Recently, a proposed expansion of the Secure Act known as Secure Act 2.0 was introduced in Congress. This expansion includes additional provisions that aim to further improve retirement security and address other financial issues faced by Americans, such as healthcare and Social Security.
In this episode, we'll take a closer look at the key changes in Secure Act 2.0 and explore the potential benefits and drawbacks of these changes.
As discussed in the episode, here is a link to the Michael Kitces article on Secure Act 2.0:
Secure Act 2.0: Detailed Breakdown Of Key Tax Opportunities (kitces.com)
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This podcast is for informational purposes only. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice. StatonWalsh and Founder’s Financial Securities do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.
Ryan Staton is an Investment Advisor of, and securities offered through, Founders Financial Securities, LLCMember FINRA/SIPC and Registered Investment Advisor.
Devin Walsh is an Investment Advisor of, and securities offered through, Founders Financial Securities, LLCMember FINRA/SIPC and Registered Investment Advisor.
Check the background of this firm on http://brokercheck.finra.org/
Hello everyone. Welcome to Wealth Builders presented by StatonWalsh. We kick off 2023 discussing the recently passed secure Act 2.0. In this episode, we review the establishment of the original Secure Act and how this new legislation expands the law on the areas of retirement savings. The second version of the ACT also brings many new financial planning opportunities in 2023 and beyond. If you find this content valuable, be sure to like and subscribe. We hope you enjoy the show.Speaker 2:
This is Wealth Builders presented by StatonWalsh, a show designed to pull back the curtain of the financial industry and bring true transparency to the forefront of conversation on the show. We cover topics like financial education, current events, and interview business leaders and industry experts with the ultimate goal of helping listeners discover their own path to financial independence.Speaker 3:
Hello everyone and welcome to Wealth Builders. Happy New Year, Ryan. It's 2023. It's hard to believe it is. It is hard to believe. And we are starting to say , talking about the Secure Act 2.0. I mean, I feel like one pointer just came out. People don't even know what that is, but here's 2.0. So let's talk about like what it is and what, what does it mean to individuals and businesses and so can you give us like a little brief overview of what the Secure Act is and like what should we should be lookingSpeaker 1:
For? Yeah, so yeah, like you mentioned, if you're not familiar with what the Secure Act is in general in 2019, the Setting Every Community Up for Retirement Enhancement Act, which is a , the government loves their acronyms, but it was a law that was passed and, and I think ultimately the goal was to help improve retirement savings for Americans. Over the past 40 plus years, companies have moved away from pensions and guaranteed retirement vehicles and, and shifted into this world of now the employees are responsible for saving for their own retirement. And the , the inception of 401ks and all the other different types of accounts that have come to fruition over the years, I think have made retirement saving just more complicated for most Americans. And so the idea was that this new act would be responsible for helping improve that. And so the original, the 1.0 in 2019 created different types of retirement plans available for employers, created some tax credits to incentivize smaller employers to start offering plans to their employees. It also aimed to help people who were working later into, you know , working into later years . So RMDs are required, minimum distributions used to be , uh, required at age 70 and a half . Now they're age 72 with the new rule. We'll kind of unpack that, how that gets pushed back over time. But basically to sum it all up, secure Act 1.0 was ultimately designed to help small businesses and their employees save for retirement. There's been different iterations of this rule and how they're trying to create more retirement savings for Americans. And some have worked, some have not. And so 2.0 is really just an expansion of that.Speaker 3:
So let's talk about some of the things that it does, you know, like the context and reason behind this cuz as we know, 2019, three years ago now we're at 2.0. So, you know , we've talked about the RMDs. So what are some of the other, you know, give us some more context and some of the things that are actually gonna affect not only businesses, but individuals, you know, like for example, RMDs, you know, is going back, you know, you can contribute to traditional 401K and IRA further. So let's talk about that a little bit, Ryan.Speaker 1:
Yeah, so RMDs are a big one. That's one that will start to take effect immediately and then phase in over time. And so I mentioned that the old rules were 70 and a half the secure act, the first iteration expanded that to age 72. Now what's going to happen is they're gonna continue to push the R M D age back and eventually land on age 75. The reason they did that, I think many Americans were either still working into their seventies or maybe were taking other forms of retirement income and trying to delay their collection of, you know, 401K or IRA assets. So, you know, what this law has done has allowed people more flexibility for sure, and and especially in terms of taxable accounts or 401ks that are gonna be taxed as income in retirement. But there are always gonna be trade-offs, right? I mean, ultimately the government is saying that we'll allow you to keep your money in the account and accumulate for more years, but we're gonna take from somewhere else, or we're gonna do something somewhere else to ensure that we still get our revenues from these types of accounts. And so , um, one of the other major changes of this law was that if someone passed away with a retirement account, instead of the ability to take it out incrementally for the rest of the beneficiary's life, any non-spouse beneficiary you are now required to distribute that account over the course of 10 years, which accelerates the collection of that tax revenue in comparison to a lifetime stretch scenario, which was what the foreign rule was. So that, you know, that's one trade off . I think, you know, talking about the positives of this, the tax credits to employers who don't currently offer 401K plans or retirement plans are expanded. And there's also an introduction to help young people that have student loan debt burdens to still save for retirement. So there's some special credits and offsets that businesses can provide to their employees that traditionally have been forced to say, I either wanna make more student loan payments and not save for retirement until later. Now they have the ability to do both because employers have a form of a match that they can provide based on the amount of money that employees are paying towards student loans.Speaker 3:
And I know one of the main things that we do in our business, Ryan, is you know, we manage, you know, corporate retirement plans like 401ks and we always hear about meps . Mm-hmm . <affirmative> , you know, it's a hot topic in the world, kind of bringing a bunch of small plans together, get better pricing. So explain us to what MEP is, what that means, some of that in this new secure act and how it's gonna help some of these small businesses, you know, plan, help their employees plan for retirement, helps them in recruiting, probably , um, you know, bringing on new employees that might have been in cost better before it might not be able to get the, the plan as cheap as a company might have a 10 plus million plan. So let's talk about that a little bit more for the benefits of these mapps , which is the multiple employer plan. Yeah . Inside of the SecureSpeaker 1:
Act. Another lovely acronym.Speaker 3:
How many are , how many are gonna do , how many acronyms you think? 5, 10, 20? We'llSpeaker 1:
Have to put a key in the show notes so that everyone understands what all these acronyms mean. But yeah, as you mentioned, a MEP is a multiple employer plan. And so these were created as a result of many small businesses stating that 401ks were just too expensive to provide. And so through various tax credits and, and other things, the Secure Act really aimed to open that world up. Meps were born out of the idea that multiple employers could now pull their plan together. And so essentially take the assets of 10, 15, 20 up to 50 even, you know, potentially more, allow them to all participate in a retirement plan but get pulled pricing based on the value of everyone's plan together. And the idea behind this is for a small plan , uh, traditionally in the pricing of a 401k , small plans are more expensive, less assets to charge against. Now this gives those plans the ability to launch and get access to a lower entry point from a fee perspective. And so in theory, you know, they're, they're a a great tool that can be used if someone's looking to offer a plan, kind of a plug in place scenario where you have similar PR plan provisions as others, you know, we can kind of plug into that, have a master account registration, still have, you know, our own individual 401K plan of sorts, but get better pricing like we are a larger organization. So I think that's the ultimate benefit is potential cost savings. Doesn't mean that maps are perfect for every business and every small small company. Uh, there are still other types of retirement plans out there that could be more cost effective or could make sense. So it's still a case by case basis, but I de I definitely think the rules were designed to open the door for companies that wanted a traditional 401K plan but thought maybe they couldn't afford it or they thought the fees were too high to now get access to something.Speaker 3:
So how can, how will these changes impact individual and business ? Like what's the timelines like , is it January 1st, 2023? Great, it all comes to effect . Is that true? Is it , is it coming out over a period of time? Yeah . So how will these changes impact both individual and businesses? Cause a lot of this stuff is critical. Yeah . You know, we're talking about individuals, you know, the RMD rules , you know, be on , contribute their retirement plans longer. And these businesses, these tax credits, like is this stuff people take advantage of now? Is it being rolled out over 6, 12, 13, 24, whatever months it may be? What's that timeline look like?Speaker 1:
Yeah, so I , a lot of these features will actually take place between now and, you know, 2028 and some beyond. So there are some phase phase ins or you know, the , some feathering in of sorts of different provisions. But I think long term , you know, if we just wanna cover this at a high level and we, we could maybe even take some time at a later day to, to pick apart this thing really in detail. But at a high level, the primary changes are going to be access and availability to retirement plans, provisions like auto enrollment that will incentivize and motivate employees to start participating in plans. Um, you're also gonna see things like changes in potential changes in social security and Medicare and some of those provisions that'll be cost savings or potential changes and , and payroll tax caps, again, probably highly technical items that we don't need to unpack today, but one of the biggest things will be incentivizing employees to save more money for their own retirement. Not at the expense of, you know, paying for healthcare or paying for student loans or essentially eliminating the idea that there's a choice that needs to be made here. You need to save or pay for one versus the other. Now this, you know, this new law is designed to give options and allow people the ability to do multiple things at once, which I think is , is beneficial. I think there's still more, it probably adds a , a touch more complexity to this scenario now, which any legislation tends to do, especially new legislation. But I think that at its core it's really supposed to be designed for people who are, are trying to give themselves a more secure retirement. SoSpeaker 3:
What , are there any disadvantages? A lot of times things come out, people might not trust the government or is like what does , are there any disadvantages to any part of the Secure Act 2.0? I know, I know one of the things we talk a lot about is auto enrollment and plans and how we're big fans of it, but I feel like sure , some people might be , what do you mean they're just take my money out there, but we're , you can actually stop that you , you're not required to it forever, but is there anything people should look out for that might be a disadvantage for them or?Speaker 1:
I think disadvantages always come in a lack of understanding. Anytime you try to create some kind of universal standard or law around any topic it all , there's always some gray area, wiggle room, whatever you want to call it. But there's, you know , everything is not necessarily black and white in terms of how it will affect in each individual person. And I think because this is new, some of these provisions do take effect immediately. Some will happen over time and so there will be some time for interpretation and other, you know, review of the law to figure out how it is going to affect certain people. I think the biggest thing to understand if you're a retirement plan participant today is that, you know , auto enrollment features will be a requirement of some form, whether it's in the plan or some kind of state level retirement account. And so any company that has, you know, an automatic payroll system will be enrolling their employees in some form of retirement account plan, et cetera . And so as an employee, one of the things that you're gonna have to pay attention to is, you know , those notices that you get in the mail, I know we're all guilty of it, we get tons of disclosure documents and mailings. It'll be very important over the next year and year and beyond to really read those and pay attention to what they're telling you . A lot of these things will, you'll still have the flexibility to opt out of certain provisions, but you're gonna have to take the initiative to do that yourself.Speaker 3:
Is that something that's hard to do, Ryan? Is that something that's going like their online portal? Is that something they're going through HR for?Speaker 1:
Yeah, I mean it's, it's relatively easy. I think if you have direct access online to a 401k , you know, let's just use this in the context of a four [inaudible] plan, for example, now you log into your website, you go on there and you have a deferral option, you know, money I'm putting into my plan at some percentage or dollar amount out of every paycheck. The easy way to opt out of that is you just either select the option, the opt-out box that's provided to you, or you can just change those contributions to zero. Um , if that, if you truly wanted to not participate in any way, it would be really easy to do. It's just, it's going to require that extra step of you going in and doing it. If you do nothing and you take the passive approach, ultimately you're gonna be enrolled in a plan at some minimum entry threshold. And those, you know, those contributions will be deducted from your paycheck,Speaker 3:
Which we want. Everybody needs to save more . It's definitely a good thing. It's a , you know, 2023 is zero is the year of saving I think is ,Speaker 1:
It's cer it's certainly not a bad thing. I think it's just, again, people's, the disadvantages with things like this come, like I said before, through a lack of understanding, having a full understanding of this. And , and this is why it's important too to, you know, have direct communication with your HR department, with financial advisors, CPAs, other professionals that you work with to make sure that you're planning, that you're doing at whatever level that may be is centered around whatever the laws and, and , and things that exist out there. Whether it's tax law laws like this, you know, legal with estate planning and you have to constantly review these things because the law does change all the time. And you know this, this is no exception. And so having an understanding that part of us doing this episode today is really to bring to light at least at a high level what changes are now going to exist or are going to be affected over the next several years. Uh , but more importantly to bring attention to something that kind of got lost in the holiday news cycle quite honestly. And so we wanna make sure that we bring it to the forefront of people's minds and as they're cracking through New Year's resolutions and trying to figure out what they want to do financially, keeping in mind that some of their planning may have changed, not just in terms of how much extra they want to save or how they want to invest or what their goals are, but the law has also changed. And so how you utilize different types of savings plans and strategies will also change with that.Speaker 3:
So I know you found a really great graphic from Michael Kites who is probably one of the industry leaders in just knowledge and education for financial advisors. So we'll definitely put that in the show notes. So make sure we take a look at that. Anything else kind of closing up, Ryan, just like finishing up anything else with the secure Act 2.0 everyone listening should , should know about, wanna take advantage of and as always, if you have questions, don't hesitate to reach out to us, call us, text us, email us, whatever it may be. We're here to answer any questions. I know a lot of times it can be confusing whether you are are an individual or a business owner. There's great opportunities for you to take advantage of the secure Act 2.0.Speaker 1:
Yeah, I think if I were just to recap at a high level primary changes that we're focused on today, auto enrollment features coming down the line requirements of that coming for many employers. So if you don't have a plan or you do have one that doesn't include that, that's a big piece of the puzzle in the individual marketplace. You know, some things that we didn't talk about are Roth options, which are new as part of this where some types of retirement accounts traditionally had not offered a Roth option. For example, a simple IRA which commonly used by small employers with you know, let's say a dozen employees or a handful of employees that didn't want a traditional 401K before, you know, a traditional option was the only option. And when we say traditional, we mean pre-tax, you get a tax deduction for putting the money into the account, but when it comes out it's treated as taxable income. Now Roth options will be available in accounts that traditionally didn't have that option.Speaker 3:
So that's, that's huge Ryan cuz I'm thinking about now. So a lot of people who are high earners they could utilize in their 401k , the Roth option. Now is it going be the same and simple step accounts like that where it doesn't matter what your income is compared to like something like a Roth, are they still able high earners who might not traditionally qualify for Roth? Are they still be able take advantage of that Roth option like they would if it was a 401K Roth option?Speaker 1:
Yeah, so I mean an interpretation as of today is yes and you know, it won't be income limited. It will , it will still be annual contribution limit. Those limits will still apply. But yes, it would be treated in the same way. And so I think ultimately it gives more options for employees depending on what type of account you have through the , through your employer, you know, in the same vein of, you know , talking about taxes and different tax treatment, you know the RMD age will be pushed back to 73 immediately. I think that's valuable for those that want to continue to work or maybe don't need the money, they can continue to defer that and not necessarily pay taxes on that. That could be a good or a bad thing remains to be seen. Tax all will inevitably probably change. Again, it's guaranteed to change bySpeaker 3:
2026. No , you think so?Speaker 1:
Yeah , so things change all the time. This, you know, this is no exception. So, you know, some other benefits will be, you know, on the, in the arena of R M D there used to be a penalty for not taking the appropriate r m D of 50%. Um, now that will be reduced to 25%. So I think one of the big things with new laws is that they can be confusing and there's a lot of things to unpack. One, you know, thing I will, I will give Congress is that that particular provision at least helps. I , I don't think that it helps completely, but in the confusion of not understanding when an RMD should be taken or you know, for folks that don't work with other professionals and are doing it on their own, they did cut that penalty in half now and we'd like to see a a system where we can do away with that all together. But ultimately that is a benefit of this. There will also be additional catch up contributions in retirement accounts that will be expanded from their normal limits today. You know, a couple others that we can touch on quickly utilizing retirement funds to make charitable contributions, qualified charitable distributions, a good way to take pre-tax money and donate it on a tax advantage basis that will be expanded and adjusted for inflation. So we'll catch up contributions. So a lot of moving parts here, A lot of it generally retirement focused. I think the big one that we didn't talk about yet, and then I'll just touch on briefly , um, and then we can wrap this thing up and maybe, you know, we'll have a 2.0 episode of our 2.0 episode, but the idea of 5 29 plans and utilization just for college and in the event that a child doesn't utilize that money for college education that has now changed. There is going to be an option in the future of any unused 5 29 accounts could be converted to Roth IRAs for the beneficiaries. There are gonna be some, some rules around that and some things to navigate, but that is a good way to make sure that money doesn't go wasted or you know, in some cases we've seen real world examples of money doesn't get used for college, family doesn't have any more children and then they end up cashing it out, paying taxes, penalties and etSpeaker 3:
Cetera . So for that raw diary option, Ryan , does that go to the the child?Speaker 1:
It's the way it reads currently, it's for the beneficiary of the account. Okay . So it won't be for the grantor or the parent that's making the, the deposit into the account. It's not a, this is not a tax play for a parent utilizing their child's account. This will be for the benefit of the child at some point and, and it'll, it'll still have to look and feel like a traditional Roth IRA contribution. But there is some time before that actually, you know, that's one of those provisions that's getting feathered in over time. AndSpeaker 3:
So I mean that, that is huge. So I I just think about, let's say child, they don't go to college, they gets scholarship, they never use that money. They can still use up to $10,000 of that for their first home. So now gives it much more flexible and , and to see that it's more in place . Cause I've , I've noticed over the last few years people weren't as thrilled for 5 29 plans just because of things like that. They might wanna open up other accounts for their children for now if they don't use that. That's, that's , that's a , it's a great provision of this planning and definitely something we wanna have to incorporate in our planning and kind of spread the message about.Speaker 1:
Yeah, that's a result of a lot of different things. But I think, you know, student loan reform has been a topic of conversation. Some people are unsure about what that looks like long term , you know, what do we have , have to actually save for college. But I think in, you know, back to the, the topic of the secure act, what this does is any unused money does not go to waste. You know, it can be used to kickstart retirement for your children. It can be used to kickstart, you know, the use of that money for other things like you mentioned, you know, there are other ways you can use Roth IRA money before retirement. And so it is certainly, it , it's just, again, back to the beginning when I said flexibility I think is the key of this, this whole thing is you now have many different options where for a very long time there have been not necessarily limited options, but I think there has been a, a rigid nature to retirement planning and retirement accounts in general. And the world is starting to open up a little bit more. It's starting to become more flexible. There's a lot of different reasons why that is, but this is a legislative step I think in some cases in the right direction. And ultimately it'll be up to, you know, the listeners out there and clients and partners to , it's gonna take some time to educate the masses on this and I think get everyone up to speed to, to figure out, you know , how does this work for us? How do we use this to our advantage potentially and, and what have , what benefits will happen or what benefits will be realized for me in the context of this secure Act 2.0 framework that maybe weren't available to me before.Speaker 3:
Oh , good stuff. So I know there's a ton of information say on the Secure Act 2.0. So I , we know it's confusion though . It's a lot of information there. We're here for anybody who has questions, but we're gonna do all kinds of information about this. We're wanna have some visuals for you. We're gonna do a blog post around it . We're gonna have this podcast coming out . It's all gonna come out around the same time. So make sure you take a look at it all and answer if any questions you have, don't hesitate to reach out. But thank you as always for listening to Wealth Builders today. We appreciate all of you. And if you like the episode, make sure you like and subscribe and look forward to the next one. Thanks everybody. Next time .