The Setting Every Community Up for Retirement Enhancement (Secure) 2.0 Act ushers in a number of retirement planning changes that could affect your clients. As retirement planning and tax planning are inextricably linked, many of these changes could have tax implications — and provide new planning opportunities.
Here are five provisions of the Secure 2.0 Act that could affect your clients' tax planning.
1. QLACs
Qualified longevity annuity contracts, or QLACs, are deferred annuities that are purchased inside of retirement accounts such as IRAs and 401(k)s.
The Secure 2.0 Act increased the amount that can be used to purchase a QLAC from $145,000 to $200,000. It also eliminated the requirement that the QLAC premium could not exceed 25% of the account balance.
QLACs can provide a significant tax benefit. The money used to purchase the QLAC is removed from the required minimum distribution calculation until money from the annuity is distributed. There are no taxes due until the contract is annuitized.
Beyond the tax benefits, the increased QLAC limits can help your clients set up a substantial income stream for their later years in retirement. This income stream can also be there for a surviving spouse if needed. QLACs offer the ability to defer commencing the income stream and the RMDs on the money used for the QLAC premium out as far as age 85.
2. Increased Plan Catch-Up Contributions
The Secure 2.0 Act increases the catch-up contributions for employer-sponsored retirement plans like 401(k)s and 403(b)s.
For qualified retirement plans, the catch-up contribution limits will increase to the greater of $10,000 or 150% of the regular catch-up contribution amount indexed for inflation beginning in 2024. This change will be limited to plan participants who are 60 to 63.
For SIMPLE IRAs, there will be a similar increase in the catch-up limit for participants to the greater of $5,000 or 150% of the regular catch-up contribution level for SIMPLE plans, indexed for inflation.
This change provides both tax and retirement planning opportunities for clients in this age range covered by these types of plans.
The opportunity to contribute a greater amount to their retirement plan is a positive development.
From a tax planning perspective, there are several considerations. For clients in this age range who contribute to a traditional 401(k), SIMPLE or other plan, these additional amounts provide an added tax benefit in the year of the contribution. Many of your clients in that age range may be at the top of their career earnings, and an additional tax break can be useful.
Note that the Secure 2.0 Act allows for a SIMPLE Roth option beginning in 2023, something that was not available previously.
This also opens up the tax planning regarding Roth contributions. If a client's current-year tax situation won't be harmed by making additional Roth contributions, these added catch-up contributions might be directed to a Roth option in their plan. This allows them to reduce the amount of future RMDs and can be a factor in their estate planning to the extent that they intend to leave IRA assets to non-spousal beneficiaries.
