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What Is Your Most Valuable Resource, The SECURE ACT 2.0 & How It Can Affect Your Retirement – Finger Financial Five #47

“Time is what we want most, but what we use worst.” – William Penn

What is always moving and can never be gotten back?   Time.  It is our most valuable resource.  When I pay for landscape service because there are no “magic sprinklers”, what do I get?  Hopefully a nice yard and TIME.  Time for what? Time to fill with the good stuff.  For me, it is currently training for and experiencing the Ironman, spending time with my family, learning something new or just sitting and thinking.

When you retire, you will likely have a lot of free time. Fill it with the good stuffGood stuff usually is spending time with loved ones, personal development, and giving back.

On the lighter side, since signing up for the Ironman several months ago, I have seen more sunrises than I saw in the previous five years.  I have listened to podcasts and learned about so many things while running.  I have lost weight. I have spent time with some good friends.  We have talked about life, TV shows, and “who was better, Jordan or Kobe.”  I have filled my mind and body with the good stuff.  I have no idea if I will finish, but I do know I am better off now than if I had not started.  Isn’t that how most things are?  If you want to follow my progress, download the Ironman Tracker App from your app store.  It is the Ironman held on September 18th in Cambridge, Maryland.

If you want to know more about the SECURE Act and the possible 2.0 version, read on…

In late 2019, the president signed the SECURE (Setting Every Community Up for Retirement Enhancement) Act into law.

Required minimum distributions (RMDs) for employer-sponsored plans and IRA accounts were raised from 70 ½ years to 72 years old. It was a welcome change. The act also included smaller changes to aid workers in saving for retirement.

But the SECURE Act also changed the rules which govern inherited IRAs, or so-called stretch IRAs. The change in this provision was more controversial because it requires faster distributions, at least in most cases.  This can affect beneficiaries in that they must take distributions from their inherited IRA within a 10-year period, rather than over their lifetime.  This can be costly for them from a tax standpoint.

Although the changes are recent, Congress is already considering what many are calling SECURE Act 2.0. As the bill winds its way through Congress, there is no guarantee of passage, but it enjoys widespread bipartisan support and both the Senate and the House have drafted similar bills.

The devil is always in the details, but we are monitoring progress and believe now is a good time to provide a high-level overview.

Please feel free to check in with your tax advisor on tax-related matters.

Let’s begin our overview.

  1. Easing the RMD bite, again. As already mentioned, an RMD from a traditional IRA isn’t required until 72. SECURE Act 2.0 would raise the RMD to 73 beginning in 2022, 74 in 2029, and 75 in 2032.

    Taking your first distribution from a tax-deferred retirement account will depend on many factors, but if the funds are not needed, it is usually a good idea to defer withdrawals.

    By delaying a withdrawal, the investments maintain their tax-exempt status. If you happen to need cash before RMDs are required, you decide how much to withdraw. You are not confined by an arbitrary rule.

  2. A more favorable catch-up provision. If Secure Act 2.0 is passed into law, employees 50 and older will be able to make extra catch-up contributions to a 401(k) or similar plan.

    Currently, the catch-up limit is $6,500, which is indexed to inflation.  As proposed, SECURE 2.0 maintains the catch-up limits for those aged 50+, but increases the annual catch-up provision to $10,000 for participants ages 62 through 64. The new higher limit would begin in 2023. This new maximum is indexed to inflation.

    Under SECURE Act 2.0, all catch-up contributions beginning in 2022 must be deposited into a Roth IRA.  This is significant because it  disallows a tax deduction on the contributions (thus the government captures revenue). Nonetheless, Roth IRAs are not subject to RMDs and withdrawals are exempt from federal income tax.

  3. Student loan matching. SECURE Act 2.0 would permit employers to make matching contributions to their 401(k) plans tied to the employee’s student loan payments. The goal: encourage younger employees to save for retirement.

    It would also help employers pass non-discrimination tests that prohibit the favoring of higher income employees.

    While we recognize this provision will probably complicate the administration of a 401(k) plan, we applaud the proposal simply because we know the sooner one begins saving for retirement, the sooner one will enjoy the power of compounded returns. As we always counsel, it’s never too early to start saving.

The proposed changes discussed above are, in my view, the more important components of the proposed act, but I’d also like to briefly mention some other provisions.

SECURE Act 2.0 would also:

  • Allow Roth contributions to SEP and SIMPLE plans

  • Accelerate part-time workers’ participation in 401(k) plans

  • Extend to 403(b) retirement plans some of the features of 401(k) plans

  • Require the Treasury secretary to increase awareness of the Retirement Savings Contributions Credit (also known as the “saver’s credit”), which is available to low and moderate-income workers

  • Eliminate some impediments to offering lifetime income annuities as a retirement plan investment option

  • place limits on employers who attempt to capture excess plan payments from a participant.

SECURE Act 2.0 may pass as proposed, changes could be made or the bill could run into obstacles preventing it from being enacted into law.

As I have already said, this review is a high-level peek at what is being proposed. Any advice I may provide will be tailored to your individual circumstances.

Changes to the proposed law are expected, but the odds favor passage. My office is happy to entertain any questions.

Sources

[[https://www.jdsupra.com/legalnews/secure-act-2-0-look-out-for-new-8698774/  “SECURE Act 2.0–Look Out for New Retirement Plan Incentives”]]

[[https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/congress-considers-a-new-round-of-retirement-legislation.aspx “Congress Considers ’‘SECURE Act 2.0’ with a New Round of Retirement Plan Fixes”]]

[[https://www.planadviser.com/secure-act-2-0-likely-become-reality/  “‘Secure Act 2.0’ Likely to Become a Reality”]]

Investment advice offered through Stratos Wealth Advisors, LLC, a registered investment advisor; DBA Riverbend Wealth Management.

This content is developed from sources believed to be providing accurate information and provided by Riverbend Wealth Management. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stratos Wealth Partners and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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