Beware the Pitfalls of Secure 2.0: Wade Pfau

The Setting Every Community Up for Retirement Enhancement (Secure) 2.0 Act delivers a host of beneficial changes for retirement savings. But the legislation is not without pitfalls, as Wade Pfau, co-founder of Retirement Income Style Awareness Profile and Retirement Researcher, tells ThinkAdvisor in an interview.

For example, the Secure 2.0 Act lets investors convert a 529 college savings plan to a Roth IRA.

“When it was first mentioned in the media, people reacted, ‘Oh, wow! I can convert my 529 plan to a Roth IRA!’” he said. “But you may be surprised about the many restrictive rules.”

Pfau, principal and director of retirement research at McLean Asset Management, recently released the second edition of his book “Retirement Planning Guidebook: Navigating the Important Decisions for Retirement Success” (Retirement Researcher Media, March 2023).

At nearly 500 pages and weighing about a pound and a half, the comprehensive book incorporates the latest changes relevant to retirement.

Safe to say the author answers virtually every question both consumers and financial advisors can come up with about retirement planning to date.

In the interview, Pfau, co-host of the “Retire With Style” podcast, discusses the Secure 2.0 Act’s raising of the starting age of required minimum distributions from retirement accounts from 72 to 73, the reduction in RMD penalties and lifting the RMD requirement from 401(k) plans.

He also explains other Roth 401(k) changes, as well as Secure 2.0 Act’s providing that some catch-up contributions are to be inflation-adjusted.

As for more pitfalls, here’s one about catch-ups: High earners can put them in Roth accounts only.

The Secure 2.0 Act was signed into law in December 2022 as an expansion of the Secure Act passed in 2019.

Will there be a Secure 3.0 Act? Pfau opines on that question.

ThinkAdvisor recently held a phone interview with Pfau, a professor at The American College of Financial Services for more than a decade, who earned a doctorate in economics from Princeton University. He was speaking from his base in Dallas.

Besides getting into the weeds of the Secure 2.0 Act, he furnishes some enlightening statistics about the ages that folks are claiming Social Security now, a sign that they are perhaps approaching the decision “more strategically.”

Here are highlights of our interview:

THINKADVISOR: Signed into law in December 2022, the Secure 2.0 Act brought numerous changes to retirement saving. When will they go into effect?

WADE PFAU: [The Secure 2.0 Act] created a number of changes that will be introduced at varying points. It’s crazy: Some were effective immediately; some were effective at the start of this year; some are effective at the start of next year or in later years.

Some things don’t start till 2024 or 2025, and there are even some that don’t start until 2026 or 2027.

What’s the biggest change?

It might be increasing the required minimum distribution’s [from traditional IRAs and other qualified retirement accounts] starting age from 72 to 73 because it’s a change that affects the most people.

In 10 years, the age will be 75, depending on birth year.

What other changes concern RMDs?

RMD penalties are substantially reduced. Before, if you didn’t take your RMD, there was a 50% excise tax on it.

That’s been reduced to 25% and in several cases, 10%.

When it comes to Roth 401(k)s, the Secure 2.0 Act says that no RMDs are required during the owner’s lifetime. That brings more flexibility, doesn’t it?

Yes. But that won’t start until next year [tax year 2024]. So in 2023 you still have to take an RMD on a Roth 401(k).

In the past, if you had a Roth 401(k), you had to take an RMD, but you could avoid that by doing a rollover to a Roth IRA.

Now, because there are no longer RMDs on Roth 401(k)s, you don’t have to do that.

This can be valuable for tax planning. Right?

Yes. If you want to leave money in your Roth 401(k), now you can because you don’t have to worry about RMDs.

Another positive is that now employer contributions can be made to Roth accounts. When does that begin?

This year. Before, employer contributions could only go to regular IRAs; they weren’t allowed in Roth accounts.

This is a positive change, but it will increase your taxable income. The employer puts money in, and now you have to pay taxes on it.

What other Secure 2.0 Act changes are helpful for retirement saving?

Some of the catch-up contributions that were not inflation-adjusted now will be. Also, qualified distributions for charities will start to be inflation-adjusted next year.

In the past, you didn’t get inflation adjustments on catch-up contributions or on qualified charitable distributions.

Are there any other significant Secure 2.0 Act changes but ones that are unrelated to retirement savings?

The [tax-advantaged] ABLE account [Achieving a Better Life Experience] for people with disabilities now has a relaxed age restriction: The maximum age for the start of a qualifying disability has been increased [from 26 to 46].