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During a recent client meeting, I exclaimed, “A piece of really exciting legislation just passed at the end of the year!” We all paused in silent wonder and my odd interpretation of the adjective “exciting.”

While my nerd level is not in question, many parts of the SECURE Act 2.0 are. With nearly 100 provisional changes, this legislation is under the microscope of planners and tax professionals across the country trying to break apart the legalese to understand its impact. That means what I’m about to summarize should be taken with a grain of salt, as the official interpretation may shift as we get clarity on what Congress meant in the fine print.

One of the biggest headline changes of this legislation (in terms of the client families I serve) is that the SECURE Act 2.0 changed RMDs. I’ll do my best to summarize those changes below because very few want to spend their free time reading about tax law.

  • What’s an RMD?
    • The IRS was happy to let you save for retirement using a tax-deferred vehicle (401k, 403b, Traditional IRA, etc.). They eventually hold up a uniform life expectancy table in one hand and their tax collection basket in the other. A Required Minimum Distribution (RMD) is the amount you must take from your Traditional IRA at a certain age that is 100% taxable as ordinary income.
  • What changed?
    • The age at which you must start taking RMDs.
      • In 2019, the first version of the SECURE Act increased the minimum distribution age from 70.5 to 72. If you were born in 1950 or earlier, these provisional changes don’t impact you.
      • The second version of the SECURE Act states that if you were born between 1951 -1959, you could delay RMDs until you reach 73. If you were born in 1960 or later, your RMDs wouldn’t start until 75.
    • The penalty for skipping an RMD has gone down.
      • The IRS previously applied a 50% penalty for RMDs not taken, one of the steepest they impose. That penalty is now 25%, which can be reduced to 10% if it’s corrected ‘in a timely manner.’
  • What are the impacts of this change:
    • If you take withdrawals from your IRA to cover income needs, these changes may not significantly impact your financial picture.
    • There has been no impact on the age at which Qualified Charitable Distributions (QCDs) can be made; you can still gift directly from your Traditional IRA accounts to your 501(c)3 charity of choice (up to $100,000) starting at age 70.5. (This strategy avoids the tax liability of the gifted portion of your RMD.)
    • While delaying income from your pre-tax accounts might sound good in theory, fewer years of required distributions will potentially mean a larger balance at your passing. This could trigger state estate taxes if that applies to you (here in Oregon, the estate tax impacts those with over $1,000,000 in assets). And, with the 10-year distribution rule on inherited accounts for non-spouse beneficiaries that was passed with the first version of the SECURE Act, there are fewer years for your heirs to distribute that income.

While they may be frustrating to keep up with, legislative changes like this provide a great opportunity for proactive planning. Roth conversions, utilizing QCDs, and gifting appreciated assets are all potential avenues to explore, each with pros and cons. If you want to learn more about the SECURE Act 2.0, check out this summary article from Fidelity and check out this easy-to-follow bulleted list of the changes. If you want to discuss how these changes impact your unique financial picture, I welcome the conversation.