and type ’em in. This will be the last one before we get back to the presentation. “Does transferring from a 401(b) to a Roth IRA count as an RMD distribution?”
Amanda: That’s a great question. We get that question a lot. Going from a 401(k) or a 403(b) to an IRA requires that you take the RMD first, so you’ll have to take the RMD and then you can transfer whatever is left to the IRA.
Andi: Okay. Back to you.
Amanda: So speaking of 10% penalties, if you are under age 59 and a half, so in the saver mode, you can’t take money out of your traditional IRAs or your retirement accounts under most circumstances without paying a 10% penalty. This 10% penalty has never really had a good waiver function, but it does have a bunch of exceptions. So some of the more commonly used exceptions are like education, first time home buyer, some things like that. But they added a few new exceptions. One is for if you’re suffering from a terminal illness, you can- you can take withdrawals without paying the 10% penalty. Survivors of domestic abuse may also take emergency withdrawals essentially from their accounts without paying the 10% penalty. And if you accidentally contributed too much, you can also take distributions without the 10% penalty. In particular, the terminal illness and the survivors of domestic abuse, this is gonna be something that’s clarified in regulations that just aren’t out yet. So how you’ll prove those- those circumstances is very much up in the air at this point. But just so that you know, if you’re in the situation where you feel like you may need distributions for one of these two reasons, it is available. Beginning in 2026, if you wanna take distributions for long-term care premiums, you’ll be able to take up to $2500 with no 10% penalty. Again, the 10% penalty only applies if you’re under 59 and a half. So depending on the age that you are when you get a long-term care policy, it may affect you or not. Also for those of you who are charitably inclined, one of the things that you can do with your required minimum distribution when it’s excessive and you really don’t need all of that money, is donate it directly to charity. The advantage of doing this is that you don’t have to itemize your deductions in order to claim your charitable contribution. So you just take the funds right out of your income. It also reduces your AGI for Medicare purposes. So in both of those ways, it can be a really powerful tax planning tool. This was limited to $100,000 per year. That $100,000 has been the same since this law passed. So now beginning with 2023, it will begin to be adjusted for inflation going forward.
There’s also a new rule that you can make a $50,000 split-interest gift, it’s called. Usually this is done through certain kinds of trusts, like a charitable remainder trust. The rules around this are pretty exacting. One of the rules seems to indicate that this is the only gift that would be allowed in that trust. So there’s a question, whether it would be worth it to create the split-interest gift in order to make it. But that’s something that you’ll wanna talk with your professionals about. All right. One of the big things that we’re very excited about is that there’s a lot more opportunities to save into Roth accounts. Roth accounts previously, the IRAs had and still have, income limitations. And then your employer plans, you could do your own Roth contributions, but your employer contributions were always gonna be pre-tax. Now employer match dollars for Roth 401(k)s, Roth 403(b)s, and Roth 457 s can all be done on a Roth basis as well. So your employer plan, if you choose, can be entirely a Roth plan as opposed to just your contributions being Roth contributions and your employer’s being pre-tax. The match is immediately vested. You do as the employee pay income tax. And this is a little nuanced, but you don’t pay payroll tax on that amount, so there’s gonna be a difference on your W2 between boxes one, 3, and 5 to reflect that employer match if your employer decides to do this. This is at the option of the employer if they’re gonna offer this. Right now it’s probably not heavily adopted just because it was a kind of a surprise change. But as the year goes on, we would expect that more employers are gonna make this available as an option. The employee chooses whether or not to have their match be on a Roth basis if the employer offers it. Also, if you’re self-employed or you participate in a simple IRA or a SEP IRA, these can now be designated Roth accounts. That’s totally new. Previously, these were all pre-taxed. So now they can have designated contributions from the employee or in the case of SEP IRAs, from the employer. All right.
So if you have a business and you’re thinking about creating a retirement plan, particularly if you’re in California, there’s a new rule from last year that if you have 5 or more employees, you have to either enroll in CALSavers or create a retirement plan. There’s a lot of murmuring that something similar will be adopted on the federal level, in what I’ll call SECURE 3.0 for right now. So if you’re thinking about setting up a plan for your employees, there’s now a credit for small businesses for the administrative startup costs. Up to 100% of those costs can be received back as a tax credit. So that’s a really helpful piece of legislation. You have to have 50 or fewer employees, but if startup costs and administrative costs were part of what was concerning you about starting a retirement plan for your employees, this is meant to help that. Additionally, if you’re a sole proprietor, Schedule C filer, you can set up a 401(k) all the way up until the tax deadline for your return, including extensions. So all the way up until October. For 2022, if you didn’t set up the plan prior to December 31st, you can only make the employer side contributions. For 2023 going forward, you can set up that plan all the way up until your filing deadline and make both the employee and the employer side contributions to your 401(k). So that’s a big change. That’s a nice relief for people who don’t have a really good sense of what their profitability is until they start preparing their tax return. You can go all the way until October to decide if you wanna make employee-side or employer-side contributions. This is for Schedule C, sole proprietor, not corporations, not partnerships, not other entities.
There’s also some relief for military spouses. So this is a subject that’s near and dear to me. I’m a military brat, and when you move a lot, it’s possible for the spouse who is not in the military and is moving a lot, to be getting employed at each new location and having to start over with eligibility for retirement accounts. So in a lot of ways that can end up impacting their long-term ability to save for retirement. What this law has done is created a credit up to $500 per military spouse, for making military spouses eligible within two months of being hired and giving them the benefits that would’ve accrued to somebody who had been employed for two years. So whatever match or anything like that, that exists in the 401(k) plan for non-military people extending those benefits to military spouses as soon as practicable is essentially can give you a credit up to $500 per military spouse. Also for employers who really care about their employees participating in the plan and wanna make sure that as many are participating as possible- Previously, the only way you could encourage your employees to participate was to match a portion of their contribution. Now you’re allowed to give a de minimus gift to the employee, like a small gift card, Starbucks card, something like that, that would encourage them to participate.
Andi: All right, we have a bunch more questions that have come in. If you have questions, type them into the Q&A. We will get to as many of them as we can. There’s a couple of hundred people on the call today, so we may not get to all of them. I will be providing information so that you contact can contact us directly if you don’t manage to get your question answered during the webinar. “Wanted some clarification on an answer that you gave earlier. Somebody said, “Thank you for your early response. I’m still a bit confused, so I think this is a logistics question on how it’s done. When I transfer funds from my 401(k), I get a distribution statement and the funds transferred to the Roth get taxed as income. So what do you mean by you must take the RMD first and the rest can go on to Roth? Does that mean that the funds transferred into my Roth are not considered an RMD? So logistically you have to make that withdrawal yourself before you can put it into the RMD- or sorry, into the Roth, or how does that work?
Amanda: The funds that are that are required to be distributed are required to be distributed to you. They’re not eligible for a rollover. So that portion of the funds, even though it might be taxable in both cases, it doesn’t qualify to be rolled over or converted, at all. If it’s an RMD, it has to be distributed.
Andi: Got it. Okay. And then this actually I assume this comes from a PURE client. “Does PURE monitor RMDs for their clients?”
Amanda: Yeah, we do. We will- if we have your retirement account, as one of the accounts that we manage, then yes, we make sure that you’re taking your RMDs.
Andi: “If you make a mistake and don’t take your full RMD, is the penalty on the full amount or on what you didn’t pay?”
Amanda: It’s on what you didn’t take.
Andi: Okay. “And then are there more Roth options for retirees?”
Amanda: Not really. If you don’t have earned income, it’s very difficult to contribute to any kind of retirement account. Most accounts are employer-based accounts and IRAs require earned income in order to be eligible. The only real Roth option, which already existed is to do a Roth a conversion.
Andi: Okay. And then people really wanna put their RMDs into their Roth plans. “Can the Roth be transferred to a new Roth plan and pay the tax?”
Amanda: Can the Roth be transferred to a new Roth?
Andi: “Can the RMD be transferred to a new Roth plan?”
Amanda: No, the RMD has to come out of retirement accounts, so it’s gotta come out. The only- the best way to avoid the tax on the RMD is to do the qualified charitable distribution if you’re charitably inclined. Often that’s a better avenue than trying to do a direct charitable contribution. You can do it directly out of your IRA and to the charity of your choice, and that will avoid the tax. But otherwise, yeah, an RMD has to come to you.
Andi: “Are beneficiaries of a Roth account required to take an RMD following my death?”
Amanda: That’s a great question. Roth accounts don’t have RMD requirements, but the entire account has to be distributed within 10 years. So there’s not an annual RMD requirement, but there is that 10-year rule.
Andi: “Another Roth option. The spousal, if one retired, could still contribute if other is working and making income, right?”
Amanda: Yes. So one spouse has to have earned income. The limit to contribute is gonna be based on that spouse’s earned income. So this year, if you’re over age 50, the limit is $7500. If the working spouse makes $7000, that’s the total limit, right? So they can put $7000 into their own. But if the working spouse makes $15,000 or more, then both spouses can contribute.
Andi: “Is earned income only W2 income for Roth Contributions?”
Amanda: Earned income’s gonna include W2 income and also self-employment income. So your net income from Schedule C or if you’re in a partnership, you receive a 1065(k)1 and it has self-employment earnings on there, then that will also qualify.
Andi: I’ve got a few more questions that are not directly related to the SECURE Act, so I’m gonna hold onto those and let you get back to the presentation.
Amanda: Okay. Sounds great. Great questions. Keeping me on my toes. All right. After this year, beginning in 2024, there’s a lot more changes that are gonna come into place, as I mentioned. These changes are gonna phase in over several years. So in 2024, there’s no RMD requirement for Roth 401(k)s and Roth 403(b)s. I know I just said that Roth accounts don’t have RMD requirements. That’s true for Roth IRAs currently. Roth 401(k)s and 403(b)s if you left your retirement account with your employer, currently do have an RMD requirement, that’s going away in 2024. Additionally, if you leave an employer plan with your employer, previously surviving spouses had to take required minimum distributions as if they were the employee or as if they were themselves. So if the older spouse is the surviving spouse, then it would be based on their life expectancy. Now if it’s more favorable to them and it results in a lower RMD, they can elect to be treated as the employee beginning in 2024.
Finally, IRA catch-up provisions have been $1000 since 2015, so every year as they increase the amount that you can contribute to a traditional or Roth IRA, the amount for people age 50 and older has been $1000. That’s gonna be indexed for inflation going forward. Maybe next year it’ll be $1500 or something like that. It’s gonna keep going up and up. It’s gonna widen the amount of money that you’re eligible to put into an IRA account for age 50 and older relative to people who are under age 50. A couple other changes that are coming to employer plans. One, if you’re working and you’re saving. One is that if you make payments to student loans, your employer may treat those payments as if they were contributed to the retirement account for the purpose of calculating your match. For example, if you have significant student loan payments and your employer would’ve matched, say 5% of your income into your retirement account, if your student loan payments are 5% of your income, then you’ll get that 5% match from your employer. Even though you didn’t put the money into your retirement account. So it’s an incentive for like younger employees and people who are still paying student loans for a very long time, like I am. So it’s a really solid benefit for people who feel like they have to choose between paying student loans and saving for retirement. Additionally, there’s some options for emergencies. If you have a personal emergency, you can take $1000. You self-certify to your employer that you have this emergency. You can take $1000 from your 401(k) or from your IRA. It’s taxable like normal, but there’s no penalty. It is subject to limitations. You can treat it similarly to a disaster distribution and pay it back within a couple of years. If you’ve paid it back and then you have another emergency, you can take it back out. You can go back and forth with it. If you don’t repay it, then you can’t take this every year. So it’s just something to be aware of. If you’ve taken it once, you’ll wanna confirm that you’re eligible to take it again before you take another distribution.
Also they’re gonna create a retirement savings Lost and Found. This is a really big deal. There’s, it might be surprising to a lot of you on this call. But there’s a lot of people who have no idea if they had a 401(k) at a prior employer, where it is, what custodian it’s with, how much is in it, how it’s invested. They don’t know anything about it. They’ve just, it’s some old job and they just completely forgot about it. This is gonna be set up by 2025 as a mechanism for you to look it up, like unclaimed property or something like that. You can go to a government website, look up your name, I hope, and see what the 401(k)s or other employer plans that you were eligible for are out there. And then you can consolidate them or put them into an IRA or something like that. There’s also gonna be a new pension-linked emergency savings account. This is several years down the line. But this is a plan where as if you’re debating can you save for an emergency or can you save for retirement, and you feel like you can’t do both, you’ll be able to save money into your retirement account and have the first $2500 designated as an emergency fund. So it’ll be accessible to you without penalty, and it will be on a Roth basis, so it won’t be taxable if you have to pull it out. So it’ll essentially be a $2500 savings account essentially for emergencies within your retirement account. If you don’t use it, then that’s fine, it’s just part of your retirement account. So it’s a cool advantage. We’ll see how heavily it’s adopted.
There’s a lot of regulations that are gonna be published in the coming years to talk about how this works, how match works for employer matching purposes, things like that. So there’s still some nuances to be worked out with this. It’s also only gonna apply to non-highly compensated employees. So this year, I believe that’s $145,000 or less of income. Wage income. All right, in 2025 there’s this kind of unusual rule. This is also gonna be subject to a lot of regulation in the coming years, clarification from the IRS, but effectively if you’re age 60 to 63 during this time in 2025 or later, you’ll be able to make an additional catch-up contribution up to $10,000- or beginning at $10,000. And this is gonna be a way for you to really beef up your savings, ideally in your last couple of working years. Additionally, in 2025 employers are gonna automatically enroll you in new 401(k) plans. So if there’s a 401(k) plan at your work already, you’re already enrolled or not, you’re not gonna be automatically enrolled in 2025, most likely. But if a business is starting a new 401(k) plan in 2025 or later, they’ll be required to automatically enroll their employees, and employees will have to opt out or opt down to a lesser contribution amount if they want to do something different than what they’re automatically enrolled to do.
Andi: All right, we do have a number of other questions. Again, this is gonna be your last chance. Now if you have any other questions to ask for Amanda, go ahead and type them into the Q&A. So I’ll go ahead and go through all of the SECURE Act questions first, and then we’ll save the non-SECURE Act Questions for the end.
Amanda: That sounds good.
Andi: “Do any of the SECURE Act 2.0 provisions impact those who have already retired?”
Amanda: The required minimum distribution age definitely does. So that’s a delay. If you don’t need to take as much as your required minimum distribution would be, then it gives you more time to plan for how you’re going to manage those at that time. The qualified charitable distribution, I don’t think I mentioned earlier, but you have to be at least 70 and a half to make that contribution. That’s another one where for people who are 70 and a half or older, the increased levels of charitable contributions will affect people. Those are the main ones off the top of my head.
Andi: We have a comment. This is actually pretty useful. “As for the RMD and other rollovers to Roth, it’s easiest to remember that the RMD must be taken out of the IRA and it is based on the prior year’s ending balance. So any rollovers to a Roth in the current year will not affect the amount of the RMDs. So you can’t roll the RMD into a Roth, but you can use the RMD money to pay the taxes on the money rolled from the IRA to the Roth.” Does that sound right to you?
Amanda: Yeah. Is that an advisor on the call? That’s a great point. Yeah. Helpful. That’s a great point. That’s a great point. So yes, that’s very true. It’s based on your prior year balance, which is why you have to take it first. Because it’s already a set amount at the beginning of the year, and conversions are for the calendar year that the conversion happens, or rollovers too. So they don’t have like a look back period. So if you take your December 31, 2022 balance, that’s how you would calculate your RMD, regardless of what you do in 2023 with that account. So that’s why that RMD is required. And then, yeah, that’s a great strategy, right? If you don’t need that extra money and you want to do a conversion you can take that money and just earmark it for the tax that you would pay on the conversion. Process your conversion. Send the RMD to the IRS and the- in California, the FTB. And use that to offset your tax liability.
Andi: And our tipster says he’s not an advisor, he just works with his own stuff in his own account. So thank you for that. I appreciate that. “Does the elimination of the RMD in 2024 apply to those who have already retired and are not yet 73?”
Amanda: Can you repeat that? The elimination of the RMD for, is that what you said?
Andi: “Does the elimination of the RMD in 2024 apply to those already retired and not yet 73?”
Amanda: I see. For the- for Roth 401(k)s and Roth 403(b)s I think is what we’re asking about. Those plans will not have RMDs beginning in 2024. And yeah, it looks like right now, again, this is so new. IRS has barely issued any regulations that interpret the law or say how they’re gonna enforce it or how, what they’re gonna be looking at. But the way that the law is written, it looks like those RMDs will be eliminated for everybody, even if you’re already subject to RMDs at that time.
Andi: Okay. And then let’s see. “Now that the Roth 401(k) will not have RMDs in 2024, can you explain why ERISA might make keeping the money in the 401(k) or 403(b) a better option than rolling into a Roth IRA, assuming good investment options?”
Amanda: Yeah, the investment options is the number one reason, I would say, so in IRA you can invest in pretty much anything that you want. Most employer plans are relatively limited in what they can offer. So if you’re satisfied with your employer 401(k) or your employer 403(b), it’s not really necessary to roll it over into a Roth IRA. But often, the Roth IRA is maybe lower fees, maybe part of a more comprehensive strategy if you have more accounts and more- and you have your spouse’s accounts and you’re thinking about how to balance everything together and what assets to locate where. If you have a more comprehensive view, that might be better. I always think having more of your money in a single account makes it easier to rebalance and to choose your investments. So if you have Roth 401(k)s from multiple employers, it might be easier to roll them all together into a single Roth IRA.
Andi: Okay. “In the past, wasn’t withdrawing from a Roth part of the RMD minimum amount included with the pre-tax withdrawal? So is this no longer an advantage to take from both to minimize taxes?” Does that make sense?
Amanda: I’m not, no. I’m not sure what-
Andi: “In the past, what wasn’t withdrawing from a Roth part of the RMD minimum amount included with the pre-tax withdrawal.” No, because withdrawing from a Roth would be post-tax, correct?
Amanda: Right. So your Roth IRA distributions are not taxable and they don’t- they don’t get reported on your tax return as like taxable income. When you’re calculating what your required minimum distribution is, you only look at the pre-tax account. And then you calculate your RMD and you have to take it from those.
Andi: Okay. “Question about automatic enrollment by employer was confused about quote unquote “new 401(k”). Will all employers that have a 401(k), 403(b) be required to auto-enroll new employees starting in 2025, not just new 401(k) plans?
Amanda: So the way that I’ve read it is that it’s the new plan. So if you’re setting up a plan in 2025 or later, you’ll be required to enroll employees as they become eligible. But if you have an existing plan that does not have an automatic enrollment feature, you’re not required to add one in 2025.
Andi: All right, and I’m gonna go ahead and have you answer these two questions as well. We’ve been getting them a number of times on the Your Money, Your Wealth® podcast, so I wanna make sure that they get answered here for those who are listeners of the podcast or others who have might have these questions as well. “When are employees responsible for paying the tax on employer Roth contributions?”
Amanda: This will be added to your wage. So you’ll pay the tax as part of your regular wage withholding. And then, it’ll be reconciled on your tax return, just like any of your other taxes. So if you normally owe, because you don’t have sufficient withholding, you’ll pay when you file your tax return. If you normally get a refund, it will just be part of that equation still.
Andi: Okay. And then another one. This is I believe a provision that you didn’t touch on. “With the new ability to roll excess 529 plan funds into a Roth up to $35,000, can I open a 529 plan now with myself as beneficiary, retire at age 60, then at age 75, move it into my Roth?”
Amanda: That’s a great question. It’s an interesting solution to the rules that as they’ve been presented. There’s a problem with that. It depends if you’re working or not. So if you retire at age 60 and then you wanna move this money from a 529 to a Roth IRA, you’ll have to have earned income at age 75 in order to make that contribution. So just to back up, this is and explain what this is. The 529 plans are a college education savings vehicle that often ends up overfunded or underfunded because it’s very difficult to guess what tuition is gonna be and also what your returns within that account are gonna be. So as you save, through your child’s life, under the sort of imaginary circumstances in which these were created, you’ll save this money, it will grow tax-free, and then you’ll distribute that money to pay for their college. But if there’s too much money left over, it gets trapped because you can’t withdraw it without paying a penalty and the tax. And there’s a couple of ways around that. You can change the beneficiary, things like that. But for a lot of people, they just want the excess funds to go to the beneficiary. There’s really no tax-efficient mechanism to do that. So one of the things that SECURE 2.0 created is the ability to take old 529 plans that have been established for at least 15 years. So that’s, I think the question between age 60 and age 75, it has to be at least 15 years established, no contributions in the last 5 years. So effectively this is, for somebody who is done with their education, they’ve been sitting on this account, they can move funds over to their Roth IRA as a rollover, but it counts as their Roth IRA contribution for that year. So it does not have the normal income limitation that a Roth IRA contribution would have, but it does have the earned income limitation, meaning you have to have earnings in order to do it. And then it’s the normal annual exclusion. So the total amount you can do is $35,000, but that’s not all in one year. If it was a current year, somebody under age 50, it would be $6500 per year.
Andi: Excellent. Thank you for that. If you would do me a favor and put up the next slide that you’ve got there in your deck. I wanna mention the fact that obviously there are a great deal of strategies that come out of this SECURE Act 2.0. And armed with the right information, you can control how much tax you pay now and in retirement. I am putting a link into the chat so that you can sign up for a free tax reduction analysis with one of the experienced financial professionals at Pure Financial Advisors. You’ll learn exactly how the SECURE Act 2.0 will impact your retirement plans, strategies to legally pay fewer taxes than ever before. The benefits of these Roth accounts that we’ve been talking about, as well as myths and mistakes to avoid. Plus, you’ll learn tax loss harvesting techniques, tips for reducing taxes on your investments, and how to generate tax-efficient income in retirement. This is a no-cost, no obligation, one-on-one tax reduction analysis. It’s tailored specifically to you and your financial situation, and Pure Financial is a fee-only financial planning firm. So we don’t sell any investment products. We don’t earn any commissions, and we are a fiduciary, which means that we are required by law to act in the best interest of our clients. Pure financial Advisors has 4 offices in Southern California, as we mentioned, as well as new offices in Seattle, Denver, and Chicago. But it doesn’t matter. You can meet with one of our financial professionals online from anywhere via Zoom. Just click the link in chat. Schedule your tax reduction analysis now at the date and time that works best for you. I’m also going to include our contact information in the chat as well, and you can see it on screen in case you have any questions that we aren’t able to get to throughout the course of this presentation, you can go ahead and contact us directly, but the best thing to do is to schedule that tax reduction analysis. All of your questions will be answered, as well as strategies to arm you to have the best possible retirement that we can set up for yourself.
Now let’s get back to the rest of our questions. This is, again, this will be your last chance. If you have any additional questions, go ahead and type them into the chat. Let’s see. Next one is “Is there any reason to keep money in an employer’s 401(k) account instead of rolling it into an IRA? It seems to me that you would always want to roll it into an IRA so that you can take advantages of the IRA rules, like the rollover to a Roth.”
Amanda: Most people do transfer to a traditional IRA and then, maybe they’ll do conversions. Maybe they’ll rebalance their account altogether. It- it varies. If you had one employer for most of your life, having a 401(k) as just your single account is not that difficult to manage, but you are limited by what the employer options and investments are. So it may be difficult. Especially, as you age out of working to balance your portfolio in the way that makes the most sense for your short-term to long-term goals. An IRA has more flexibility in terms of what you can invest in and that. But for a lot of people, you’ve worked multiple different places and so you may have a 401(k) at several different companies. And then as I mentioned earlier, it’s just easier, in my opinion to roll it all into one account and then manage it from there.
Andi: Excellent. “If you have an inherited IRA for someone who is not an eligible designated beneficiary and the original beneficiary had already taken RMDs before they passed in 2022, how do you meet your RMD requirement? Do you take the original account holder’s RMDs as per the IRS table using their age, or does it need to be all withdrawn within 10 years?”
Amanda: This is a really great question, and it is actually still up in the air. Last year, at the beginning of the year, IRS threw a curve ball to pretty much everybody and said, if you are the beneficiary of an account, an IRA account, where the decedent was subject to required minimum distributions, then you are also subject to required minimum distributions and the 10-year rule. Prior to that, everybody was under the impression, including IRS instructions at the time, that the 10-year rule meant you could do it over time, you could do it all in the 10th year, you could do it however you wanted. So right now, that proposed regulation that imposes the new RMDs is still not a final regulation. At the end of last year, because IRS hadn’t finalized that regulation, they- they issued a notice that said there was no- no penalty for failing to take an RMD under this interpretation for 2021 or 2022. So effectively they obviated the need to take RMDs for 2021 and 2022, and they basically said, wait for more guidance. So we’re still waiting for more guidance. My guess is that if you had to take RMDs, it would be similar to the old stretch rules. So it would be based on your life expectancy, and then you would have to take the rest at the end of 10 years. But ultimately, it’s just gonna depend what the IRS says.
Andi: “Can parents contribute to a working adult child’s IRA?”
Amanda: Yeah. Yeah, they can. And also to a young adult, right? There’s no there’s no lower age limit for- for contributing to an IRA. You just have to have the earned income. So one of the things that I like as an education strategy, instead of this new mechanism where you could take a 529 and put it into a Roth is to just directly fund a Roth IRA for your kids who are working. If you have a 15- or 16-year-old kid that’s got a job at In ‘N Out Burger, you could put money into their Roth IRA instead of into a 529 and they’ll be able to distribute that penalty-free for education expenses.
Andi: Excellent. Thank you for the strategy. “If applicable for this webinar-” They’re all applicable for this webinar. This is a tax webinar, so sure. “May I ask for those whose student loans were forgiven, will we have to pay taxes on the forgiven amount?”
Amanda: No. That was also- came out earlier last year around the time that that it was announced. The- the IRS came out and clarified that there would be no federal income tax. It may vary by state whether or not your state excludes it from income tax, but for federal purposes, it’s not taxable.
Andi: Excellent. If you have a 401(k) Roth account and are under 59 and a half, can you take penalty-free distributions of the principle as long as you leave any gains in the account?”
Amanda: For a Roth 401(k) or a Roth IRA?
Andi: It says Roth 401(k).
Amanda: For Roth 401(k), distributions are gonna be, first of all, determined by the plan. So you normally can’t take distributions while you’re still working. And then they come out pro rata. Your earnings will come out with your principal. For a Roth IRA, on the other hand, your contributions come out first, so you always have access to your own money in a Roth IRA even if you’re under age 59 and a half. And then it’s not until you reach the earnings portion that you would be subject to both tax and penalty if you’re below 59 and a half and you don’t have qualified distributions.
Andi: Alrighty. “What is the tax rate for the rollover from a traditional to Roth IRA?”
Amanda: From a traditional to Roth IRA? It’s an ordinary income tax, so whatever your tax bracket is, that’s the tax that you’ll pay. Tax brackets, they work on a stairstep, so you’ll pay every step along the way. So if you made a really big conversion, you might pay multiple different rates along the way, and then you’ll have a sort of a blended rate. But if you look at your tax return you can look at a tax- tax bracket table and see where your taxable income is, and that will tell you what your tax bracket is for most people. And then you can just apply that rate essentially, and that will tell you what your starting rate will be.
Andi: Excellent. “When someone has access to a retirement plan through work 401(k), how does one know the optimal choices for sequential funding if you get a match on 401(k), Roth 401(k) and after-tax contributions? I’ve been maxing out my 401(k) every year, but I feel I wanna take advantage of matching more and post- tax to make more rollovers to Roth IRA easier. Thank you.”
Amanda: Yeah, this is really, that’s where the tax assessment really comes in, right? Is meeting with an advisor, going over your exact situation and how much free cash flow do you have? What tax bracket are you in now? How close to retirement are you and what is your age? Because those aren’t always correlated. Just figuring out all of those pieces and putting them into the puzzle together in the way that’s gonna be most efficient for your situation. Ultimately what you wanna avoid is paying really high taxes in some parts of your life and really low taxes in other parts of your life. It’s nice if you can even it out. Over time, you’ll pay less, over the course of your life. So figuring out in each given year how you do that is really where an advisor comes into play.
Andi: And I have just put that link into the chat again so that you can schedule that tax reduction analysis as well as if we don’t manage to get to your question. Because we do only have a few minutes left, go ahead and schedule that tax reduction analysis so you can get all these questions answered and figure out the best strategies that apply to your specific situation. Couple more questions here. “Can I set up a 401(k) if I work for an overseas company and am paid in local currency?”
Amanda: If you’re working for an overseas company as a employee your retirement options are gonna be designated by that employer. There may be, it depends how much interaction they have with the United States. It doesn’t, it’s not contingent on the currency that you’re paid in. It’s contingent on whether or not that employer has that type of plan set up or an equivalent plan, in that country.
Andi: Excellent. “I moved my thrift savings account directly to an IRA. The 1099 says that this money was income, was this mistake? It looks like my income jumped 500%.”
Amanda: Yes. It’s not necessarily a mistake on the 1099R. Depending on how you did your rollover, your custodian may not be aware that you rolled it over. On your 1099R, there should be a code in box 7 for a direct rollover. That code will usually be ‘g’. When you enter that into tax software, it should make it a non-taxable event. But if you have a code 7 or code 1 or code 2 or something like that, then there’s gonna be other questions to answer in do-it-yourself software or for your tax preparer to enter to indicate that this was a tax-free rollover from one type of qualified account to an IRA or another type of qualified.
Andi: This is the last chance. We’ve only got about 4 minutes left. If you have any questions, now is the time. I’ve also put a link into the chat so that you can let us know what you thought of this webinar, fill out an evaluation, and let us know what we can be doing differently or better to make this more effective for you. But I will say that we got- “This was a great seminar.” “Thank you for this presentation.” “Thank you so much.” “Thank you very much both for the presentation and the moderation of the event. The question responses were very much appreciated.” Thank you all so much for that. Schedule your tax reduction analysis now. If you have any further questions that we did not get a chance to answer and I will also put our contact information back into the chat so that you can contact us directly if necessary. And I think that is about all that we have the time for.
Amanda, thank you so much. This has been incredibly informative, great information. And for those who have been asking, yes, there will be a recording made available to you. You’ll receive an email in the next few days so that you can rewatch it and remind yourself of all of these strategies that are available to you. Amanda, thank you so much. Appreciate the time.
Amanda: Thank you. It’s been a pleasure.
Andi: All right. Thank you all so much. Schedule that tax reduction analysis now or contact us if you have any further questions. Have a great day in the meantime. Bye-bye.
• Neither Pure Financial Advisors nor the presenter is affiliated or endorsed by the Internal Revenue Service (IRS) or affiliated with the United States government or any other governmental agency.
• This material is for information purposes only and is not intended as tax, legal, or investment recommendations.
• Consult your tax advisor for guidance. Tax laws and regulations are complex and subject to change.
• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC an SEC Registered Investment Advisor.
• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
CPA – Certified Public Accountant is a license set by the American Institute of Certified Public Accountants and administered by the National Association of State Boards of Accountancy. Eligibility to sit for the Uniform CPA Exam is determined by individual State Boards of Accountancy. Typically, the requirement is a U.S. bachelor’s degree which includes a minimum number of qualifying credit hours in accounting and business administration with an additional one-year study. All CPA candidates must pass the Uniform CPA Examination to qualify for a CPA certificate and license (i.e., permit to practice) to practice public accounting. CPAs are required to take continuing education courses to renew their license, and most states require CPAs to complete an ethics course during every renewal period.
JD – The Juris Doctor (JD) degree is usually required to practice law in the United States. It is considered the first degree in law and is required for eligibility to sit for the bar examination. While the JD entitles a person to apply for and take any state’s bar exam, it does not allow him or her to practice law before being admitted to the bar. The specific requirements for a JD vary from school to school. Generally, the requirements include completing a minimum number of class hours each academic period and taking certain mandatory courses such as contracts, torts, civil procedure, and criminal law in the first year of law school. All states require that students pass a course on professional responsibility before receiving a JD degree.