Understanding the SECURE Act 2.0 with Ed Slott

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Understanding the SECURE Act 2.0 Show Notes

In the first couple months of 2023, one of the things we’ve been trying to do is highlight how the newest tax rules affect you. A lot of people have been wondering what exactly Congress was thinking with some of those new tax rules.

However, there were some welcomed changes from Congress with the SECURE Act 2.0. How does the SECURE Act 2.0 compare to the SECURE Act? America’s IRA Expert Ed Slott joins Dean Barber on The Guided Retirement Show to help explain the ins and out of the SECURE Act 2.0.

In this podcast interview, you’ll learn:

How the Original SECURE Act Was a Game-Changer for Retirement Planning and Legacy Planning.
What’s New with the SECURE Act 2.0?
Why Roth Accounts Are Even More Advantageous Now
How to Clear Up the RMD Age Confusion

First, Let’s Look Back at the SECURE Act

Before we dive into what’s new in the SECURE Act 2.0, we need to understand the impact of the SECURE Act. Ed and Dean thoroughly reviewed the key points of the SECURE Act back in 2020 on another episode of The Guided Retirement Show, How to Avoid the Biggest Tax Traps with Ed Slott. Here are a couple of telling quotes from Ed about the SECURE Act from our podcasts that he’s appeared on.

“Whenever Congress names a law, you can be sure it will always do the opposite. So, when they call it the SECURE Act, you better run. Your money is less secure.” – Ed Slott

“When you see a tax bill called the SECURE Act, hold on to your wallet. They’re coming for you.” – Ed Slott

“If you’re watching your IRA and your plan is to leave your IRA to children or grandchildren, that plan is off the table. The SECURE Act was the beginning of the end, but now IRS has added new regulations that just came out this year (2022). I think that was the final nail in the coffin. I’m here to tell you IRAs and 401(k)s, retirement accounts are lousy assets. They’re no good anymore to pass to the next generation. So, you need to look to alternative solutions. The Roth IRA, even life insurance, anything tax-free is a better solution.” – Ed Slott

IRAs Are No Longer a Good Option for Transferring Wealth

That last quote from Ed was from last spring. Nearly a year later, we’re still talking about how the SECURE Act has destroyed the ability to effectively transfer wealth to the next generation. The SECURE Act significantly changed the landscape of retirement planning and family financial planning.

“The ‘OG’ SECURE Act from 2020 was transformational. That was a game-changer. That changed the plans that most people had for 20, 30 years for their 401(k)s , IRAs and leaving them to children or grandchildren, who could stretch or extend deferrals on their inherited IRAs and Roths for 20, 30, 50, 80 years. Congress didn’t like that.” – Ed Slott

The SECURE Act eliminated stretch IRAs and implemented a complicated 10-year rule. This affects anyone who has an IRA or 401(k) or might inherit an IRA or 401(k). It’s not just the people who are thinking about passing down their wealth that are impacted. It’s the people who are inheriting it as well. Most beneficiaries now must have all the money out of the IRAs or 401(k)s that they inherit at the end of the 10th year after the account owner passes away.

A Ticking Tax Timebomb

When you shorten that window of when all the money needs to come out of the account, it creates a big-time tax problem. When a lot of money must come out in a short timeframe, more money will be lost to taxes even if they stay at the current rate. And taxes won’t be at the current rate for much longer, as they’re scheduled to go up when the Tax Cuts and Jobs Act sunsets in 2026.

Hopefully, this helps to highlight how troublesome the IRA rules of the SECURE Act are, and why it’s critical to understand them. The SECURE Act got so complicated that the IRS had to write regulations, but it just got more complicated.

“It turned out that some beneficiaries had to take Required Minimum Distributions in those 10 years if they inherited from somebody had already started taking RMDs. Then, the IRS had to come out with relief, but only to some people. And that created more confusion. And then on December 29, 2022, the SECURE Act 2.0 gets enacted and becomes effective a few days later. Congress really played games with us on this one.” – Ed Slott

The SECURE Act 2.0 Pushes RMD Age to 73

While we’re on the topic of RMDs, one of the biggest takeaways from the SECURE Act 2.0 was the RMD age being pushed from 72 to 73. And then on January 1, 2033, it’s scheduled to be moved up to 75. However, the RMD age hasn’t shifted to 73 for everyone. If you’re already taking RMDs, you distribution schedule won’t change.

“The IRS and Congress look at RMDs as a water faucet. Once RMDs start, you can’t stop them and you’re into the system. There’s no off switch.” – Ed Slott

But for anyone who hasn’t started taking RMDs yet, moving the RMD age to 73 gives you one more year to do things like Roth conversions before you’re more constrained with RMDs. It doesn’t mean you can’t convert once RMDs begin, but it will cost more because the RMD must be taken. You must first satisfy the RMD, pay taxes on it, and then if you want to convert part of the remaining balance, you can.

“If you’re in your 60s, start bringing your IRA balance down. Then maybe when you start RMDs and when tax rates are higher, your RMDs could be lower. Because with a Roth IRA, once the funds are in there, they’re tax-free. Plus, there’s no lifetime requirement to take distributions. You never need to touch it and it keeps growing tax-free. And your beneficiaries can hold on to an inherited Roth for 10 years after your death. So, there are benefits to the Roth.” – Ed Slott

The New RMD Age of 73 Is a Nice Provision in the SECURE Act 2.0, But…

Congress loved pushing the RMD age to 73 because it makes people think that they’re putting off the pain for one more year. Ed believes that it’s a great provision, but he doesn’t like the idea of deferring as long as possible.

“The ‘M’ in RMDs stands for minimum. It doesn’t stand for maximum. You can always take more. I might even suggest that people look at doing conversions and getting money out before taking RMDs. Why wait until they need to come out? You have an opportunity now to get money out at lower rates. Don’t wait until 73 just because they pushed the age back.” – Ed Slott

Roth Conversions Can Be Very Beneficial, but They’re Not for Everyone

Roth conversions are one of Dean’s favorite aspects of financial planning. However, it shouldn’t just be assumed that it will work well within your financial plan. You need to be aware that doing a Roth conversion can impact other dividends and capital gains that might otherwise have some preferential tax treatment. Roth conversions can also cause more of your Social Security to become taxable and increase your Medicare premiums.

“Before you start converting, I believe that you already need to have a good holistic financial plan done so that you can see the impact in dollars to your probability of success. You’ll see the impact in terms of how much less tax you’ll pay over your lifetime. And you’ll see the impact of additional money that you can spend in retirement. That financial plan should be reviewed by a CPA from a tax perspective to look at tax planning strategies like Roth conversions.” – Dean Barber

Also, keep in mind that once you convert, you will owe the tax even if your financial situation changes. So, you need to know exactly what it’s going to cost.

The Complexity of Increasing Medicare Premiums

The increasing your Medicare premiums part of that is especially complicated. Why? There are a couple of reasons. One, it isn’t a tax that you see on your tax return like you see with Social Security. It’s just billed, so you need to look at another document. The other reason is what Ed calls the cliff. If you go $1 over the income limits, the IRS can really lower the boom on you.

And then there’s the two-year lookback. Ed always tells people that if they’re really worried about that, they should convert before turning 63.

“Some people say that they’re not going to hit Medicare until they’re 65 and think that they can do a conversion at 64. No. Two years later, it’s going to trigger those IRMAA charges for Parts B and D. If you can, get those conversions in at 62 or earlier.” – Ed Slott

The other problem with those IRMAA limits is that they are adjusted for inflation. So, it’s a guess at what those IRMAA limits will be. And again, if you go $1 over those IRMAA limits, there’s a two-year lookback and you could suddenly be paying hundreds of dollars more per year or even per month in Medicare Part B premiums.

Still, Ed likes the idea of Roth conversions. Overtime, if you take down all your IRA and have everything in a Roth, you’ve solved the IRMAA problem because anything you take out of the Roth in retirement is tax-free.

An Example from Ed Relating to IRMAA Surcharges and Roth Conversions

Ed was questioned by someone at one of his seminars about the IRMAA surcharges and Roth conversions. That person liked the idea of Roth conversions, but she was on Medicare. She had the Parts B and D surcharges and pointed out that those charges would increase by doing Roth conversions and said that would make her angry. Well, Ed had a counterpoint.

“I said to her that she made a good point and that would make her angry, convert anyway. Because I would rather have her be angry for one year than for the rest of her life.” – Ed Slott

If your RMDs are big enough, you can get in a position to where you have permanently increased Medicare premiums once your RMDs start. Sometimes, it’s best to take a little bit of pain up front for better long-term results. That’s the theme of the Roth, at least for the next three years while tax rates are low.

When to Do Roth Conversions

The bottom line is that you must look at it holistically in line you’re your whole tax projection. It depends on your situation because everyone’s circumstances are different with their income levels, goals, and life in general. You need to meet with your advisor to see if Roth conversions will work for you.

“I think it’s important that when you’re looking at doing Roth conversions that you don’t wait until late in the year. You should be doing that planning early in the year so that you don’t run up against a time clock.” – Dean Barber

Ed agrees with planning for Roth conversions earlier in the year. However, it sometimes makes more sense to wait until after Thanksgiving to do the conversion.

“Even in big loss years like 2022, people got surprised and did early in the year on how much more it cost than they projected when they got all those mutual fund capital gains distributions.” – Ed Slott

Beware of Phantom Income

What Ed is referring to is called phantom income. That tends to happen when you have a bad year that was preceded by a couple of very good years where you might have some profit-taking. You can have a fund that loses money during the year, but have a capital gains distribution that you must pay taxes on. That can mess up your Roth, take you over the cliff for the Medicare premiums, etc.

“If you hold mutual funds in a taxable account, you need to pay attention to those capital gains distributions. Generally, you’ll get an idea sometime in November of what those capital gains distributions will be so you can determine if you need to sell that particular fund. There’s all kinds of tax planning that goes into that at the end of each year as well. ETFs are better to own in a taxable account than a mutual fund.” – Dean Barber

What Games Did Congress Play with the SECURE Act 2.0?

The SECURE Act 2.0 wasn’t as much of a game-changer like the SECURE Act was. The SECURE Act 2.0 was a part of a 4,100-page omnibus bill. But the SECURE Act 2.0 part was still about 350 pages of that with more than 90 provisions affecting retirement accounts.

With all the retirement account rule changes that have been made since the SECURE Act went into effect in 2020, it’s been extremely complicated to determine what set of rules that different people are required to follow. Some of the rules of the SECURE Act 2.0 are effective now, some were retroactive prior to 2023, some aren’t effective until 2024, and some aren’t effective until 2033.

Ed actually made a cheat sheet available for each member of the Ed Slott Elite IRA Advisor Group^SM that clarifies what rules are in effect and when they’re in effect. Dean, Bud Kasper, Will Doty, Logan DeGraeve, and Drew Jones are all members of Ed’s group and are thankful to have such a great resource with all the educational material that Ed shares.

“I go back a long time with (studying) tax law. It used to be when a bill was signed into law and enacted that everything was effective on the date of enactment. But now, we have what I believe are budget gimmicks.” – Ed Slott

Reviewing Ed’s Main Takeaways from the SECURE Act 2.0

We’ve covered quite a bit in this article about the SECURE Act 2.0, but it still wasn’t nearly as Earth-shattering as the SECURE Act was. As you can hopefully see, though, there are still quite a few important provisions within the SECURE Act 2.0 that you need to be aware of.

Ed’s two main takeaways from the SECURE Act 2.0 are the Roth piece of it and the increased limits. Ed has noticed that Congress isn’t even hiding the fact that they love Roth IRAs. Congress uses Roth IRAs to create revenue. The only money that can get into a Roth IRA or 401(k) is already taxed money.

“Why do they (Congress) put that in? Because they’re the worst financial planners on Earth. They’re so short-sided. They just get all the money up front and only look at 10-year budget cycles. So, they think it’s great with all the money they’re bringing in. They want more people going to Roth 401(k)s.” – Ed Slott

A Quick Example of Roth vs. Traditional

You might ask, ‘How does that bring in money?’ If you’re an employee and put money in your 401(k), you get a deduction. It’s not on your tax return, but your W-2 shows less on that contribution. You pay tax on less money. For example, if you make $50,000 and put $5,000 in your 401(k), your W-2 only shows your income as $45,000. If you instead go to a Roth 401(k), you’ll still have the contribution, but you’ll pay tax on the full $50,000. That’s why Congress likes Roths. When people don’t take deductions, that’s the same thing as generating revenue.

“I think it’s a great thing. Tax rates are very low right now. Look what Congress is doing with all these provisions and the revenue provisions in the SECURE Act 2.0. There’s the Roth SEP IRA. We never had that before. And there’s the Roth SIMPLE IRA. Also, there’s Roth matching and catch-up contributions. They want Roth everywhere because they need to money. So, why not take advantage of that?” – Ed Slott

Relishing the Opportunities of the Roth

As Ed mentioned, there’s one provision where catch-up contributions can go to the Roth 401(k). If your wages from your company are more than $145,000, it must go to the Roth.

There’s plenty of opportunity in those provisions to dump more money in Roth. This is great to do when tax rates are low. And remember that tax rates are projected to be higher in the future. We know what tax rates will be for 2023, 2024, and 2025. But after 2025, tax rates are supposed to go back to 2017’s rates, which are higher. So, this is a perfect time to load up on Roths.

“The more you can get into any kind of Roth vehicle, the more you’re going to have a hedge against the uncertainty of future higher tax rates and what they can do to you in retirement. When I ask people in seminars if they think their tax rates will go up and only like half the people will raise their hands. They’re in this belief that in retirement that their tax rates will go down. Dean and I know that that rarely happens. Because if you don’t do anything, your RMDs can be higher than your best years working. Plus, you don’t have the deductions you had when you were working.” – Ed Slott

A Potential Tax Nightmare for Surviving Spouses

Here’s another thing that people don’t think about enough. When you’re doing a tax return married filing jointly, you need a lot more income to hit the brackets where the tax rates are higher. But as soon as one spouse passes away, that surviving spouse will automatically be in a higher tax bracket because the income likely won’t decline very much. You hit the higher tax brackets as a single taxpayer.

“That’s another reason why I love the Roth IRA. Not only do you get tax-free income, but you’re not going to get pushed up into a higher bracket. And Roth IRA income doesn’t cause any of your Social Security to become taxable.” – Dean Barber

Ed refers to this as the widow’s tax. He can’t stress enough how important it is to take advantage of lower tax rates in 2023, 2024, and 2025. While inflation has caused a lot of pain for a lot of people over the past year and a half, it’s also created tax planning opportunities. The brackets have been expanded while the rates stay the same. There’s more income for Roth conversions that can pass through the brackets.

Final Takes on Increased Contribution Limits

One of Ed and Dean’s favorite aspects of the SECURE Act 2.0 were the increased contribution limits that people can make to their retirement accounts. Anytime you can put more money away, you should at least consider doing so if you have disposable income. That was one of the overall themes of the SECURE Act 2.0.

Prior to the SECURE Act 2.0, if an employee was putting money into a Roth 401(k), the employer match was forced into the traditional part of the 401(k). That has now changed thanks to the SECURE Act 2.0. There’s even one provision where catch-up contributions, which are only available to people who are 60-63 years old, can go to your Roth 401(k). And if your income from your company is more than $145,000, it must go to the Roth.

While this can be an exciting opportunity for some people, we should note that it could take a while for employers to get this provision written into plan documents. Dean and Ed think it might not be until sometime in 2024. The Roth SEP and SIMPLE IRAs are currently effective, but there won’t likely be institutions that have the forms ready since the SECURE Act 2.0 just passed in late December.

IRS Regulations on the Way?

Since the SECURE Act 2.0 was passed at the last minute in 2022, we need to wait for the IRS to make regulations and give examples of how all these rules work. So many of the provisions have people still asking questions.

It’s not crystal clear following the passing of the SECURE Act 2.0, but it appears to Ed that the employer still puts the money in and gets a deduction for it. Because if a business is paying out, even if it’s going to a Roth, it should be a deductible item. But the employee gets the money into the Roth and doesn’t get a deduction like they would with the traditional 401(k). Again, the SECURE Act 2.0 was jammed through at the last minute in 2022, so we need to wait for regulations.

Paying Attention to Potential Penalty Exceptions

There’s also a big section in the SECURE Act 2.0 about penalty exceptions for taking money out early from an IRA or 401(k). The amounts that can be taken out without penalty are rather miniscule, but…

“They’re kind of small, but I get it. If it’s your only money, it should be a last resort. People should look at this. I’ve seen articles that it’s a great way to get your retirement savings before 59½. Well, what are you going to have for retirement then? It should be an absolute last resort. Even without the 10% penalty, you still must pay the tax. I think that’s what lost in that. That’s expensive money to fix a problem. That’s another big part of the SECURE Act 2.0. I hope you don’t have issues, but there are some safety hatches in the SECURE Act 2.0. But they happen at different levels and at different years.” – Ed Slott

What Dean and Ed Wish the SECURE Act 2.0 Would’ve Addressed

For all the good that the SECURE Act 2.0 did, it failed to address the most complex part of the SECURE Act. We’re talking about beneficiary designations—non-eligible designated beneficiaries, non-designated beneficiaries, and eligible designated beneficiaries.

“That really sticks in my side because that book was open. It could’ve taken one line to make it clear what the deal is with the 10-year rule. Are there RMDs in Years One through Nine or not? Congress could’ve easily said what it intended. The fact that Congress punted on that means that they’re OK with what IRS’s interpretation. So, that will probably dictate the rules. Congress had to know there were a lot of complaints. The law was ambiguous and written poorly.” – Ed Slott

With the SECURE Act, Congress made IRAs very complex and difficult to inherit. IRAs are now a lousy option for transferring wealth and estate planning. And the SECURE Act 2.0 did nothing to change that. Roths and life insurance are widely considered as better options.

“What Congress really did is incentivize us to do the planning we should have been doing all along. Even under the old rules, IRAs were complicated to get out to beneficiaries. But at least they had the Stretch IRA. With that gone, it’s lousy.” – Ed Slott

Penalties for Missed RMDs

Dean believes that they’re trying to make up for how complex they’ve made it to inherit IRAs by reducing the penalty if someone messes up an RMD on a beneficiary IRA. The penalties on missed RMDs has been another thing that grinds Ed’s gears.

“Don’t get me started on that. It was the harshest penalty in the retirement tax code. There was a 50% penalty for not taking an RMD. That’s how it was for decades. The SECURE Act 2.0 reduced that to 25% and then to 10% if you make up the missed distribution. The thing is that the 50% penalty was so harsh that the IRS was lenient in almost every case. I don’t recall anyone ever getting hit with that penalty. The IRS waived it in almost every case because they didn’t want to hit people with that draconian penalty. It was like if your dog ate your homework, they’d waive the 50% penalty. Now that it’s only 10%, are they going to be as lenient? I’d rather pay 50% of nothing than 10% of something, so we’ll see how that develops.” – Ed Slott

We’re Here to Help Further Clear Up the Confusion Surrounding the SECURE Act and SECURE Act 2.0

Make no mistake about it, the rules of the SECURE Act and SECURE Act 2.0 can be difficult to comprehend. Dean and the rest of our team at Modern Wealth Management are thankful to have a resource like Ed that can help us make sure that we understand everything there is to know about the SECURE Act and SECURE Act 2.0. That way, we can pass that knowledge on to you so you can make sound financial decisions.

As Ed and Dean explained, this information can only help you so much if you don’t have a financial plan. If you don’t have a financial plan, we have a couple of ways to help get you started with building one. One of those ways is through granting you access to our financial planning tool. This is the same tool that our CFP® Professionals use with our clients. You can use it from the comfort of your own home at no cost or obligation by clicking the “Start Planning” button below.

SECURE Act 2.0

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Having a Financial Plan in Place

It’s also critical to work with a team of financial professionals as you’re building and adjusting your plan. You can see how the rules we’ve talked about within the SECURE Act and SECURE Act 2.0 have continuously changed. We want to make sure you’re up to date on those rules and many other aspects of financial planning as you’re preparing for and going through retirement. So, if you have questions for us and/or need assistance with building your plan, let us know. You can schedule a 20-minute “ask anything” session or complimentary consultation with one of our CFP® Professionals. We can meet with you in person, by phone, or virtually.

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Understanding the SECURE Act 2.0 | Watch Guide

Introduction: 00:00
Impact of the “OG” SECURE Act: 01:45
What Is the SECURE Act 2.0: 04:54
Employer Roth Match: 11:04
Increased Limits to Retirement Accounts: 13:41
The Widow(er)’s Penalty: 15:07
Let’s Talk RMDs: 16:35
Roth Conversions: 19:00
Other Items in SECURE 2.0: 26:26
Conclusion: 30:54

Resources Mentioned in this Podcast

Investment advisory services offered through Modern Wealth Management, Inc., an SEC Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.