Courtesy of Nicholas J. Colantuono
Nicholas J. Colantuono, a resident of Westborough, is with Franklin retirement and investment firm Johnson Brunetti.
Updated: August 21, 2023
Know How
SECURE Act 2.0 and its impact on retirement accounts
By Nicholas J. Colantuono
Planning for retirement takes careful consideration, and today between stock market volatility, the ambiguous future of several banking institutions, and fast-rising inflation, those who are soon to be or in retirement should take advantage of every opportunity to make their hard-earned money last.
In response to financial burdens resulting from the COVID-19 pandemic, subsequent layoffs, and an upsurge in early retirements, the Internal Revenue Service signed into law the Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 late last year. The bottom line is due to a reduction in household incomes coupled with an increase in the cost of our day-to-day lives, Americans were taking money out of their retirement accounts to cover the difference, placing the retirement system on shaky grounds.
While SECURE Act 2.0 contains dozens of provisions specific to helping strengthen the retirement system, perhaps none is more impactful than the delay in taking the minimum distribution from 401(k) and IRA accounts. As of Jan. 1, that age increased to 73 (from 72) and will further increase to age 75 starting in 2033. As such, individuals have additional time to delay taking withdrawal of deferred savings from their retirement accounts, which brings up an eye-opening point.
While most retirees know distributions from retirement accounts are taxable as income, many are shocked to see the impact that those taxable distributions can have on their other retirement benefits, such as Social Security and Medicare. It cannot be overstated enough: Every dollar taken out of a retirement account is considered income and therefore taxable at the state and federal level. This could affect the take home on your Social Security, your capital gains tax rate, and your Medicare premiums in retirement.
SECURE Act 2.0 does away with the so-called stretch IRA, a vehicle for IRA beneficiaries to stretch distributions from an inherited IRA over their lifetimes. If an IRA is left to someone other than a surviving spouse, or a beneficiary within 10 years of age of the decedent, that beneficiary must withdraw 100% of the funds within 10 years of the original holder’s date of death and pay state and federal income tax on the distributions along the way. The result of this change is a big tax hit to heirs and increased tax revenue to the IRS. So, word to the wise, IRAs are the least tax efficient accounts to leave to beneficiaries.
Another meaningful change allows those with a 529 college savings plan to transfer unused funds into a Roth IRA in the same beneficiary’s name without incurring taxes or penalties on the rollover. These rollovers are limited to a lifetime total of $35,000 and require the 529 plan must have been open for more than 15 years.
Ultimately, when planning for retirement, it’s important to focus on longevity and factor in both anticipated and unforeseen issues, such as medical costs, a downturn in the economy, the need to financially assist family members, etc. The imperative is to earmark some funds for growth, while building a financial safety net that may include cash, CDs, money market funds, and/or insured vehicles like fixed and fixed-indexed annuities.
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