Bill Cass is Director of Wealth Management Programs for Putnam, and Mike Dullaghan is Director of DCIO Content and Sales Enablement
A recurring theme at retirement plan conferences is the value of doing more wealth business.
At the same time, at wealth conferences, a recurring theme is the value of doing more retirement plan business.
Interestingly, the convergence of state plan mandates to offer retirement plans with the provisions of the SECURE Acts (passed in 2019 and 2022) makes it increasingly likely that more workers will be covered by workplace savings plans in the next five to ten years. This growth of plans will create opportunities for both wealth and retirement advisors.
Increase in the RMD age
Beginning this year (2023), the age for required minimum distributions increases from 72 to 73. This means the RMD age for people born from 1951 though 1959 is 73. The RMD age increases to 75 in 2033. Those born in 1960 or later will not be required to take minimum distributions until reaching age 75.
Given that more than 71% of withdrawals taken in the last five years have been necessary owing to RMDs,1 the increase in the RMD age creates a retirement savings preservation opportunity.
Contact all clients who are age 70 or older and explain this change. Just because the RMD age is increasing doesn’t mean all retirement account owners should wait to withdraw savings. Some clients in more favorable tax brackets may want to consider distributions from their retirement account before reaching RMD age. Lastly, the increase in the RMD age does not impact the rules around qualified charitable distributions (QCDs) from IRAs, which remain available at age 70½.
The new 10-year rule and the impact on heirs
For all inherited IRAs whose owner died after 2019, the IRA is now subject to a 10-year distribution requirement for most non-spouse beneficiaries (limited exceptions apply2). Additionally, the 10-year rule applies to retirement plans and IRAs, including Roth IRAs.
Connect with clients and discuss the implications of a 10-year distribution requirement for non-spouse beneficiaries, comparing it with previous “stretch IRA” provisions. These planning conversations may include, among other ideas, charitable gifting with IRA assets. Also, determine whether beneficiaries in lower tax brackets may be better off inheriting IRA assets while those in higher tax brackets inherit assets eligible for a stepped-up cost basis at death.
Roth accounts to hedge the risk of future higher taxes
With record federal debt and fiscal challenges for both Medicare and Social Security, investors may want to investigate opportunities to create tax-free retirement income via Roth contributions and conversions.
Talk to clients about the diversification of their taxable versus tax-free retirement assets. Roth conversions may make strategic sense during down market years. Consider offsetting partial Roth conversions with itemized deductions. Roth 401(k) deferrals and catch-up contributions, and the new availability of Roth designated employer contributions, may help jump-start tax-free retirement income savings.
Auto-enrollment for new plans
All plans established on or after January 3, 2023, must offer auto-enrollment before January 1, 2025.
Ask plan clients and prospects, "How well is your plan taking advantage of auto-enrollment?" Help sponsors understand their previously established plan may be at a competitive disadvantage by not using auto-enrollment. Help sponsors model the costs of adding or enhancing their auto-enrollment and auto-escalation features.
Startup tax credits — cover 100% of costs for first 3 years, subject to certain limits
Target profitable businesses. Demonstrate how tax-efficient plan design can help reduce the tax liabilities of the business or owner. TPAs or fintech plan design optimization tools will help. For existing plans, conduct a “tax efficiency audit” of their existing plan design to ensure it is generating the maximum tax savings possible. For new plans, startup credits from the SECURE Acts are icing on the cake for these conversations.
Employer matching contributions for student loan payments
Companies are able to make matching contributions to 401(k) plans based not only on their employees’ plan contributions, but also on their student loan payments.
Businesses in which the majority of the jobs require a college degree are a good target. Attracting and retaining workers can be a challenge for these businesses. Allowing student loan repayments to trigger company matching contributions may offer compelling recruiting benefits for them.
Putnam offers extensive resources to help you take advantage of the opportunities created by the SECURE Acts. Visit Putnam Defined Contribution Perspectives or Putnam Wealth Management for more information.
1ICI Research Perspective, vol. 29, no. 1, February 2023, figure 12.
2Certain non-spouse beneficiaries who inherit retirement accounts may choose to base required distributions on their remaining life expectancy instead of being subject to the 10-year distribution rule. These include those who are disabled, chronically ill, not more than 10 years younger than the retirement account owner, and minor children of the account owner (may stretch distributions based on remaining life expectancy until reaching age 21, after which the 10-year rule applies).
For informational purposes only. Not an investment recommendation.
This information is not meant as tax or legal advice. Please consult with the appropriate tax or legal professional regarding your particular circumstances before making any investment decisions. Putnam does not provide tax or legal advice.