Secure Act 2.0

Here are some of the highlights of Secure Act 2.0 as it relates to personal finances:

  • Required Minimum Distribution (RMD) Starting Age Is Getting Pushed Back Again
    • In 2020, the Secure Act changed the starting age for RMD’s to age 72. Secure Act
      2.0’s new starting age will be 75–but there’s a phase in. Here’s what it looks like:

  • RMD’s No Longer Required From Roth Employer Plans
    • Previously there were no RMD’s for Roth IRA’s, but you still had to take RMD’s
      from Roth 401k’s, Roth 403b’s, Roth 457’s, etc.
  • New Roth SIMPLE and SEP IRA’s
    • Prior to Secure 2.0, Roth options were not available in SIMPLE and SEP IRA’s.
  • Employers Can Now Make Roth Contributions
    • Prior to Secure 2.0, Employer matches and other contributions to employer
      plans were always traditional (tax deferred) contributions regardless of the
      employee’s contribution.
  • Roth Catch Up Contributions For Wages Over $145K
    • For W–2 Employees, if you earn more than $145K the previous year and you are
      making catch up contributions, they will automatically be Roth contributions.
  • Potential Ability to Transfer 529 Funds to Roth IRA’s
    • There is a $35K lifetime limit for these transfers and several other stipulations
      that must be met in order to allow this transfer to happen (529 must exist for 15
      years, etc.)
    • These transfers can start in 2024, but make sure you look up the rules to see if
      you would be allowed.
  • IRA Catch Up Contributions Will Be Indexed For Inflation Each Year
    • Starting in 2024, the catch–up contributions for those over age 50 will be indexed
      for inflation in $100 increments
  • Employer Plan Catch Up Contributions Will Increase For Ages 60–63
    • Starting in 2025, those who participate in Employer Retirement Plans and who
      are ages 60–63 will be able to contribute more than just the catch up
      contribution.
  • Maximum Annual Qualified Charitable Distributions (QCDs) Will Be Indexed For
    Inflation
    • The annual amount for a QCD has been $100K for 15 years. Starting in 2024,
      QCD maximums will be indexed for inflation.
  • RMD Penalties Reduced
    • Beginning in 2023, the penalty for not taking your RMD for the year is reduced to 25% (from 50%) AND there is a correction window so that you can correct your mistake and reduce the penalty even further to 10%.

 

There are lots of other things in this Secure 2.0 Bill, but the above are the highlights that I feel are the most likely ones that apply to more people.

 

IRA’s With Alternative Assets And The IRS Crackdown

You may have seen headlines recently about proposals to crack down on IRA’s with large balances and alternative assets. More specifically, Paypal founder Peter Theil has really been in the spotlight with his ROTH IRA balance of $5 billion due to the appreciation of his Paypal stock and then subsequent investments.

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The FIRE Movement – Or choices?

Let’s start with what FIRE stands for—Financial Independence, Retire Early. Isn’t this what everyone wants? I have a theory about how this movement started. There has been a lot of research in the financial planning space and trying to figure out how much you need in investment assets and how much you can take out over the course of your retirement (safe withdrawal rate) without running out of money.

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ROTH IRA’s – Why the Hype?

There has been a lot of talk in the media recently about ROTH IRA’s, Backdoor ROTH IRA’s, and Mega Backdoor ROTH IRA’s? The biggest reason for this is because we are in such a low tax environment. Do we know what the tax landscape will look like when we need the money? No, but we do know that now we are dealing with low rates, and we can choose to pay these low rates and deal with what we do know.

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IRA vs. ROTH IRA

Whether you are preparing your income taxes yourself or you have hired someone to do them for you, you will most likely be seeing the question asking if you contributed to an IRA or ROTH IRA for the previous tax year.  By the way, you have until April 15th to make that contribution for the previous year-just make sure it is reported in your filing!

IRA’s

  • Tax Deferred—you get a tax break on the money you contribute.  You will pay tax on all distributions.  If you withdraw before age 59.5, there is a 10% penalty on top of the taxes unless you qualify for an exception.
  • Tax-Deductible Eligibility—If you and your spouse are not covered by a retirement plan at work, then your contributions are tax deductible.  If one or both of you are covered by a work retirement plan, then there are further income tests to determine if the contribution will be tax deductible.
  • Contribution Limits—For 2020 and 2021, the higher of your Earned Income or $6000 ($7000 if age 50+). 
  • Required Minimum Distributions—you are required to start taking money out of your IRA’s every year starting at age 72.   The government gave you a tax break all of these years, now they need some revenue.

ROTH IRA’s

  • After tax contributions—you contribute after tax money.  As long as the ROTH IRA has been open for 5 years and you are 59.5, then your distributions are TAX FREE.
  • Contribution Limits—the same for IRA’s above ($6K, $7K for age 50+).
  • Contribution Eligibility—there are income limits to be able to contribute to a ROTH IRA
  • No Required Minimum Distributions while the owner is alive, however, a beneficiary will be required to take minimum distributions but no tax will be due.

Let’s say you aren’t eligible to contribute to an IRA or a ROTH IRA, but you really like the idea of this ROTH IRA—because who doesn’t like TAX FREE MONEY?! If you have an IRA account you can do what is called a ROTH Conversion.  A ROTH Conversion is the process of converting your IRA account to a ROTH and paying the taxes now.  There are some other things to consider when doing this, so you should consult a professional.

Financial Journey LLC is a registered investment advisor offering advisory services in the state of Virginia and in other jurisdictions where exempted.  Information provided is for educational purposes only and not, in any way, to be considered investment or tax advice.