SECURE 2.0 Act – Key Provisions for Retirement Planning in Texas
Disclaimer: This blog post is not legal advice and is for educational purposes only. This blog post does not create an attorney-client relationship. If you would like to speak to an attorney about a legal matter, please reach out to us today!
The SECURE 2.0 Act, part of the Consolidated Appropriations Act of 2022, introduced significant changes to retirement planning, including how it affects those with disabilities like our hypothetical Texans, John and Cynthia. In this post, we’ll break down the key provisions of the SECURE 2.0 Act, and how these changes might affect you and your family’s financial planning.
1. Emergency Withdrawals Without Penalty
Under the SECURE 2.0 Act, effective January 1, 2024, retirement account holders can withdraw up to $1,000 for emergency personal or family expenses without incurring the 10% early withdrawal penalty. This change is particularly useful for individuals who are facing unexpected financial challenges due to disability or other health issues.
For John and Cynthia, this provision can provide a valuable safety net by allowing early access to retirement funds in a time of need. Given their medical conditions, this could be a lifeline during an unexpected financial crisis.
2. Penalty-Free Early Withdrawals for the Totally and Permanently Disabled
Another important provision is the ability to withdraw funds from retirement accounts like IRAs or 401(k)s without the 10% early withdrawal penalty if the individual is “totally and permanently disabled.” The IRS defines “totally and permanently disabled” as being unable to do substantial work due to a long-term or indefinite disability.
For John and Cynthia, who are both living with serious health conditions, this could mean they are eligible for penalty-free withdrawals from their retirement accounts. However, they would need to have medical evaluations confirming their disability status to avoid penalties. It’s important to work with a financial advisor to ensure they qualify under the IRS definition and to coordinate the necessary documentation.
3. Required Minimum Distributions (RMDs) and Medicaid Eligibility
Under SECURE 2.0, the age for Required Minimum Distributions (RMDs) has been increased to 73. This gives individuals more time to grow their retirement accounts before they must start drawing funds. While this is a benefit in terms of retirement planning, RMDs can impact eligibility for means-tested benefits like Medicaid.
In Texas, Medicaid eligibility is based on income and asset limits. As RMDs are considered income, they could potentially push someone over the income limit for Medicaid eligibility. For John and Cynthia, planning ahead for RMDs is essential. A financial strategy, such as using a special needs trust, may help mitigate the impact of RMDs on their Medicaid eligibility.
4. Retirement Accounts and Disability Planning
The SECURE 2.0 Act allows for some flexibility in planning for disabled beneficiaries. For example, it is possible to leave retirement assets directly to a disabled beneficiary without them losing eligibility for benefits like Medicaid, as long as the assets are structured properly.
One important strategy for ensuring that retirement assets don’t negatively affect a disabled beneficiary’s benefits is to designate a special needs trust (SNT) as the beneficiary of the retirement account. This trust can receive the assets without disqualifying the beneficiary from essential benefits. In Texas, a properly structured special needs trust can help manage retirement assets while protecting eligibility for Medicaid and other benefits.
5. Summary
The SECURE 2.0 Act provides a range of changes that can benefit individuals with disabilities, especially in terms of accessing retirement funds early and planning for RMDs. However, it’s important to understand how these changes affect benefits like Medicaid and SSDI. For Texans like John and Cynthia, working with an experienced estate planner is essential to make sure that these provisions are used to their advantage while preserving their eligibility for crucial means-tested programs. If you would like to see how you can benefit from the SECURE 2.0 Act, reach out to us today to schedule a free consultation!
