Need-to-Know Retirement Laws for Advisors, Clients

The recently passed $1.7 trillion omnibus spending package is stirring up plenty of controversy beyond Capitol Hill as is par for the course when it comes to U.S. politics.

Without getting into partisan political discourse – that’s not the point of this piece – the omnibus bill is controversial because it’s a 4,000-plus page abyss that lawmakers had essentially no opportunity to read in full. Additionally, it represents more government chicanery by both parties because it was passed in the dead of the night around a major holiday by a lame-duck Congress. Not to mention the added spending while inflation is still historically high is tone-deaf at best.

With that housekeeping aside, it must be noted that the legislation features a retirement package, known as SECURE Act 2.0, that includes several points advisors and clients need to be aware of. That is to say advisors can leverage SECURE Act 2.0 as an avenue for connecting with clients as 2023 approaches.

In simple terms, builds on the SECURE Act, which was approved by Congress in 2019, but there’s much more to the story. Read on to discover some relevant talking points for use in client conversation.

Inside SECURE Act 2.0

With retirement savings being dealt a major blow in 2022 due to soaring inflation and tumbling equity and fixed income markets, SECURE Act 2.0 is arguably good news for clients.

“The most notable provision in the new bill increases the age at which individuals must begin taking required minimum distributions (RMDs) from their retirement account to 73 from 72, beginning January 1, 2023. In 2033, the RMD age will increase again, to 75,” notes Michael Townsend of Charles Schwab.

Extending the RMD age by a year can help advisors give client investments more time to rebound from 2022 weakness while allowing for benefits of more dividends and interest payments flowing into client portfolios.

“The bill also increases catch-up contributions for individuals ages 60 through 63, beginning in 2025. Individuals who qualify could contribute an additional 50% of the regular catch-up contribution limit, which kicks in at age 50,” adds Townsend. “If the provision were in place for 2023, that would mean a 62-year old could contribute the maximum to his company's 401(k) plan of $22,500, plus a catch-up contribution of $7,500, plus an additional 50% of that catch-up contribution, or $3,750—for a total of $33,750. That amount is likely to rise a bit by the time the new rules take effect in 2025.”

In plain English, SECURE Act 2.0 can help advisors leverage time to improve client outcomes and time is very much a pivotal asset when it comes to retirement strategies.

More SECURE Act 2.0 Goodies

There are other provisions in SECURE Act 2.0 that advisors can and should discuss with clients. For example, starting in 2024, clients with a Roth 401(k) won't have to take RMDs from the account. Additionally, business owners can create rainy day funds for staffers as well as offering matching of employees’ student payments by way of contributions to a retirement account.

Of note to advisors with a roster chock full of business owner clients, the new bill contains provisions to help firms launch retirement plans – a benefit at a time when retain talent is difficult.

“The legislation also makes a number of changes to help companies start an employer-sponsored plan or to encourage participation in an existing plan. The law, for example, creates a ‘Starter 401(k’ plan that simplifies the requirements for a small company to launch a plan and expands the tax incentives for companies that start a plan,” concludes Townsend. “Beginning in 2025, employees at companies that are launching a new retirement plan would be automatically enrolled in the plan, unless they opt out, and would see their contribution amount automatically increased annually.”

Related: Preffereds Could Be Pertinent Again in 2023