By: Jason D. Nickerson, CFP®, EA, President & Chief Operating Officer, John G. Ullman & Associates
The Secure Act 2.0 clearly focuses on the belief that there is a real shortfall between what we have saved for retirement and what we need to have saved to retire. The new law has opened up some great opportunities for you to impact the financial decisions you have made in the past, influence decisions you can make now, and plan other decisions for the future. Here are the three key provisions you need to discuss with your advisor now to implement in your plan right away.529 Conversion to Roth IRA
You’ve done well in saving for your child’s college education utilizing a 529 plan. You have done so well that you have (or are projected to have) some left in the plan. In the past, we have typically talked to clients about what to do with those funds. Would you want to support your child’s advanced degree? What interest do you have in pursuing advanced personal education? What type of support would you want to give to grandchildren? Now, we can add a whole new layer of planning. What support would you want to give your child’s retirement savings? Under a new law, 529 assets can be converted by the beneficiary to a Roth IRA.
Pros
• Up to $35,000 can be converted from a 529 Plan to a Roth
• Tax-free growth in the Roth IRA
• It can be an early start for your child’s retirement savings.
Cons
• The conversion is taxable. You must pay tax on the accumulated earnings in the 529 when converted to the Roth.
• Limited to $35,000, lifetime
• The account must be open for 15 years.
• The conversion is subject to the annual Roth IRA contribution limits.
Opinion
This is one of my favorite tax changes in recent years; however, there is much room for improvement. None of these thoughts should keep you from considering this opportunity now. Key areas that can be improved in future laws:
•Eliminate taxation of the conversion. If the funds in the 529 would come out tax-free if used for education, they should be allowed to transfer to a Roth tax-free. As long as the Roth owner abides by the rules, the funds can come out tax-free.
•Eliminate the $35,000 limit, or change it to allow for more conversion.
Higher Catch-Up Contributions
Most of us are probably already aware that when we reach the BIG 5-0, we get to make additional contributions to retirement plans. Hopefully, those of you reading are doing that now. In the new law, you need to take advantage of a major expansion of this concept. Starting in 2025, those between the ages of 60-63 can make even higher catch-up contributions of $10,000.
Pros
The law is recognizing that we either need or want to work longer. We can supercharge our retirement savings in those later working years.
Cons
None. As an advisor, one of my key objectives with clients is to get them to save more money.
Opinion
I would like to see the age decrease to 50, like the current catch-up rules. I don’t see the magic of 60-63. We know how this math works. The earlier you save, the more compound earnings can work for you.
Required Distribution Age increased
The age for required distributions from retirement plans was increased in 2023 to age 73. That age will further increase in 2033 to age 75.
Pros
More tax-deferred growth and more opportunity for tax planning opportunities around required distributions
Cons
Nothing comes to mind at the moment. Remember, these are required distributions we are talking about. You are still able to access funds at 59 1/2.
Opinion
If people are working longer, then this change supports that by not requiring distributions until the later years. I think pre-retirees can now plan to save money in other ways (not in tax-deferred plans with a required distribution) to support cash flow if they retire before RMD age.
As you can see, this new law has been really focused on retirement savings. This article touches on three of the key provisions that can benefit your overall financial plan. If you want to learn more about these and how you might be able to implement them, join my free webinar on July 20th at noon for a little “lunch and learn.” Visit jgua.com/presentations to register.