Secure Act 2.0 Update

Andrew Busa, MSPFP, CFP^®, MPAS^®, CCFC

Director of Financial Planning

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 IRAA type of account in which funds can be saved and invested without being subject to tax until the account holder reaches retirement age. 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QCD lowers your taxable income and fulfills your RMDA required minimum distribution is the amount of money that must be withdrawn each year from tax-deferred retirement accounts once the beneficiary reaches retirement age (72, according to IRS rules). 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 annuityA financial instrument that pays the holder a guaranteed stream of payments. The annuity is funded by either a lump sum (one-time) or a series of deposits. Once funded, the sum is invested by the insurance company who sold the annuity (the accumulations phase). After a certain trigger (for example, the holder’s retirement or reaching a certain age) payments begin to be issued to the holder (annuitization phase). Annuity payments may be fixed or variable in both amount and in length (some pay out for a designated span of years, others until the holder’s death).. 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 annuitiesA financial instrument that pays the holder a guaranteed stream of payments. The annuity is funded by either a lump sum (one-time) or a series of deposits. Once funded, the sum is invested by the insurance company who sold the annuity (the accumulations phase). After a certain trigger (for example, the holder’s retirement or reaching a certain age) payments begin to be issued to the holder (annuitization phase). Annuity payments may be fixed or variable in both amount and in length (some pay out for a designated span of years, others until the holder’s death). for years, but this is the first time donations can be made directly from retirement accounts. There are other advantages and risksThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. 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 liabilityLiabilities are calculated by adding up your existing debts (mortgage, car loans, student loans, credit cards, etc.). 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.