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January 17, 2023—The new SECURE Act 2.0, which passed into law last month, may have far reaching implications on retirement planning in the U.S. This “sequel” legislation builds upon many of the themes found in the prior Act, such as expanding access to retirement accounts in cases of hardship and moving the age when required minimum distributions begin. In this podcast, Senior Wealth Strategist Ryan Davis of Wilmington Trust Emerald Family Office & Advisory® explains some of the more notable changes from SECURE Act 2.0 and their implications for high-net-worth individuals.

Emerald GEM Formatter

SECURE Act 2.0: What the new law may mean for you

Hi, thank you for tuning in and welcome to our Emerald Planning GEM podcast series. GEM is an acronym for Get Educated in Minutes. We created this podcast series to help you address some of your most pressing planning concerns in a timely, concise, and actionable manner. I’m Ryan Davis, a senior wealth strategist with Wilmington Trust’s Emerald Family Office and Advisory® and your host for today’s show. Today I’m going to answer the question: What should affluent and high-net-worth individuals know about the new SECURE Act 2.0?

It’s now 2023, and we are starting off the year with new legislation from Congress. Back in December, Congress passed the Consolidated Appropriations Act of 2023. While this legislation is intended primarily to fund the federal government, it contains a section devoted to retirement accounts titled SECURE Act 2.0. This legislation is a sequel to the SECURE Act of 2019 and builds upon many of the same themes found in the prior act: expanding access to retirement accounts in cases of hardship, incentivizing employers to offer retirement accounts, reducing punitive taxes and easing the administration of retirement accounts, and further pushing back the required minimum distribution date over time. The SECURE Act 2.0 has approximately 100 provisions, but today I’ll focus on a few that we believe are the most relevant to affluent and high-net-worth individuals. 

As with the first SECURE Act, the new law makes numerous changes to the amount that can be contributed to retirement accounts, how those contributions are treated for tax purposes, and when distributions must come out of retirement accounts.

  • First, we have an increase in the age for required minimum distributions (RMD) from age 72 currently to age 73 for individuals who attain age 72 after December 31, 2022; and then increases again to age 75 starting on January 1, 2033 for individuals who attain age 74 after December 31, 2032.*
    • Additionally, beginning in 2024, Roth 401(k)s will no longer be subject to RMDs.* This change brings parity to the treatment of Roth individual retirement accounts (IRAs) and Roth 401(k)s.      
  • Second, we have higher catch-up contribution limits: SECURE 2.0 modifies the existing employer retirement plan catch-up contribution amount which is $7,500 for 2023 and the IRA catch-up contribution amount which is $1,000 in 2023. **  
    • Beginning in 2025, the catch-up limits for employer retirement plan owners aged 60 to 63 will increase to the greater of $10,000 or 150% of the regular catch-up amount in 2024. *      
    • Beginning in 2026, the $10,000 amount will be indexed for inflation. *    
    • Beginning in 2024, the catchup contribution to IRAs will be indexed to inflation. The IRA contribution limit is currently not indexed. *       
  • Third, the new law generally expands Roth treatment by requiring all employer retirement plan catch-up contributions to be given Roth treatment starting in 2024 for participants with compensation equal to or in excess of $145,000.* Also, beginning immediately, account owners may elect Roth treatment of employer retirement plan matching contributions. The matching contribution will be treated as income to employees who make this election.*    

The new law also contains several provisions relevant to wealthier individuals who may benefit from more sophisticated planning techniques.

  • IRA owners who are older than 70½ can now make a one-time distribution to charitable remainder trusts and/or charitable gift annuities up to $50,000. The existing $100,000 qualified charitable distribution amount will also now be indexed to inflation. *      
  • Under the new law, beneficiaries of 529 college savings accounts (529 plans) can make direct rollovers of unused funds to a Roth IRA up to a lifetime maximum of $35,000. *
  • Also, under the new law, account owners may use $2,500 per year from a retirement account to pay premiums on a long-term care contract. If the owner is younger than age 59½, the distribution will be exempt from the 10% early withdrawal penalty. *       
  • Finally, while it’s somewhat of a departure from the retirement account focus of the rest of the legislation, SECURE Act 2.0 enacts new limits on conservation easements claimed through pass-through entities. This provision codifies the IRS’s recent campaign against syndicated conservation easements. *  

So, what could you be doing to prepare for the new law?

  • Generally, for many wealthier account owners, the new rules provide more flexibility to enhance their contributions after age 50 during prime earnings years and to delay taking required minimum distributions in their seventies. Comprehensive financial planning can be key to taking advantage of this flexibility in an informed manner. Evaluating current cash flow and income tax liabilities against anticipated future cash flow and income tax liabilities may help provide guidance to make the best decisions for you and your family.
  • Additionally, generous contributors to 529 plans for younger generations can take comfort in the new provision allowing for rollovers of unused educational funds to a Roth IRA. On the other hand, if you are the beneficiary of a 529 plan that has unused funds, you should consider whether a Roth IRA rollover makes sense for you. There are certain limits to this rollover provision including a requirement that the 529 account be open for 15 years. *
  • For charitably inclined taxpayers, you may want to consider how to balance the potential income tax liability of traditional retirement account distributions, the financial need for those distributions, and using those assets as sources of funds for charitable distributions. Given that traditional retirement accounts carry income tax liabilities in some cases, it may be beneficial to use those accounts for charitable gifting during life or at death, rather than leave the account to children or other beneficiaries.
  • Finally, the law contains many varied effective dates beginning from 2023 onward. Some elections, such as the election to treat employer contributions as Roth, are effective immediately. You should consider seeking advice to best navigate these new opportunities.  

This new law is complex and has many nuances. We will likely receive more guidance in the coming months, and we’ll work to keep you informed on these developments.

Thanks again for joining us today. I hope you found our GEM to be helpful. Please contact your Wilmington Trust wealth advisor if you have any questions about Secure Act 2.0 and how it may affect planning and retirement accounts. We would be glad to help you. If you have a topic that you would like us to discuss on a future GEM, please let us know. Send an email to Emerald@wilmingtontrust.com. See you next time!

 

Sources:

*SECURE 2.0 Act of 2022

**Notice 2022-55, Internal Revenue Service

 

Definition of Terms

Conservation easements: A voluntary, legal agreement that permanently limits uses of the land in order to protect its conservation values. The Internal Revenue Code permits charitable deductions for conservation easements.

Indexed for inflation: A number that is stated at a fixed value in a federal statute but is adjusted periodically by relevant federal agencies based on inflation statistics produced by the federal government. Inflation adjusted tax numbers are found in the Internal Revenue Code and adjusted periodically by the IRS.

Pass-through entities: A type of business organization that is differentiated from a C Corporation by the lack of two-levels of taxation. S Corporations, LLCs, and partnerships are all pass-through entities.

Qualified charitable distribution: A technique allowed by statute permitting an IRA owner to contribute funds directly to charities from their IRA in return for a charitable deduction.

Required minimum distribution: Payments from tax-deferred retirement accounts required by federal law at an age specified by statute. 

Syndicated conservation easements: A syndicated conservation easement consists of a group of individuals or multi-tiered entities organized as a partnership or association formed to promote a common interest in order to carry out a particular transaction. From a tax perspective, a syndicated conservation easement revolves around making donations of conservation easements to certain organizations with the intention to benefit from corresponding tax benefits resulting from those transactions.

Wilmington Trust Emerald Family Office & Advisory™ is a registered trademark and refers to wealth planning, family office and advisory services provided by Wilmington Trust, N.A., a member of the M&T family. Wilmington Family Office is a service mark for an offering of family office and advisory services provided by Wilmington Trust, N.A.

The information provided herein is for informational purposes only and is not intended as a recommendation or determination that any tax, estate planning, or investment strategy is suitable for a specific investor. Note that tax, estate planning, investing, and financial strategies require consideration for suitability of the individual, business, or investor, and there is no assurance that any strategy will be successful.  

Wilmington Trust is not authorized to and does not provide legal or accounting advice. Wilmington Trust does not provide tax advice, except where we have agreed to provide tax preparation services to you. Our advice and recommendations provided to you are illustrative only and subject to the opinions and advice of your own attorney, tax advisor, or other professional advisor.

The information in this podcast has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. The opinions, estimates, and projections constitute the judgment of Wilmington Trust and are subject to change without notice.

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