Retirement Planning Changes – Lot’s of Good News!

As part of the 2023 Consolidated Appropriations Act, the SECURE (Setting Every Community Up for Retirement Enhancement) Act 2.0 was signed into law on December 29, 2022.  The purpose of the act is to provide incentives for retirement savings.  It includes dozens of new provisions impacting businesses and individual retirement savers.

A great feature of many of these provisions is the increased flexibility with retirement funds.  One of our primary purposes in financial planning is to ensure that you have options in the future.  Many of these provisions make it easier to keep your options open.

 

RMDs Delayed until age 75

Required Minimum Distributions, RMDs, the distributions that you are required to take from qualified retirement plans when you reach the specified age, are now delayed until age 75 if you were born in 1960 or later.   Previously, under the first SECURE Act, RMDs were required at age 72. This delay allows your qualified retirement funds to potentially (hopefully) grow for a longer period of time without the headwinds of an annual income tax bill on those funds.

 

New Roth options

Roth contributions to retirement accounts are after-tax contributions, meaning that you do not take a tax deduction for them in the year that you contribute the funds.  However, the funds that you withdraw from your Roth account in retirement are not taxable (subject to some qualifying rules).  This means that the growth in those accounts is never subject to federal income tax*.

There are a few ways to make Roth contributions to your retirement savings including Roth IRAs, Roth 401k and Roth 457 accounts as examples.  However, not all employer plans include Roth accounts.  And, many people cannot contribute directly to Roth IRA accounts because their income is over the limit.  Plus, the limit for IRA contributions is pretty low to be the sole source of retirement savings.

SECURE Act 2.0 opens up additional options for retirement savers to build Roth accounts.  First, the act allows employer matching contributions to retirement plans to be designated to Roth accounts.  Prior to the SECURE Act 2.0 all employer contributions were required to be pre-tax contributions. And, for those who have SEP-IRAs or SIMPLE IRAs, Roth contributions are now permitted to these accounts as well.

One of the strange features of qualified employer plans that included a Roth component prior to SECURE Act 2.0 is that RMDs were required from the Roth component of those plans even though RMDs were not required from Roth IRAs.  One of the provisions of the new act eliminates the requirement to take RMDs from your employer plan Roth accounts.

 

Not all provisions of the act are effective right away.  And, these changes came about quickly so plan providers and custodians will need some time to set up their systems to accommodate these changes.  Also, these new provisions allow for this increased flexibility – they do not require that employers offer these new features.  As an example, even before the first SECURE act, relatively few employers offered Roth components in their 401k plans despite the fact that they were legally permitted.

 

Usual Caveats

While we appreciate the increased flexibility the SECURE Act 2.0 provides, there are still the usual caveats.  Everyone’s situation is unique and should be evaluated individually.  Just like this tax law introduced changes, a future tax law could introduce other changes.  Any tax law changes mean that your plan should be revisited.

*According to the current tax treatment of qualified withdrawals from Roth accounts.

 

What’s next for you?

So, your son or daughter has finished up their applications.  You have the list of schools divided up into top choices, middle choices and safety schools.  You’re making plans for the holidays and soon you’ll be making plans for graduation. 

Looking back, you’ve attended countless games, recitals and performances and scheduled around practices and rehearsals for years.  You’ve helped them study, driven to innumerable places, and navigated so many moody nights and thorny social issues.  And soon, they’re off to college.

So, let me ask you this – what’s next for you?

For most parents, their children become their purpose.  Your focus is almost solely on raising compassionate, well-adjusted, contributing members of society.  And, if you’re staring at the college process right now, there’s a good chance that you’ve done a good job at doing what you set out to do.  But, if you’re going through the college process right now, life is soon going to be different than it has been for the last 18 or so years.  This is why I ask, what’s next for you?

Life does not end when you send your kids off to school.  It’s simply time to move on to the next stage in your life – just like the kids are doing.  That’s not to say you won’t worry and that they won’t call home when they have something to celebrate or they’re encountering new life lessons.  But they’re also finding new freedom and you can do the same.

Try this – and if you do this all the way – it can be a challenge.

Picture a vacation where you spend an entire week doing just what you love to do.  Not with the kids and don’t put any financial constraints on it – just you doing what you love to do. Think about doing what you love without stopping to drive someone somewhere, or to attend a game or a conference or an open house.  And without being required to go to work at your current job.  What would that look like?  What would you be doing each day?  Where would you be?  Would it make a difference what time of year it was?  What if it was longer than a week?  Would it still look the same?

When you are caught up in the day to day life of raising a family, many decisions are put on autopilot.  There are just so many choices to be made that you need autopilot just to keep your sanity.  But, in doing that, you keep going to work to get the paycheck to do the other things that are also on autopilot.  You get in a mode of believing that you must do A so that you can do B so that you can get to C on time.  And let’s face it – routines are a big part of what gets us through everyday life. 

But now the routine is being upended anyway.  Let’s step back and look at what comes next because you want to make it happen – not because it happens to you.  Don’t worry about what the standard path is.  No one says you must follow standard path – except maybe you.  Most people continue on the path that they’re on because it’s easier to just keep going.  That doesn’t mean it’s the only path or the best path – it just means that they have a lot of company. 

I’m not saying that you can definitely go out tomorrow and live the exact life you pictured for your vacation.  But, imagine that you go out tomorrow and have a new purpose.  Your new purpose is building that life that you pictured. Rather than simply going to work each day so that you can get to the day that you retire, you start each day with a purpose that is specific to you.  Imagine how much easier it is to greet each day knowing that you’re not just working, you’re working toward YOUR goals. Imagine knowing that the energy you expend each day is getting you closer to where YOU want to be.  The time is going to pass anyway – spend it building the life you envision.

Once you have had the courage to design your ideal life, call me.  Let’s talk about what’s possible – without the constraints that you put on yourself.  Let’s see what steps you can take once you give yourself permission to build your ideal life.

 

P.S. You’ll be setting a great role model for your kids too.