The SECURE 2.0 Act was enacted late last year as part of the Consolidated Appropriations Act 2023. Although most of the provisions of the law relate to retirement plans, several items may affect estate, charity, education, and disability planning to varying degrees. At first glance, individuals might think they would benefit from the opportunity to increase their wealth or reduce their tax burden. But is there more than meets the eye?
Here we decode some of these key provisions of the SECURE 2.0 Act for advisers and their clients.
RMDs start at age 73 and are projected to increase to 75 by 2033
Previously, retirement account holders were required to begin paying out Required Minimum Distributions (RMDs) from the year they turned 70½. With the passage of the original SECURE Act in 2019, that age was raised to 72 for the 2020 tax year. This new law raises the age to 73 for the next decade and 75 thereafter.
What are the effects? For account holders, the ability to hold funds in their accounts for a longer period of time means the potential for greater tax deferred value appreciation. However, for the beneficiaries of these accounts, the outcome may not be so gratifying.
Most non-marital beneficiaries already faced an accelerated timeframe for withdrawing funds from an inherited IRA with the 2019 law (10 years compared to their life expectancy). Given the delayed start date for RMDs, beneficiaries may now receive a larger inheritance of tax-deferred funds than before the rules changed, resulting in a higher tax burden when it comes time to withdraw funds.
Retirees can choose to make distributions before they turn 73, but they’re more likely to leave the money where it is until the government says they have to take it out. The end result will be that the state will receive more revenue and the total value in the hands of the beneficiaries will decrease.
Annual inflation indexation of the QCDs
Since 2015, IRA owners have been able to donate up to $100,000 each year to charitable causes in the form of a Qualified Charitable Distribution (QCD). With SECURE 2.0, this amount is now adjusted for inflation in $1,000 increments, making the ability to make tax-free charitable donations better and better over time.
What are the effects? This is a positive development, although you may need to educate your customers about the difference between QCDs and RMDs. Many clients may believe that QCDs are associated with RMD age. This is understandable given that a QCD can meet an RMD up to the $100,000 mark. However, while the qualifying age for a QCD was originally the same as the RMD age at 70½, the RMD age has since been raised. So your customers can decide to create a QCD even if they don’t have to take RMDs yet.
Note that QCDs cannot be created from employer-sponsored pension plans. Therefore, charitable individuals who still have 401(k)s at age 70½ may want to consider converting their plans into an IRA. This allows them to pull large pension balances before the first RMD calculation and potentially save on taxes during payout years.
QCDs that can be deposited with split interest companies
The SECURE 2.0 Act states that a QCD can be made to a split interest entity (e.g. a charitable residual fund). [CRT] or a charitable gift pension [CGA]). The transaction is limited to a one-time transfer of $50,000 and the company can only be funded with the QCD.
What are the effects? While it sounds tempting to be able to transfer a QCD to a CRT or CGA – you get a partial tax break and a revenue stream while ultimately benefitting a charity – a look into the specifics of this provision raises questions about its benefits.
Given that an individual can only wire $50,000 and provide no additional assets to the company, the benefits of the tax break are likely to be minimal. Even if a couple could each transfer $50,000 from their respective accounts to the same entity, as the wording of the bill suggests, the benefits of a lifetime donation totaling $100,000 would be relatively small.
In addition, distributions from the split-interest entity to the income recipient are taxed as ordinary income (the nonprofit recipient receives benefits tax-free).
These aspects, combined with the high administrative costs required to set up and maintain the business, could make such a maneuver careless.
Unused funds in a 529 plan may be transferred to a Roth IRA
Under SECURE 2.0, unused funds from a 529 college savings plan can be transferred to a Roth IRA up to a lifetime limit of $35,000. The 529 plan must have been in operation for at least 15 years to be eligible and no funds paid in the last 5 years may be renewed.
What are the effects? This is a potential game changer, as confusion over how to deal with underutilized 529 funds is an ongoing problem, particularly for parents of children who do not complete school or receive sufficient funds through scholarships.
Given the time constraints, it is important to advise parents to open and fund 529 plans for their children as early as possible. An account opened during a child’s infancy could be eligible for a transfer immediately after graduation (provided there are funds left).
The age of onset of disability has been raised to 46 for eligibility for the ABLE account
ABLE accounts, also known as 529A accounts, are tax-advantaged accounts that allow disabled people to save for expenses related to their disability. With new legislation raising the age at which disability occurs from 26 to 46 from 2026, these people will have more opportunities to top up their retirement savings.
What are the effects? The benefits are obvious, as those who have disabilities in old age (and those who wish to support those people) have the opportunity to protect and increase funds for the benefit of the disabled person.
This change may also result in an increase in the number of government-sponsored ABLE plans available to people with disabilities.
There’s more to it than that
As with any new legislation, it’s important to look beyond the headlines to better understand how key regulations could impact your customers’ future plans. While these developments appear overall positive, advisors and their clients should examine the details to determine if a particular strategy is appropriate for their financial plan.
Commonwealth Financial Network® does not provide legal or tax advice. You should consult a legal or tax advisor regarding your individual situation.