SECURE ACT 2.0 - What you need to know

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In the final days of 2022, Congress passed a new set of rules designed to make it easier to contribute to retirement plans and access those funds earmarked for retirement.

SECURE 2.0 builds upon its predecessor, the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was passed in 2019.

The sweeping legislation has dozens of significant provisions. To help see what changes may affect you, the major provisions of the new law are broken down into four sections below.

 

New Distribution Rules

The RMD age will rise to 73 in 2023. By far, one of the most critical changes was increasing the age at which owners of various retirement accounts MUST begin taking required minimum distributions (RMDs). Starting in 2033, RMDs must begin at age 75. If you turned age 72 before January 1, 2023, you must continue taking distributions under the prior rules. But if you are turning 72 in 2023 and have already scheduled your withdrawal, we may want to revisit your plan.1

Reduction in the RMD Excise Tax.  Previously a 50% excise tax was imposed if you missed taking an RMD by the deadline. Starting in 2023, if you miss an RMD for any reason, the penalty tax drops to 25%. If you fix the mistake promptly, the penalty may drop to 10%.2

New Accumulation Rules

401(k) and Employer-sponsored Plan Catch-Up Contributions. Starting January 1, 2025, employees aged 60 through 63 can make catch-up contributions equal to the greater of $10,000 (indexed annually for inflation) or 150% of the regular catch-up limit to workplace retirement plans. Also, the catch-up amount for people aged 50 and older in 2023 has increased to $7,500.  However, beginning in 2024, all catch-up contributions for those earning more than $145,000 in a particular year will have to be (taxable) Roth contributions.3 

Traditional and Roth Catch-Up Contributions. Currently, individuals aged 50 or older can make an additional catch-up contribution to a Traditional or Roth IRA up to $1,000 per year. In 2024, the $1,000 amount will be indexed for inflation on an annual basis.

Automatic Enrollment. Beginning in 2025, the Act requires employers in newly-established plans to enroll employees into workplace plans automatically at a 3% contribution rate. The contribution rate automatically increases by 1% per year until the employee is contributing at least 10%.  However, employees can choose to opt-out.4

Student Loan Matching. In 2024, companies can match employees’ student loan payments with retirement contributions. The rule change offers workers an opportunity to receive employer-funded retirement plan contributions while paying off their student loans.5

 

Revised Roth Rules

529 to a Roth. Starting in 2024, pending certain conditions, individuals can roll a 529 education savings plan into a Roth IRA. If your child gets a scholarship, goes to a less expensive school, or doesn't go to school, the money can get repositioned into a retirement account. Individuals will be able to roll over up to a total of $35,000 from 529 plans to a Roth IRA for the same beneficiary, provided 529 accounts have been held for at least 15 years. The annual rollover amounts will be subject to the annual Roth IRA contribution limit, but not the Roth IRA income limits. Any contributions to a 529 plan within the last 5 years (and the earnings on those contributions) are ineligible to be moved a Roth IRA.6

SIMPLE and SEP. From 2023 onward, employers can make Roth contributions to Savings Incentive Match Plans for Employees or Simplified Employee Pensions.7

Employer Matching Roth Contributions. Previously, employer matching contributions were required to be deposited into each employee’s pre-tax account in the retirement plan. The new legislation allows employer matches to the Roth portion of the account for electing employees.  Note, however, that electing a Roth match will subject the employee to taxation on the matching amount contributed to the plan by the employer.

Roth 401(k)s and Roth 403(b)s. The new legislation aligns the rules for Roth 401(k)s and Roth 403(b)s with Roth Individual Retirement Account (IRA) rules. Effective January 1, 2024, the legislation no longer requires minimum distributions from Roth Accounts in employer retirement plans.8

 

Act Highlights

Support for Small Businesses. Beginning January 1, 2023, the new law will increase the credit to help defray the administrative costs of setting up a retirement plan. The credit increases to 100% (from 50%) for businesses with less than 50 employees. By boosting this credit, lawmakers hope to remove one of the most significant barriers to small businesses offering a workplace plan.9

Qualified Charitable Donations (QCD). From 2023 onward, QCD donations will adjust for inflation. The limit applies on an individual basis, so for a married couple, each person who is at least 70½ years old can make a QCD as long as it remains under the limit (currently $100,000 per taxpayer per year).9  Individuals will also be able to make a one-time distribution of up to $50,000 to a charitable remainder trust or charitable gift annuity. 10

New Exceptions to the 10% early-withdrawal penalty. Generally, distributions from a retirement savings account before age 59½ are subject to an early withdrawal penalty unless an exception applies. The new legislation provides several new exceptions to the penalty, including terminal illness, domestic abuse, payment of long-term care insurance premiums, to recover from a federally declared disaster area, and an emergency personal expense.  

Retirement Savings Lost and Found. The Act intends to establish a searchable database for lost 401(k) plan accounts within two years of the legislation’s enactment.

Saver’s Credit transitioning to a Saver’s Match. Currently, low- and moderate-income taxpayers receive a credit up to $1,000 for retirement savings. Starting in 2027, the credit transitions into a match that will be contributed to the individual’s retirement account.

Other Highlights

There are several additional provisions in the new SECURE Act 2.0 legislation. A few examples include providing credits for enrolling military spouses immediately in employer plans, expansion of lifetime income products in retirement plans, improved retirement plan coverage for part-time workers, S-Corporation ESOP opportunities, and several other provisions.

The provisions listed above summarize only a portion of the Secure Act 2.0. The Gilbert & Cook Team looks forward to analyzing the impact the changes have on your financial situation to best understand how to assist you in Living a Life of Abundance. 

Also, retirement rules can change without notice, and there is no guarantee that the treatment of specific rules will remain the same. This article intends to give you a broad overview of SECURE 2.0. It is not intended as a substitute for real-life advice. If changes are appropriate, we will outline an approach and work with your tax and legal professionals, if applicable.

Sincerely,

Gilbert & Cook Team

 

 

The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.
Citations:
1. Fidelity.com, December 23, 2022
2. Fidelity.com, December 22, 2022
3. Fidelity.com, December 22, 2022
4. Paychex.com, December 30, 2022
5. PlanSponsor.com, December 27, 2022
6. CNBC.com, December 23, 2022
7. Forbes.com, January 5, 2023
8. Forbes.com, January 5, 2023
9. Paychex.com, December 30, 2022
10. FidelityCharitable.org, December 29, 2022

Confidence in a Crisis

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Below is a summary of our recent webinar, "Confidence in a Crisis", originally aired on May 5th, 2020. The Gilbert & Cook team shares insight on the current economic state and explore some financial and investment opportunities. Even though we are in uncertain times, we believe that you still have choices and we believe in finding confidence in those opportunities. Please know that every situation is unique and we encourage you to speak with your Advisor regarding your individual situation. 

The Corona-virus Aid, Relief and Economic Security (CARES) Act

Recently the $2.2 trillion CARES Act was signed into law in hopes of helping those most impacted by the COVID-19 pandemic. This brings far-reaching implications for both families and businesses, as well as many opportunities and planning strategies to consider.

Increased Charitable Deductions:

As you might expect, charities are in great need. Charitable donations of cash up to $300 may be as an "above-the-line" deduction when determining your Adjusted Gross Income ("AGI") in 2020. The Act also provides for higher limits (in calendar year 2020) for cash contributions by taxpayers who itemize deductions.

Individual taxpayers will be allowed to deduct cash donations up to 100% of their 2020 AGI - that is up from the limit of 60% in previous (and subsequent) tax years. Corporate taxpayers will by allowed to deduct up to 25% of their taxable income in 2020 - up from 10% in previous years. One caveat here is that the increased limit does not apply to donations to private foundations or donor advised funds - AND to use the increased limits your contributions must be made in cash, directly to the charity.

Qualified Charitable Distributions

Another popular strategy that has often been considered is a Qualified Charitable Distribution ("QCD"). This year, however, you may need to rethink that strategy. Due to the unlimited charitable deduction allowed for cash gifts, IRA holders can utilize cash distributions from their IRAs and give the proceeds to their favorite charity. If you are itemizing deductions for income tax purposes, you can deduct this charitable distribution (subject to reductions in total itemized deduction based on your level of AGI). This may result in a much larger deduction available than in years past, (which was limited to $100,000 (QCDs from IRA accounts)). This may be the only year this strategy can be utilized. We encourage you to talk to your tax preparer and Advisor to determine what strategy is right for you.

 Retirement Plan Distributions

Those who have inherited either 401k or IRA accounts in the past will not be required to take distributions in 2020 under the CARES Act. Additionally, if you would have normally had a Required Minimum Distribution ("RMD") from a retirement account in 2020, those have also been suspended for 2020. RMDs are the distributions that you are required to take from your qualified retirement accounts and IRAs at age 72 (formerly age 70 1/2 prior to the SECURE Act passed at the end of 2019). Many people use these retirement plan distributions for their day-t0-day cashflow, while others have just had to deal with the required distributions as part of their annual personal tax planning. Again, every situation is different so please consult with a qualified tax professional if you have questions about your specific tax situation.

Prior to the CARES Act, if you were under the age of 59½, typically you paid a 10% penalty to take a withdrawal from a retirement account. In calendar year 2020, however, if you are under 59½ AND affected by COVID-19 (specific requirements in the Act must be met), those withdrawal penalties are waived for distributions up to $100,000 (or 100% of your account, if less). Keep in mind that you will still be required to pay income tax on the withdrawal amount, just the 10% early withdrawal penalty is waived. Note: There are also provisions that the withdrawals will not be taxed IF the amounts are returned to the retirement account(s) within specific time-frames. Again, consult with your tax advisor as it relates to your personal tax and financial picture. 

Timely Tax & Investment Strategies

Tax Loss Harvesting

You may have heard the saying, “when the market is down, you don’t lose any money until you sell the investment and recognize the loss.” So why would you want to sell at a loss?

We are NOT recommending that investors get out of the market. We always challenge investors to think about investment strategies that may be beneficial for their overall individual tax and financial situations.

Tax Loss Harvesting occurs when selling a security at a price less than you paid for it in order to use the recognized loss to offset other recognized gains and/or ordinary income for the current or future tax year. Harvested capital losses can be used to offset capital gains later in the year or possibly decrease your other taxable income (up to $3,000 per year). Any net capital losses (over the $3,000 annual maximum that can be used against ordinary income) can be carried forward to future years. It is important to 1) consider the financial plan you and your Advisor have put into place; 2) review your specific portfolio; and 3) see if there are some losses that it makes sense to harvest. Once again, we encourage you to talk with your Advisor and tax professional to see what is best for you.  

Roth IRA Conversions

What is a Roth Conversion? Basically, it is when you take money out of your traditional IRA and move it into a Roth IRA. In doing that, you are trading tax deferred dollars inside your traditional IRA for completely tax-free growth and tax-free withdrawals in the future in a Roth IRA. As the original account owner, you are not required to take RMDs from Roth IRAs, and the Roth IRA is a great legacy asset to leave for the next generation(s).

There are tax considerations to keep in mind, though. You DO have to pay income tax on the value of the assets that you convert from “traditional” to Roth. Although Roth IRA contributions do not provide immediate tax benefits like traditional IRAs, there is more flexibility in the future when it comes to withdrawing the funds and planning for taxes. This could be an opportune time to take advantage of this simple tax strategy (the Roth Conversion). Be sure, however, to consult with your tax advisor to determine your specific income tax implications.

Frontloading Contributions

If you are a long-term investor, there can be some good opportunities when the market is down. We have encouraged many of our clients to make their annual 401(k) or IRA contributions while the market is down (thereby providing an opportunity to buy into portfolios at a lower cost).

How to Keep Score During COVID-19

As we started into the economic understanding of this pandemic just two months ago, the world had three big, real-time scoreboard numbers that everyone was watching: 1) the number of new COVID-19 cases; 2) initial unemployment claims; and 3) the stock market. And ALL the numbers were bad! We are still getting constant doses of “Breaking News” and the latest stock market fluctuations. Since our March article, “What Turns a Healthcare Crisis into a Financial Crisis”, we’ve seen the following play out: forced shelter in place, forced business shutdowns, business revenue loss, job loss, economic contraction, debt and rent delinquencies, state and local governments strained, etc.

So, let’s call it what it is, the US is in the midst of a recession. We were due, after the longest run in history of uninterrupted economic expansion. Recessions, as a matter of course, are normal parts of the economic cycle. However, we couldn’t have predicted a recession due to a forced closure of vast parts of the economy due to a global pandemic. So how bad is this recession compared to others?

Gross Domestic Product (GCP)

In the 1st Quarter of 2020, it was reported that US goods and services were down -1.2%. That of course is -4.8% on an annualized basis – which is the reported number for the headlines. Estimates now for the 2nd quarter – April, May, June – are worse yet. Depending on how quickly the economy reopens, probably down somewhere between 20 – 30% on an annualized basis. That would mean that in the first two quarters of the year, the GDP would have contracted somewhere between 6-9%.

To put that into perspective, the entire 2008-2009 contraction was -4%. And it took six quarters to play out. The first half of 2020 will be a number that, most likely, far surpasses that. From a single quarter perspective, if we hit the 6-9% contraction level in the second quarter, we are basically retracing our steps to 2016 GDP levels. 

Bear Market Drawdown and Recovery

From the highpoint on February 19th, to down -34% on March 23rd took 23 trading days. Let’s look at how quickly, and compressed, that market recovered so far. On May 5th, we are up more than 28% from that bottom - a very compressed recovery time of only six weeks. So, what happened? The government has stepped in and provided various supports for our economy, including bond market backstops and the CARES Act as mentioned above.

The US Stock Market is a regenerating, rejuvenating mechanism. After a financial crisis, we find that opportunities emerge, and new ideas replace the old. The economic world is always evolving and adapting, and the stock market is the best way to participate in that. As investors, we have to be focused on the long-term nature of the market. If the recovery takes longer than expected, the markets will likely react negatively. We will need to be patient in terms of our expectations for stocks and GDP output. 

Resetting Expectations

As we look at our current economic situation, we must reset our future expectations upward. 2020 saw Gilbert & Cook start the year with relatively conservative stock and bond expectations. We were at historic highs in the stock market and historic lows in interest rates. We will admit, we did not anticipate a pandemic and recession in 2020. But given that, all stock categories and debt categories (except US Treasuries) now have better long-term expectations from where we sit today. In this pullback, we do hit a reset button to some degree. In periods of crisis and downside like this, it is not the correct time to stray from the long-term financial plan we have put into place.

Keeping Score

Initial jobless claims are a score-keeping mechanism for the economic downtown and recovery. Since the shutdown at the beginning of the COVID-19 crisis, in the last six weeks we’ve seen 30 million people file for initial unemployment claims at their state's unemployment office.

What we truly believe here is that those jobs are not gone – they are in hibernation. Out of isolation – when safe, those workers will return to their jobs and businesses will once again be back near full-capacity. Part of the government stimulus program increased weekly unemployment benefits. In most states, the additional stimulus makes the average replacement wage equal or greater than 100%. Therefore, the impact to individual households will be much more tolerable than in previous economic crises. We are more focused at this time on the number of continuing unemployment claims. In just the last 2 weeks, we saw more workers going back to work than the number of new claims filed.

Risks

The sole villain in this drama is the Coronavirus itself. If you eliminate that enemy, you see the markets react very positively. The risks are:

  • A virus relapse causing the economic resuscitation taking longer than anticipated. How much uncertainty will people tolerate? As we go back to work, are we willing to trade possible loss of life? Will the country go back to work, or will there be a fear of further contamination? A recovery is dependent on bringing jobs and consumers back out of hibernation and reinvigorate the economy as quickly and as safely as possible.

  • Dividend Payouts – Certain providers in energy, retail, and real estate sectors are cutting their dividend payouts. 

Opportunities

Know yourself as an investor. The stock market will reinvent and regenerate itself. Lean into your Gilbert & Cook team to help you know your course and follow your plan.

We believe that American ingenuity and resilience will persevere. The world health and science communities are smarter and better funded than at any time in history. Ever.

We believe the debate is around when the virus will end, not if. And that COVID-19 is the only enemy. If the virus is contained then all those other issues that we are talking about will begin to dissipate.

We believe that life after the virus will be different. In the same way that 9/11 changed our way of life forever, this pandemic may also. But we will figure it out. And every day, all across the world - people get up, they go to work, and they make the lives of their families and communities better. 

Be safe & healthy. Please reach out to your Gilbert & Cook family if there is anything that you need.

Disclosure: This event is for informational purposes only. Gilbert & Cook, Inc. does not offer tax or legal advice. You should consult with an attorney for legal advice and a qualified tax professional for tax advice. Gilbert & Cook, Inc. is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Gilbert & Cook, Inc. and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Gilbert & Cook, Inc. unless a client service agreement is in place.

4 Tax Changes You Should Know About for 2020

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By: Al Ryerson

It’s a new year, and with it comes new tax guidelines. At the start of the new decade, the IRS has made adjustments to a number of points, ranging from the amount of money you can contribute to your 401(k) retirement plan to the income tax brackets that help you determine your tax rate.

Here are a few changes you should know about for 2020:

STANDARD DEDUCTION

When filing your federal tax return, you may either take the standard deduction or itemize deductions on your tax return in order to reduce your taxable income. In 2020 the standard deduction has risen to $12,400 for single tax filers, $24,800 for married couples filing jointly and $18,650 for heads of households.

Remember, although using the standard deduction is easier than itemizing, it’s worth seeing if itemizing will save you money. Taking the standard deduction means you won’t be deducting home mortgage interest or other popular tax deductions such as medical expenses or charitable donations. Work with your tax preparer to identify what itemized expenses may qualify. If your standard deduction is more than your itemized deductions, it might be worth it to take the standard deduction and save some time.

Note: Although it might make sense to take the standard deduction for federal tax purposes, it may still be appropriate to itemize your deductions for state tax purposes.

CONTRIBUTIONS TO RETIREMENT ACCOUNTS

The IRS has raised the employee contribution limit for 401(k) and 403(b) plans to $19,500 – an increase of $500 from 2019. Savers age 50 and older can contribute an additional $6,500 as part of their “catch-up” contributions, up from $6,000 in 2019.

Contribution limits for IRA & Roth IRA accounts remain the same at $6,000 (plus an additional $1,000 for individuals age 50 and over). 

HEALTH SAVINGS ACCOUNTS

If you are eligible for an HSA (Health Savings Account) you have the opportunity to put aside pre-tax, or tax-deductible, dollars which can be withdrawn tax-free to cover qualified health expenses.

Health Savings Accounts are a tax-advantaged account for which the contribution limits generally increase year after year with inflation. This year, the 2020 limits have increased to $3,550 for individual coverage, and $7,100 for accounts covering a family plan.

HSA bonus – the monies in your account remain available for you from year-to-year. They are not subject to annual forfeiture like a Flexible Spending Account (FSA).

GIFT & ESTATE TAX

As you may remember, in 2019 the Tax Cuts & Jobs Act nearly doubled the amount of assets allowed for decedents to gift over their lifetime - and shield from federal estate and gift taxes. In 2020 the lifetime gift and estate tax exemption increased slightly to $11.58 million per individual. An individual can leave $11.58 million to heirs and pay no federal estate or gift tax, while a married couple will be allowed to gift $23.16 million.

The annual gift exclusion – the amount you can gift to another person without it counting against your lifetime exemption – remains at $15,000 annually. Remember - a husband and wife can each make $15,000 gifts, doubling the impact. Separately, you can make unlimited payments to medical and tuition expenses on behalf of others if paid directly to the institutions.

Disclosure: Gilbert & Cook, Inc. does not offer tax or legal advice. You should consult with an attorney for legal advice and a qualified tax professional for tax advice.

About the Author

Al Ryerson - Outdoor.jpg

Al Ryerson, ASA
Lead Strategist

As a Lead Strategist at Gilbert & Cook, Al focuses on the complex business and personal financial inter-relationships of our clients.

Contact Al Ryerson: aryerson@gilbertcook.com

2017 Key Financial Data

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Open the full Key Financial Data report for 2017. This report includes important information regarding the 2017 Tax Rate Schedule, standard deductions and exemptions, tax rates on capital gains and qualified dividends, exemption amounts for Alternative Minimum Tax, gift and estate tax exclusions and credits, education credits and deductions and tax deadlines.