Secure Act 2.0 Revisions | Adviser Investments

Secure Act 2.0 Update

When Secure Act 2.0 was signed into law in December, Americans faced upward of 100 changes to retirement plans spread over the next decade—it’s a lot to absorb. 

Here are two timely points about Secure Act 2.0 revisions.

A Smart Tax Strategy for Charitable Giving

First the good news: Secure 2.0 provides a one-time opportunity for qualified individuals (70 1/2 and older) to take a tax-free withdrawal of up to $50,000 from their IRA to make a charitable donation known as a QCD, or qualified charitable distribution. Here’s why this matters: The QCD lowers your taxable income and fulfills your RMD amount for the year.

A donor can make the gift in one tax year only. That could be one $50,000 gift or several smaller gifts up to the $50,000 limit.

There are a few ways to set this up, but we suggest using a charitable gift annuity. This type of annuity establishes the charitable donation in exchange for a partial tax deduction and a fixed stream of income from the charity to the donor or the donor’s spouse. The annuity requires a minimum payout of 5% annually for the donor’s lifetime and it’s taxed as ordinary income.

Charities have offered gift annuities for years, but this is the first time donations can be made directly from retirement accounts. There are other advantages and risks to consider, so let’s talk about this in more detail in our next call.

New Limits for Catch-Up Contributions

Now for the bad news: Catch-up contributions for high earners are about to get more complicated thanks to Secure 2.0.

Under current law, anyone age 50 and up is eligible to make a $7,500 additional contribution to their employer-sponsored retirement plan. That catch-up contribution can be made pretax, effectively lowering your tax liability for the year.

Beginning in 2024, if your W-2 income is greater than $145,000, any catch-up contribution is required to be treated as a Roth contribution. That means the contribution is made with after-tax dollars, so it will not reduce your current taxable income, but it can be withdrawn tax-free in the future.

To be clear, this new rule does not apply to catch-up contributions made to IRAs—only to employer-sponsored retirement plans like 401(k)s and 403(b)s.

This raises an obvious question: What if your company-sponsored plan doesn’t include a Roth option? The new law says that if the plan doesn’t include a Roth catch-up contribution option, then the contribution is not allowed. And if the plan doesn’t allow for Roths, this not only blocks high-wage employees, but it also blocks all employees in the plan from making catch-up contributions regardless of their income.

The upshot? Expect expanded Roth contribution features across employer-sponsored retirement plans. In the meantime, let’s talk about solutions if you think your catch-up contribution will be affected next year. We can also discuss any other Secure Act 2.0 revisions that may apply to you.

Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.

Our statements and opinions are subject to change without notice.  All investments carry risk of loss and there is no guarantee that investment objectives will be achieved.

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