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  • Writer's pictureBridget Sullivan Mermel CFP(R) CPA

Secure Act 2.0 Summary | 4 Facts for 2023

Secure Act 2.0 Summary. The late December passage of the Secure Act 2.0 means that a lot of us missed it. Those of us paying attention are scratching our heads wondering--what does it mean for me?

John Scherer CFP(R) and Bridget Sullivan Mermel CFP(R) CPA summarize the 4 key provisions that are in effect for 2023. At the end of the episode they cover the provisions that you've got time to find more about because they go into effect in 2024 or 2025.

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John: The Secure Act 2.0 was signed into law just before the new year. On today's episode of Friends Talk Financial Planning, we're going to tell you about the four things that you need to know today about the new Secure Act, and stick around for the end where we have a bonus tip that might be more important than the other tips put together. Hi, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.

Bridget: And I'm Bridget Sullivan Mermel, and I've got a fee-only financial planning practice in Chicago, Illinois. And before we get talking about the four tips for the Secure Act, I just want to remind people to subscribe. It helps us reach more people and that's really what we're trying to do. So John, let's take it over. What is the first big thing to know about the Secure Act?

John: Yeah. It's great to be here in person starting the new year talking about taxes. What could be better? 😊 There's a lot of stuff in the Secure Act. I think there were around 4000 pages. That is a lot of things to dig through, but there're four things that we found that really make a big difference, and we have to think about these things today.

And the one that I think is going to affect most people is your employer matching contributions into a 401K plan. It used to be that those had to be all pretax. You had the choice as an employee to put your money in Roth or in regular 401K, but the company money was always pretax. With Secure 2.0 now that employer match in the 401K can be Roth. So it's this new thing, and for people who are looking for Roth this makes sense for them and could be a really great thing.

Bridget: Yeah, that's very interesting. But there's one other part. The second sentence to this announcement is that those employer contributions are then taxable as income to you, because with Roth, you pay the tax and then you put it in, and it's not taxed ever again.

John: That's right.

Bridget: You still have to pay the tax. It's not like, “Oh, we're ignoring this match.”

John: This is a whole new payroll system, and that's a great point. For example, if my company matches $1,000, 2000, and $5,000 before it just goes in, no taxes, that's awesome, I'm really happy to have that. Now, however, that gets added to my income, and I've got to pay tax on that money, which bumps my taxes up. That totally makes sense if the Roth is what you want to do. It fits, and it's not going to cost you more in taxes, but it changes the dynamic a little bit.

Bridget: Yeah.

John: It'll be interesting to see how it unfolds. Job security for the people running payrolls, who are trying to figure out all the math on those things and for us who are trying to do planning at the end of the year for tax strategies. But the important point is to know about it. It's effective right now. So if you run a company and you have a 401K plan, or if you have a plan at work, talk to your HR people, talk to your colleagues and see how that might fit in your plan.

Bridget: Yeah. And the other thing is that this is effective 2023, so this is effective now. The other thing I want to mention is that the subtext of Secure 2.0, I would say, is more Roth 401Ks. Now, I don't know what the percentage is actually, but my guess would be that 10% or 15% of companies have it, but the Secure Act 2.0 is really trying to make it broadly available. That's what I would say. There're many more provisions that are trying to encourage it.

John: Speaking of other provisions that deal with Roth, our second big thing that you need to be aware of is for people who don't have a 401K or a 403B at work but have a SIMPLE IRA or a SEP IRA through work, those never had the option to do Roth, so it was a big drawback. Starting today with Secure 2.0 this year, there's the option to have your SIMPLE IRA or SEP IRA be Roth.

So again, a similar thing. SIMPLEs and SEPs are generally for smaller businesses, so maybe you run a small business, maybe you had a side hustle that you could do and it didn't make sense to do with SIMPLE, and you go, “Hey, now I can do Roth with that,” or you work in a small company, a dozen employees or something like that, where you can have a little more influence maybe than if you work for a company where there's thousands of people involved in it. Great opportunity here to consider. Do you want to have that Roth option?

Bridget: Absolutely. And then our third tip is about solo 401Ks.

John: This involves people who are sole proprietors, like a lot of people with side hustle. And the solo deal is that you don't have employees other than a spouse, so no employees. Thus, I have the solo 401K where I can defer money into the plan. There used to be rules that said, “Listen, if you have that, you have to set that plan up by the end of the year or else you can't do it.

Bridget: By 12/31.

John: By 12/31 Right. So in this situation, if I'm running a company and I wanted to set up a solo 401K, I haven't done it yet, in the old days, doing it today is too late, nowadays you can't do it. The first Secure Act a few years ago said, “You know what? You can set up that plan, but you can only do an employer contribution.” And so, you can put in basically 25% of your earnings on it. It's a little bit more complicated, but that's a round number on that. You can do that, but you can't as an employee make a deferral.

Secure 2.0 now says that you can set it up until the tax deadline—no extensions, but just until April—and you can do an employer contribution and an employee contribution. So here's where this fits; it's a slightly narrow band. If you have your own business, a side hustle or your full-time business, and you don't have a solo 401K, and you think, “Hey, I might want to save some money.” You used to be able to save just the employer contribution side of things. Now you can save maybe up to $40,000 or $50,000 by doing that and having some tax savings with it.

Bridget: And it helps your tax preparers out a lot, because a lot of times what happens is that people don't go to their tax preparer for tax planning. We've done entire episodes about the folly of that, but they don't do the tax planning. They show up at their tax preparer, and they say, “Oh, I got a new business,” and it's March 10. And the tax preparer says, “Oh, too bad. There's all this stuff you could have done.”

John: That’s right.

Bridget: And now it gives the tax preparer the chance to say, “Oh, we can still do it.” And these are the rules that were in place for the SEP IRA. Although I have to say one thing, and that is with the SEP, you could set it up by the due date of the tax return plus extension.

John: Okay.

Bridget: So I would double check that, if it's after April 15th and you're watching this video and you really want to do this move, double check that, because my suspicion is that maybe it is a due date of the tax return plus extensions, because I don't think that that would really cause too many backlogs or any problems.

John: What's the takeaway on this one? I love how you said, “Hey, you get to the end of the year and forget.” Generally, it's not like people say, I’ve run a business. I knew I wanted to do this and missed a deadline.” That might be the case, but so often that we find people who say, “Guess what I was doing? I did some consulting work on the side. I made a few thousand bucks. I made $10,000.” Or they might say, “Yeah, I started this thing. It wasn't material, but I started doing something, and I was making some money doing it. Oh! That’s right. I got to tell my tax person about it.”

I didn't think about it last year, the tax person didn't even know about it, and now there's this opportunity. So the takeaway is saying, “Hey, I've got this income. We're not doing anything with it. I'd like to save some more money for retirement. Let's make sure I'm talking with my tax person about this new opportunity, and ask my tax person, ‘I heard about this thing that I can do. Does it make sense?’” We didn't have an opportunity before, or it was limited. Now you've got a bigger opportunity; we got some other choices.

Make sure you're being in communication, because the tax folks, and Bridget used to be in that business, are inundated with returns and updates. They're punching through returns, and everybody knows that this time of year, gets really crazy for the tax folks. So when they go through last year's return and say, “Shoot, there wasn't a 401K on last year's, and now it's this year,” as a taxpayer to be proactive and be communicating with your tax folds and say, “Hey, let's make sure we take a look at this.” That could be really helpful; it could be a big tax saver for folks.

Bridget: And let's look at our last tip. The fourth tip is about required minimum distributions and the change. It seems like they're trying to grandfather in a change, increasing the age where you need to make required minimum distributions. John, what are the details?

John: Yeah, so they moved the age. It was at age 72 that you had to start taking money out of your IRAs and 401Ks. The new change says that now it's not until you're age 73 and that's going to go for a little while, but then it's actually going to go up to 75 down the road. But if you turn 72 this year coming into this year and you thought, “Hey, I got to start taking money out and paying taxes,” now you don't have to do that.

Bridget: 72. Good for you!

John: It is important to be aware of that.

Bridget: And I misspoke earlier. I said grandfathered in, but I should have said grandparented in😊

John: Yeah. Very good. I like it. Okay, so what's important about these four tips? Some interesting things. Some apply to a lot of people. Some it can be really valuable in your niche. These are the four main things that are effective this year.

Bridget: 2023.

John: We said there're 4000 some pages, so here're the five-star tip as far as what you need to know about the rest of the things: nothing. Not nothing, but most other things are effective in future years. These are the four big ones we think people need to know about. There may be a couple of other little things, but the major ones that you might have heard of, things like taking 529 money and putting it into Roth IRA, that's going to be on the table.

Bridget: Right.

John: There're a lot of other things that are being talked about. All the major things happen in 2024, 2025, and 2026 in some cases. So most of the new Secure Act is changing things for the future, which is nice because we get a chance to plan throughout the year. These four things, however, we talked about are things that you need to at least be thinking about here in 2023.

Bridget: Okay, so for our final extra tip at the end, let's talk about those issues. And I know at least one of these we're going to do an entire episode on.

John: Yeah.

Bridget: So the issues are 529 to Roth. So 529 savings plan, in some situations, you're going to be able to transfer those to Roth. Again, we're going to do an entire episode on that. What's the next one?

John: Well the other thing is once you get to be over 50, you can do these catch up contributions to your 401K plans. Those rules are going to change slightly—I think it's in 2024, but not this year I know for sure—and there's going to need to be some Roth contributions in order to max out those deferrals. So again, the sort of Rothification of retirement savings is going to take place, but not until next year or not until future years.

Bridget: And then there's an intriguing idea about employer matching, not just 401K contributions, but student loan payments.

John: Yeah. If I make a payment to my student loan and my employer can match that, that’s a pretty good deal. Again, that's coming down the pike. It's in the law. We can plan for it, but not this year.

Bridget: And the payroll company fully employed act😊

John: That's right. Job security for people on the payroll and those sorts of things. That might be what it is. Well, that's a great place to wrap up here with the things that you need to know about the new Secure Act for 2023. I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.

Bridget: And I'm Bridget Sullivan Mermel. and I've got a fee-only financial planning practice in Chicago, Illinois. And we're both members of ACP, or the Alliance of Comprehensive planners. We're both taking new clients and talking to new clients. but if you want to find an advisor in your area who thinks kind of like us, you can check out

John: And don't forget to hit that subscribe button.

At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.

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