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Text on screen: John Nersesian, Head of Advisor Education
TITLE CARD ((BOOK ICON)) PIMCO Education – Secure Act 2.0 with host John Nersesian (8 minutes)
John Nersesian: Hi, everybody. Thank you for joining us for a timely conversation around the new Secure 2.0 Act.
Many may recall the original Secure Act that was passed at the end of 2019, and a couple key provisions that were included. The first was addressing RMDs,
GRAPHIC SLIDE: Original Secure Act key provisions
FULL PAGE GRAPHIC: TITLE – Original Secure Act key provisions. Subtitle: Summary of key proposals included in omnibus spending bill of 2019. The column on the left is titled Required minimum distributions (RMDs) with two bullets: the first bullet reads, Increased from 70.5 to 72, which is the age to take RMDs; and the second bullet reads, Applies to investors turning 70.5 after 2019. The column on the right is titled Stretch IRA, with two bullets: The first bullet reads Eliminated for most beneficiaries: traditional and Roth IRAs must be liquidated by tenth year after death of owner; and the second bullet reads, Spouses, minor children, others exempted.
previously required to begun at age 70 ½, extended to age 72.
The second key provision under the original Secure Act was the elimination of the stretch IRA.
The inherited IRA could be distributed over the life expectancy not of the original account owner, but of the beneficiary, providing an elongated compounding and distribution period.
Unfortunately, that was eliminated as part of Secure 1.0, requiring non-spousal beneficiaries to take distributions of an inherited IRA over a ten-year window of time.
So what are some of the new provisions that are included in 2.0 that continue to enhance, if you will, this opportunity to set up a secure retirement for all Americans?
GRAPHIC SLIDE: Required minimum distributions (RMDs)
FULL PAGE GRAPHIC: TITLE – Required minimum distributions (RMDs). Subtitle is RMD starting age increased again. There are four bullets: The first bullet reads, New Act increases starting age to 73 in 2023; the second bullet reads, Increases to age 75 in 2033; the third bullet reads, Can delay first RMD to April 1 of following year (results in two RMDs that year); and the fourth bullet reads, If turned 72 in 2022, required to take RMD based on rules in effect in 2022.
The first, is the extension of RMD age from 72 to 73 and eventually age 75, providing additional compounding and wealth creation to fund an increasing longevity for many retirees.
The second key provision are catch-up contributions, available to those individuals or plan participants age 50 and above.
GRAPHIC SLIDE: Catch-up provisions for 401(k) and IRA
FULL PAGE GRAPHIC: TITLE – Catch-up provisions for 401(k) and IRA. The subtitle is Providing greater retirement savings opportunities. There are five bullets. The first bullet reads: Regular contribution limits increased to $22,500 for 401(k) and $6,500 for IRA; The second bullet reads: Catch-up contributions of $7,500 for 401(k), $3,500 for Simple IRA and $1,000 for IRA (age 50+) will be indexed; The third bullet reads: Starting in 2025, 401(k) amounts for age 60-63 will be greater of $10,000 or 150% of regular catch-up amount (indexed); The fourth bullet reads: Simple IRAs catch-up greater of $5,000 or 150% for ages 60-63; and the fifth bullet reads: All catch-up contributions for 401(k), 403(b) and 457(b) must be made to Roth accounts for those earning more than $145,000 (starts 2024).
The current catch-up provisions in the year 2023 are $7,500 for 401(k) plans and $1,000 for IRA owners.
These are additional contribution limits above and beyond the traditional contribution amounts afforded that unique cohort of age 50 and above.
And there's an even accelerated opportunity for those individuals age 60 to 63. The catch-up contribution limit will be $10,000 or 150% of the current year's catch-up contribution limitation, affording an even greater opportunity to accelerate retirement planning.
All of these numbers will, of course, be indexed for inflation on an annual basis.
GRAPHIC SLIDE: Roth 401(k) enhancements
FULL PAGE GRAPHIC: TITLE – Roth 401(k) enhancements. The subtitle is Rules for employer retirement plan-based Roth accounts. There are four bullets. The first bullet reads: Elimination of RMDs for Roth 401(k) plans, similar to Roth IRAs, starting in 2024; The second bullet reads, Creation of new Roth-style SEP and SIMPLE IRA accounts starting in 2023; The third bullet reads Employer matching contributions to 401(k) and 403(b) now eligible to be treated as Roth starting in 2023; and the fourth bullet reads, Contributions to account would be considered taxable income to participants, while future withdrawals would be tax-free.
There was another change to the Roth account universe. It's the idea that Roth 401(k) plans are now afforded the same privilege as Roth IRAs to avoid required minimum distributions, none whatsoever, regardless of age, providing an even greater opportunity to compound wealth on a tax-free basis.
GRAPHIC SLIDE: Automatic enrollment for new 401(k) and 403(b) plans
FULL PAGE GRAPHIC: TITLE – Automatic enrollment for new 401(k) and 403(b) plans. The subtitle is Enhancing retirement preparedness. There are five bullets. The first bullet reads: Effective for plan years beginning after December 31, 2024; the second bullet reads: Applies only to plans established after enactment; the third bullet reads: Mandatory initial automatic enrollment rate at least 3%, not to exceed 10%; The fourth bullet reads: Automatic increase of 1% annually until rate reaches at least 10%, not to exceed 15%; and the fifth bullet reads: Exceptions: Small employers with 10 or fewer; New employers 3 years or less; and Church/government employers.
Starting in the year 2025 newly established plans will be required to establish plans with a 3% required, automatic, enrollment or deferral opportunity for their employees, starting at 3%, automatically rising to 10%, with a maximum limit of 15%.
The qualified charitable distribution is another key provision that has been enhanced under Secure 2.0. You probably remember the original QCD opportunity.
GRAPHIC SLIDE: Qualified charitable distributions (QCD)
FULL PAGE GRAPHIC: TITLE – Qualified charitable distributions (QCD). The subtitle is Greater opportunities to facilitate philanthropy. There are seven bullets. The first bullet reads: Qualified charitable distributions (QCDs) allow account owner (age 70½) to distribute up to $100,000 annually to qualified charity. The second bullet reads, Distribution may satisfy all or part of the annual RMD without increasing taxable income. The third bullet reads, Annual limit will be indexed starting in 2024. The fourth bullet reads, Donors now eligible to gift to charitable remainder trust or gift annuity. The fifth bullet reads, Allowed only once during life, max of $50,000 (indexed). The sixth bullet reads, Trust/annuity solely funded from QCD – no commingling. The seventh bullet reads, Mandatory distributions (min. 5%) made to donor/spouse as taxable income.
It's available for individuals age 70 ½ and above to take a distribution from their qualified plan, and instead of distributing those dollars to their own taxable account, increasing their AGI and all the negative consequences of that increase, they can instead direct these dollars directly to a qualifying charity.
The maximum contribution is $100,000. That $100,000 limitation will be indexed for inflation on an annual basis. There's a second new provision, though, with the QCD.
There's a lifetime opportunity of $50,000 that can be redirected from this retirement account to one of two split-interest vehicles, either a charitable remainder trust or a gift annuity, as a way of retaining additional benefit from these redirected dollars.
Keep in mind that the income paid from these charitable vehicles must revert back to or be paid to the original account owner or his or her spouse.
What about 529 plans?
GRAPHIC TITLE: Rollover of 529 plan to Roth IRAs
FULL PAGE GRAPHIC: TITLE – Rollover of 529 plan to Roth IRAs. The subtitle is, New options for excess college savings account balances. There are six bullets. The first bullet reads, Available beginning 2024. The second bullet reads, Lifetime max of $35,000. The third bullet reads, Annual limit of IRA contribution cap, less amount contributed to IRA in that year. The fourth bullet reads, Plan opened minimum of 15 years. The fifth bullet reads, Amount limited to contributions/earnings made 5 years prior to rollover. The sixth bullet reads, Transfer made to Roth IRA held by 529 beneficiary (not owner).
What about the individual who has accrued additional dollars in their 529 plans?
A new provision under Secure 2.0 allows that individual to redirect the unused 529 balance into a Roth retirement account for the intended beneficiary.
This limitation is capped at $35,000 annually, and then amount that can be rolled in this manner is capped at the annual Roth contribution limit less any traditional Roth contributions made in that calendar year.
What are some of the planning opportunities that advisors and their investors might consider, given these new rules and regulations?
GRAPHIC TITLE: Planning strategies
FULL PAGE GRAPHIC: TITLE – Planning strategies. There is one row: Weigh benefit of Roth conversion.
Maybe the first or most obvious is the Roth conversion opportunity.
GRAPHIC TITLE: Weigh Roth conversions
FULL PAGE GRAPHIC: TITLE – Weigh Roth conversions. There are two boxes and a weighing scale in between. The box on the left is titled Leave in traditional IRA. The text below the title reads: Maintain tax deferral as long as possible in exchange for taxable income in retirement. The box on the right is titled Convert to Roth IRA. The text underneath reads: Accelerate a tax liability today in exchange for tax-free income, no required minimum distributions (RMDs).
I know, ten years ago many of us evaluated the potential benefits and costs of a Roth conversion, moving money from a tax-deferred account into a tax-free account by making a conversion and paying the current taxes on that lesser balance.
What we received in exchange was tax-free growth and the avoidance of RMDs. The Roth conversion makes tremendous sense, given these unique opportunities and enhancements.
GRAPHIC TITLE: Planning strategies
FULL PAGE GRAPHIC: TITLE – Planning strategies. There are two rows. The first row reads, Weigh benefit of Roth conversion. The second row reads, Consider qualified charitable distributions.
The qualified charitable distribution should be revisited as a way of fulfilling the charitable intent of our clients.
So many are trapped in an environment where they're required to take minimum distributions beginning at age 73, reporting the increase in ordinary income from these distributions. And these same individuals are fulfilling their charitable intent by making a contribution to charity in that same year.
GRAPHIC TITLE: Consider qualified charitable distribution
FULL PAGE GRAPHIC: TITLE – Consider qualified charitable distribution. The subtitle is, Added incentive for charitably inclined to make gifts from IRA. There are two boxes. The box on the left is titled ADVANTAGES and has four bullets: the first bullet reads, Withdrawal not treated as part of AGI; the second bullet reads, Provides tax benefit for retirees who do not itemize deductions; the third bullet reads, Avoids AGI limits for charitable deduction; and the fourth bullet reads, Reduces taxable estate. The box on the right is titled DISADVANTAGES and has three bullets: the first bullet reads, Gift is irrevocable; the second bullet reads, Gifts can’t be made to donor advised fund, most foundations; and the third bullet reads Maximum $100,000 per IRA owner (now indexed).
As we know, many individuals making this charitable contribution may not be deriving an associated tax benefit due to the increased standard deduction that is available. As a reminder, charitable contributions provide a tax benefit only under the circumstances under which an individual itemizes their deduction under Schedule A.
By combining these two functions into one, the distribution from my retirement account, the contribution or donation to an intended charity, the individual can receive the associated benefit, regardless of their itemizing status.
GRAPHIC TITLE: Planning strategies
FULL PAGE GRAPHIC: TITLE – Planning strategies. There are three rows. The first row reads, Weigh benefit of Roth conversion. The second row reads, Consider qualified charitable distributions. The third row reads, Make strategic beneficiary designations.
And then maybe the final opportunity is to revisit our beneficiary designations. So many of us, in our estate planning endeavors, name equally a number of intended beneficiaries, maybe our children. Let's revisit, though, this opportunity, considering now the requirement of a non-spousal beneficiary to take distributions over a mandated ten-year period of time.
GRAPHIC TITLE: Make strategic beneficiary designations
FULL PAGE GRAPHIC: TITLE – Make strategic beneficiary designations. The subtitle is, Reducing taxes on distributions to heirs. The first half of the page has three bullets. The first bullet reads, Allocate assets to heirs based on tax efficiency, not equal values. The second bullet reads, Leave Roth accounts, taxable investment portfolio, life insurance to higher-income heirs. The third bullet reads, Leave traditional IRAs to lower-income heirs or to charities. The bottom half of the page has two boxes. The first box is titled ADVANTAGES, and has two bullets: The first bullet reads, Tax impact to beneficiaries on IRA distributions is reduced; and the second bullet reads, Heirs may receive larger net after-tax inheritance. The box on the right is titled DISADVANTAGES, and has three bullets: the first bullet reads Difficult to determine appropriate splits; the second bullet reads, Some heirs will receive more on a pre-tax basis (equal after-tax); and the third bullet reads, Requires update beneficiary forms as assets are spent, laws change, etc.
Maybe I consider leaving Roth accounts, traditional brokerage assets, to my higher-marginal-bracket beneficiaries and designating taxable events, taxable assets, such as traditional IRAs or 401(k)s, to intended beneficiaries who are in a lower marginal bracket. The division of assets wind up equalizing, but the tax consequences over an intentionally selective methodology may lower the total tax bill paid by all beneficiaries.
I hope that this review has been helpful to you.
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If you'd like to learn more about the Secure Act or any other of the advanced wealth planning strategies that we cover as part of PIMCO's advisor education group, please contact your PIMCO account manager.
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