Secure 2.0 Can Make Clients' Retirement Plans Stronger

Parents out there may relate to this: I was at my daughter's softball game last summer.

After heavy rainfall, my son decided to jump in every puddle on the way to the field.

After I cleaned him up the best I could, I finally sat down, only to look over at him rolling around in the biggest, sloppiest mud puddle he could find.

In a way, Washington does this to financial planners every year.

Once we feel we have a handle on the financial planning landscape, Washington decides to make a change.

Savvy financial professionals have an opportunity to navigate the changes and highlight their value to clients.

Change can present opportunities.

Navigating Secure 2.0

There are nearly 100 provisions within Secure 2.0 that can affect your clients' financial plans.

While some of these changes may seem minor, sometimes the smallest details make the biggest difference.

Here are a few provisions I'm keeping my eye on:

1. RMDs

The Secure 2.0 Act has once again put a spotlight on required minimum distributions.

Changing the distribution age to 73 (or 75, depending on their current age) gives financial professionals an outlet to discuss strategies for clients who don't like the idea of being forced to take distributions from their accounts.

Clients may be coming into your office wondering if they are able to delay their RMD for another year. This can be confusing given the new legislation.

A handy rule of thumb is that individuals born in 1950 or earlier will hit RMD age at 72. They are locked in for RMDs going forward.

Individuals born between 1951 and 1959 can delay their RMDs until age 73.

Those born in 1960 and later have the option to wait until age 75.

Though there may be benefits to delaying RMDs, the condensed timeframe may make distributions bigger and include more taxable income. This can potentially create taxable issues for your high-net-worth clients.

It may be an opportunity to talk with your clients who don't need RMDs to discuss potential financial planning strategies such as QCDs, QLACs, Roth conversions, or even multi-generational tax strategies if their beneficiaries are also in high tax brackets.

2. Roth Accounts

There are numerous changes to Roth plans outlined in the Secure 2.0 plan.

This may be a good time to discuss Roth contributions to your clients' employer plans, or a Roth conversion for those that may have extra room in their tax brackets.

If you have a client who has experienced a decrease in taxable income, a Roth conversion may be a useful strategy to pay taxes now with no RMDs later.

You may have small-business owner clients that experienced a down income year (at least on paper). They have room to create some taxable events.

These small-business owners may benefit from a Roth conversion or event — for example, putting employer simplified employee pension, or SEP, money into a Roth account starting in 2024.

Does your client believe their tax rate is going to be higher or lower in retirement? Some individuals may answer this differently, but if you believe taxes will be higher in the future, then they may want to pay the taxes today and take tax-free income in the future.

3. QLACs

A qualified longevity annuity contract, or QLAC, can provide longevity insurance and may help minimize RMDs for your clients.

They will be required to take distributions from the QLAC by age 85; however, this income stream can be a way to minimize longevity risk that can be a threat to the success of a financial plan.

A high-net-worth client who doesn't need the income from their qualified plan is also likely to face longevity issues in their financial plan.

QLACs can be an excellent strategy to lower potential RMDs and provide some longevity insurance.

4. Charity

If you have clients that are charitably inclined, consider the power of a qualified charitable distribution.

A QCD is a great charitable strategy for any income group. The distribution occurs from the qualified plan, satisfies the RMD, and is tax-free. It limits taxable events and lets clients keep additional money in their checking account.

This can be a huge benefit if clients are close to higher Medicare brackets. Limiting the taxable events can help keep clients below Medicare thresholds and minimize their Medicare premiums.

The Tax Cuts and Jobs Act of 2017

With the Secure 2.0 Act front and center in our minds, it can be easy to forget that the individual income tax provisions in the Tax Cut and Jobs Act of 2017 are set to expire after 2025.

Among the provisions scheduled to expire are the higher exemption limits for the estate and gift tax, the deduction for pass-through business income, lower income tax rates, and the state and local tax deduction cap.

If the provisions expire, the tax law reverts to pre-TCJA tax law. This may mean higher tax rates for certain individuals.

It's unclear whether Congress will extend the law; however, if you have a client who may be affected by these expirations, it may be time to start discussions on potential financial planning strategies.

For example, clients with large estates currently below the estate and gift tax exemption should begin to plan in case the higher estate and gift tax limits expire.

Don't Lose Out on Losses

Tax season brings an opportunity to help discuss ways to minimize future tax liability.

Often the industry discusses tax loss selling at the end of the year when capital gains are distributed. In reality, tax loss selling is a strategy that should be looked at during the entire year.

It's important to understand the wash sale rule so you avoid accidentally negating your tax loss. Essentially, this IRS rule states that you cannot purchase a substantially identical security within 30 days of harvesting your loss.

Tax loss selling can provide an opportunity to look at your capital gain exposure. Does it make sense to continue to use nonqualified assets that may produce capital gains in the future, or do you look at deferring those gains by using an annuity?

For clients nearing Medicare age, consider tax loss selling as a way to move the assets into a nonqualified annuity that can defer taxes and potentially create a lower modified adjusted gross income.

This lower MAGI may push the individual to pay lower Medicare premiums over retirement. This can be helpful, especially if the client does not need this nonqualified money to live.

These are just some of the many strategies available for clients to use as they determine how to address the changes from Washington. It's important to understand that each client has different objectives and goals.

Tax and financial planning changes can be messy. Savvy financial professionals who understand how to cut through the mess will find there's an abundance of opportunities to make their clients' retirement plans even stronger.

Tyler De Haan is director of advanced sales at Sammons Institutional Group.