Hello, this is Ryan McGuire, Senior Consultant with Oak Wealth Advisors, providing an update on planning opportunities created by the SECURE Act series that may be relevant to our clients.

One significant change is the adjustment to the ages for Required Minimum Distribution, or RMDs from retirement accounts. Individuals born before 1951 should already be taking RMDs. Individuals born between 1951 and 1959 will now begin RMDs at age 73. Individuals born in 1960 or after will not be required to take RMDs until they reach the age of 75. These changes enhance lifetime tax planning opportunities including Roth conversions and Qualified Charitable Distributions or using pre-RMD age distributions for cash flow purposes.

Another favorable change pertains to catch-up retirement account contributions for individuals aged 50 or older. For both IRAs and Roth IRAs, the catch-up contribution limit will now be indexed for inflation. The IRA catch up limit of $1,000, when added to the normal contribution limit of $6,500, results in a total limit of $7,500 for the current year.
In 2023, qualified plans offer a catch-up limit of $7,500. When added to the individual contribution limit of $22,500, the total contribution limit becomes effectively $30,000. Starting in 2024, there will be minor differences to the catch-up contribution based on compensation and income levels. Those earning less than $145,000 can treat catch-up contributions as Roth beginning in 2024, while those with incomes exceeding $145,000 must treat the catch-up contributions as Roth. This compensation definition of $145,000 will be based on prior year “wages” from the W2. Starting in 2025, there will be a super-catch up to qualified plans for those age 60-63, which will be at least $11,250.

A notable provision benefiting families is the ability to transfer funds from a 529 college savings account into a Roth IRA for the beneficiary. There are important conditions to consider. The annual Roth IRA contribution limit remains applicable to these rollovers, with a lifetime 529 to Roth IRA rollover limit of $35,000. Remember, an individual must have earned income to be eligible to contribute to a Roth IRA. For this new rollover, the 529 and Roth IRA beneficiary must be the same, the 529 account must have been open for a minimum of 15 years, and any contributions made to the 529 within the last 5 years are not eligible to be converted. This presents a valuable opportunity for individuals who have surplus funds in 529 accounts and addresses the concern of over-funding a 529 account and having to face a tax-crunch if taking a non-qualified distribution. This is a wonderful new provision and opportunity.

To close, we felt it was important to reflect on SECURE ACT of 2019’s changes to Inherited IRA Required Minimum Distributions (RMDs), and how this has impacted planning for families who have children with special needs. Starting with IRAs received from decedents who passed away after 12/31/2019, non-spouse adult beneficiaries are now required to distribute Inherited IRA assets within a 10 tax-year period. Fortunately, beneficiaries who meet the criteria for being disabled or chronically ill are exempt from this accelerated distribution timeline. In such cases, a well-structured third-party special needs trust, designed to meet the requirements of a “qualified disability trust,” can play a crucial role. This exemption ensures that the assets within the Inherited IRA owned by the third-party special needs trust can be distributed over the beneficiary’s lifetime, allowing for prolonged tax-advantaged growth of the account. Since the amount of annual required distribution is often needed to be entirely distributed out of the trust to pay for expenses of the beneficiary, the tax impact of this sequence may end up being quite efficient, as distributions of income from the trust would be taxed at the beneficiary’s income tax level. In the situation where there are multiple children, some families may choose to leave a greater percentage of their IRA assets to the special needs trust, while choosing to leave a greater percentage of their non-IRA assets, including life insurance proceeds, to their other children.

Of course, this decision should be carefully analyzed and we encourage everyone to discuss their beneficiary designations with their legal and financial advisors.

Thanks for your time.