Bloomberg Tax
Dec. 12, 2022, 9:45 AM

How SECURE Act 2.0 Affects Tax Planning for Retirement Investors

Rob Williams
Rob Williams
Charles Schwab & Co.

Congress will likely vote on a federal retirement package, dubbed SECURE Act 2.0, by year-end, either alone or wrapped into a final spending package. The bill, now in reconciliation and final negotiation, would provide increased flexibility and options for retirement savers, including allowing retired workers to delay withdrawals from retirement accounts beyond the current required minimum distribution age of 72.

While the extended retirement distribution ages would provide flexibility to retirees, we think it also creates planning and analysis opportunities for tax planners, practitioners, and advisers.

What Are the Potential Opportunities?

Traditional tax-planning wisdom argues that no tax you can pay tomorrow is worth paying today. But we suggest it’s time to take a new look at that old argument for a couple of reasons.

First, today’s income tax rates are near historical lows. Second, many retirement savers or investors are surprised by their significantly larger tax bill at the RMD age. Retirees also may see the RMD age and distribution schedule as the recommended age versus the optimal age for funding their particular spending needs in retirement.

However, high-net-worth savers and investors with large account balances often see retirement savings as a legacy vehicle, or they don’t rely on it heavily to support spending. Even these retirees, however, may benefit from annual tax planning.

Taking distributions prior to RMD age can: smooth out taxes; take advantage of filling lower tax brackets with withdrawals in years when a retiree may have fewer other taxable income sources; hedge against the likelihood that tax-bracket rates rise in 2026, absent legislative changes to prevent the Tax Cuts and Jobs Act from sunsetting; or simply hedge against the potential for higher future federal tax rates.

What Are the Potential Benefits?

To illustrate, consider a 65-year-old retiree in the 24% tax bracket with no salary income and $2 million primarily in a brokerage account and an IRA. Under current rules, this retiree could wait until age 72 to withdraw while staying invested, or they could work with a tax planner or adviser to take withdrawals prior to age 72 to fully utilize the 24% tax bracket each year.

Assuming a 4.0% return on savings annually, smoothing withdrawals could reduce taxes by about $77,000 and increase the asset value wealth by more than $100,000 on average, assuming no future changes in tax rates and using projection tools. Rather than defaulting to delayed RMD and the traditional wisdom to defer withdrawals as long as possible, we believe that tax professionals can work closely with retirement planners, wealth managers, and advisers to add this tax-efficient planning and partnership to improve outcomes for clients.

Are There Other Major Tax Provisions?

In addition to extending the RMD age and increasing catch-up contributions, SECURE Act 2.0 would increase auto-enrollment and employer and employee options for company-sponsored retirement savings plans, making it easier for workers to use retirement plans. The proposed legislation also would create larger tax credits for small businesses, reduce reporting and disclosure notices, and create less onerous administrative requirements, among other measures.

The original SECURE Act—which stands for Setting Every Community Up for Retirement Enhancement Act—was signed into law Dec. 20, 2019. SECURE Act 2.0 aspires to help individuals plan, save, and invest for their retirement. It would most directly impact retirement plan sponsors and participants and reflect continued legislative momentum toward government-supported regulatory and tax incentives.

Practitioners and advisers should continue to watch the progress of SECURE Act 2.0, and its impact on individual tax returns, retirement planning, and wealth management in 2023 and beyond.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Rob Williams, CFP, CRPC, CPWA, is managing director of financial planning, retirement income, and wealth management for the Schwab Center for Financial Research. He leads a team that provides research, insights, training, and point of view on financial planning, retirement income, and wealth management issues.

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