Decoding Key Provisions in the SECURE 2.0 Act for Advisors and Their Clients

The SECURE 2.0 Act was signed into law as part of the Consolidated Appropriations Act, 2023 at the end of last year. Although most of the provisions within the act relate to retirement plans, several items could impact estate, charitable, education, and disability planning to varying degrees. At face value, individuals might expect to benefit from opportunities to increase their wealth or lower their tax bill. But is there more than meets the eye?

Here, we decode some of these key provisions in the SECURE 2.0 Act for advisors and their clients.

RMDs to Begin at Age 73, with Eventual Increase to 75 by 2033

Retirement account owners used to have to begin taking required minimum distributions (RMDs) in the year they turned age 70½. That age increased to 72 for the 2020 tax year with the passage of the original SECURE Act in 2019. This new bill pushes the age to 73 for the next decade and to 75 thereafter.

What’s the impact? For account owners, the ability to leave funds in their accounts for a longer period means the potential for greater tax-deferred appreciation. But for beneficiaries of those accounts, the result may not be as welcome.

Most nonspouse beneficiaries already faced an accelerated time frame for withdrawing funds from an inherited IRA (10 years vs. their life expectancy) with the 2019 act. Now, given the delayed start date for RMDs, beneficiaries will potentially receive a larger inheritance of tax-deferred funds than they would have before the rules changed, resulting in a heftier tax bill when it comes time to withdraw funds.

Retirees can choose to take distributions before age 73, but they’re more likely to leave the money where it is until the government says they have to take it out. The end result will be more revenue for the government and less total value in the hands of estate beneficiaries.

QCDs Indexed for Inflation Annually

Since 2015, IRA owners have been able to transfer up to $100,000 each year to charity in the form of a qualified charitable distribution (QCD). With SECURE 2.0, this amount will now be indexed for inflation in $1,000 increments, so the ability to make tax-free charitable gifts will only improve over time.

What’s the impact? It’s a positive development, though you may need to educate your clients about the difference between QCDs and RMDs. Many clients may believe that QCDs are tied to the RMD age. That’s understandable since a QCD can be used to satisfy an RMD up to the $100,000 limit. But while the age of eligibility for a QCD, 70½, was originally the same as the RMD age, the RMD age has since increased. So, your clients can choose to make a QCD even if they don’t have to take RMDs yet.

Keep in mind that QCDs cannot be made from employer-sponsored retirement plans. Therefore, charitably inclined individuals who still have 401(k)s at age 70½ may want to consider rolling their plans into an IRA. This will allow them to draw down large retirement plan balances ahead of the first RMD calculation and potentially save on taxes during distribution years.

QCDs Eligible to Be Deposited in “Split-Interest” Entities

The SECURE 2.0 Act specifies that a QCD may be made to a split-interest entity (e.g., a charitable remainder trust [CRT] or charitable gift annuity [CGA]). The transaction is limited to a onetime transfer of $50,000, and the entity can be funded only with the QCD.

What’s the impact? While being able to transfer a QCD to a CRT or CGA sounds enticing—you receive a partial tax reduction and an income stream while ultimately benefiting a charity—a dive into the details of this provision raises questions as to its benefits.

Given that an individual can transfer only $50,000 and cannot funnel additional assets into the entity, the tax-reduction benefits are likely minimal. Even if a married couple could each transfer $50,000 from their respective accounts to the same entity, as the language of the bill seems to suggest, the benefits of a total lifetime donation of $100,000 would be relatively minimal.

In addition, distributions from the split-interest entity to the income beneficiary will be taxed as ordinary income (the charitable beneficiary will receive benefits tax free).

Combined with the high administrative costs required to set up and maintain the entity, these aspects could render this type of maneuver imprudent.

Unused Funds in a 529 Plan Permitted to Be Rolled into a Roth IRA

Under SECURE 2.0, unused funds in a 529 college savings plan, up to a lifetime limit of $35,000, may be rolled into a Roth IRA. The 529 plan must have been open for at least 15 years to be eligible, and no funds contributed within the past 5 years may be rolled over.

What’s the impact? This is a potential game-changer, as the confusion over how to handle unused 529 funds is a persistent problem, specifically for parents of children who do not finish school or who receive sufficient funding from scholarships.

Given the time frame restrictions, it’s important to advise parents to open and fund 529 plans for their children as early as possible. An account opened in a child’s toddler years could be eligible for rollover right after the child finishes college (assuming leftover funds).

Age of Disability Onset Raised to 46 for ABLE Account Eligibility

ABLE accounts, also known as 529A accounts, are tax-deferred accounts that allow disabled individuals to save for expenses related to their disability. With the new legislation, which raises the age at which disability must occur from 26 to 46 effective in 2026, these individuals will have a greater ability to supplement retirement savings.

What’s the impact? The benefit is rather obvious, as those who suffer disabilities at older ages (and those who want to support those individuals) will have the opportunity to protect and grow funds for the disabled person’s benefit.

We may also see an increase in the number of state-sponsored ABLE plans available to disabled individuals as a result of this change.

More Than Meets the Eye

As with any new legislation, it’s important to look beyond the headlines to better understand how key provisions could impact your clients’ plans for their future. While these developments appear to be positive overall, advisors and their clients would be wise to examine the details to determine if a particular strategy is appropriate for their financial plan.

Commonwealth Financial Network® does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.