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Secure 2.0 Changes The Math for Roth Conversions

Season #2

 Secure 2.0 Act made massive changes to retirement planning. Today we're going to explore its impact on Roth conversions and tax planning in retirement.

Secure 2.0 Act Recap

The Secure 2.0 Act brings about several changes in the realm of retirement planning. One of the most significant changes is the increase in the age at which required minimum distributions must be taken. Previously, the age was 72, but it has now been increased to 73, and in ten years' time, it will be further increased to 75.

Additionally, the penalty for not taking the required minimum distributions has been reduced from 50% to 25%, making it easier for retirees to make informed decisions about their retirement planning. This change in penalties, combined with the increased age for taking distributions, will have a significant impact on retirement planning.

The Act also increases the contribution limits for 401k and other retirement accounts, and provides an additional catch-up contribution. This allows individuals to save more money for retirement in a tax-deferred way, although it should be noted that there is less time for the money to grow.

How The Secure 2.0 Act Impact Roth Conversions

The Secure 2.0 ACT has changed the math of doing a Roth conversion in a significant way.

Prior to the Secure 2.0 ACT, individuals had a limited window from retirement to the age of 70 and a half or 72 to perform a Roth conversion and control their income. However, now that the age for required minimum distributions has been extended to 75, individuals have a full 15 years, from age 60 to 75, to perform Roth conversions and control their income.

The extended window of time and the reduction of the tax penalty from 50% to 25% provides individuals with greater flexibility and more opportunities to optimize their retirement income.

With the potential to retire earlier and spend down retirement accounts, individuals may find that they can take social security earlier or use it to increase their social security check.

The Secure 2.0 ACT opens up a world of possibilities and offers individuals a greater degree of control over their retirement income.

The Tax Implications of the Secure 2.0 Act

There are many impacts that the secure 2.0 act has on tax planning. One area that you might not consider is Social Security taxation. Social Security benefits can be taxed anywhere from 0% to 85%, based on ones income. When you take money out of your traditional retirement accounts, it gets taxed as ordinary income. Doing Roth conversions can eliminate that money from the equation.

Between quitting your job and reaching the age of 73 or 75, when required minimum distributions must begin, you have a window of opportunity to control your income. During this time, it's important to consider where you're getting your money from and which accounts you're withdrawing it from, as well as whether you're paying taxes now or later. Additionally, utilizing tax losses to offset taxable income and maximizing exclusions and deductions can help defer or even eliminate tax liability.

The calculations surrounding your tax situation can change based on factors such as your age, health, and amount of money you will receive from Social Security. It's also important to consider diversifying your assets, even if you don't plan to retire until age 67 when you can take your full Social Security benefit.

You may also have the opportunity, if your plan permits it, to contribute to a 401k and then roll it over into a Roth, paying taxes in those lower income/tax years.

Alternatively, managing your investments and pursuing strategies that generate tax-free income in retirement are also options. It's crucial to consider your tax income and liability in retirement when making these decisions.

Diversifying your income sources from a tax perspective is crucial, as not all income is treated equally.

By minimizing taxes and playing the tax game, you can maximize the value you receive while minimizing the cost. Taxes can be thought of as a game, where the objective is to get the most value for the least cost.

Other Ways The Secure 2.0 Act Impacts Retirement Planning

One area that has been impacted is retirement savings. The secure 2.0 has provisions such as such as changes in catch-up contributions, taxes, and Required Minimum Distributions (RMDs). For those in their high-earning years before retirement, catch-up contributions can decrease taxable income, allowing for more savings.

Additionally, RMDs are not required from 401k Roth accounts, making retirement easier.

The Secure Act also allows the rollover of funds from a 529 plan into a Roth IRA, providing more peace of mind for long-term savings. This also allows you to setup your kids and grandkids for success. This is an interesting consolation prize from congress for taking away the Stretch IRA in the original Secure Act.

Updating Your Plans for the Secure 2.0 Act

As a retiree, it's important to stay up to date with these changes in order to ensure that your retirement plan aligns with your financial goals and current circumstances. Here's a list of steps you can take to make sure that your plan is up to date:

  • Review your current retirement plan
  • Avoid using online tools that may not be updated for the Secure 2.0 Act
  • If you used online tools to create your retirement plan. Revisit them to see if they are still valid.
  • Ask yourself if your current Roth Conversion strategy is still valid
  • If you have not filed for Social Security - Reconsider your Filing Strategy. It may have changed in light of the new rules.
  • Reevaluate your plan based on the new context of having more control over your income in retirement

Don't miss out on maximizing your retirement savings with the Secure 2.0 Act!

Download our secure 2.0 act checklists now to ensure that your retirement plan is up to date and taking advantage of all the new opportunities and benefits. Stay ahead of the game and plan for a secure financial future. Click here to download your checklists today!