The Rules Have Changed: What the SECURE Act Means for You

We all a little bit different format for the podcast for this particular episode. As you may have heard the secure act now law passed through Congress drums on the Nubian year something I plan to talk about on my next podcast.

But then Ron and I take a segment about it for my radio show that will air this weekend, so I thought. Probably easier to just let you hear that conversation. This is something that will be important to almost everybody almost everybody will be affected in some way by the secure act, some more immediately than others, but in the grand scheme of things. Almost every body will feel the effects of this so here's our conversation, breaking down everything you need to know. I hope everybody has heard about this, at least what I want to ask you to explain it in the news lately there has been a lot of talk about the secure act which was passed into law the beginning of the year where people need to know about the secure act and how it's going to affect well. It's so weird that were finally sitting here talking about it being a law because they started talking about this at the beginning of 2019 yet passed through the house in early 2019 and they said the goal is to have it on Trump's desk to sign by end of the year and then it would go into law in 2020, and you know they were talking about that last January and February, but then we basically never heard anything about it the entire year and then the Senate passes it in December and Trump signed it like three days before the end of the year and boom it is, indeed, just as I said from the very beginning now law here in 2020 sell it seem like it is happened to the last minute yet let you know a lot of people wondering about well most people yeah if you're the average consumer of news yeah did come out of nowhere I mean in the financial industry they've been telling us about it for a year and we were, wondering artisans that can happen or not. But finally did so. There are several components to law some of them aren't going to affect the average person to love.

The components are going to affect nearly everybody. So those are the two I want to focus on the first thing is they got rid of the stretch IRA so let's explain what a stretch IRA run. Let's say your mom had died and left you $1 million in an IRA that would be nice but that didn't happen. Well, that's what I said let's pretend so what with that million dollar IRA, you would've had to make some withdrawals every year. Not huge amounts but you might've had to take out 810 12,000 depending on your age and as you get older you would've had to take a little bit more about each year because the government says you hear this, we want our tax revenue from it. You have to make some withdrawals, but those withdrawals weren't really enough to substantially change your your taxable income and that year yes it was an increase but it wasn't blowing things up for you because you could stretch those withdrawals out of the course of your lifetime.

They got rid of the ability for you to stretch out over the course of your lifetime. So now if you inherited that if your mom had died in January 2020 and you inherit that IRA. You now have to take it out in 10 years, the entire million dollars is a lot of difference. So you could very well take out 100,000 year if you're really thinking ahead, but that's still a big hit to your taxable income. If we add a hunt. I know that they pay you handsomely to do the morning show every day but still adding $100,000 to your taxable income for the year is really a bump you up a tax bracket or to write with bank. So that's one problem.

The other problem is most people aren't going to plan well and there you say well I don't need any money from this year on paying extra taxes on money and take any money out and so you get in the year seven or eight and you haven't taken any withdrawals yet and now you have $1 million, or if it's invested properly more than a million right because been growing and compounding for that partial decade, and in one year you wake up and sit all crap. I have $1.3 million. I have to drain out here in three years. That's quite a bit of you lose it like 40% of it to taxes between the state and federal which could be a big jolt for letter how to figure that out yet so this is going to become an estate planning conversation. A lot of people need to have now if you inherited an IRA. If the person died prior to the end of 2019 you're still under the old rules but if anybody dies from January 1 of this year on and they have the IRA they pass on their beneficiaries there now under the new rules you have 10 years to clean it out so you really have to be careful in our planning estates and thinking about all the stuff now you sit why why did they do this. I think there are a couple components and maybe a couple of unintended consequences. I don't hate it. By the way, I don't hate it.

First of all with the stretch IRA your your deferring taxes by putting money in there and then you continue to defer the taxes when you pass down the next generation and fatal dream. The whole thing in their lifetime. The taxes are just getting deferred generation after generation of net revenue is never being realized this way they know that if you defer all this money then your kids are in have to fork over that tax revenue within a decade of you die so it does help the government get some immediate revenue in such a way that it's not hurting anybody from sales tax or property tax or a raised income tax perspective it's just simply money that you have to pay out of your inheritance.

It's like an estate tax, but for people who have an estate of less than $12 million.

Basically now you should note this does not apply to spouses if you die you leave your 401(k) to Bev. She doesn't have to cleaned out in 10 years. She still has the remainder of her life, which are known, it passes the kids or whoever the beneficiary next generation or whatever.

So note note that spouses are exempt from this now another, and I don't know if you would call this an unintended consequence or not, but I think it is a consequence you think about generational wealth and how historically a lot of the passing of generational wealth has been basically white people right because you go back 100 years. Not that many people nonwhite people own property rights. At the very least, only white people were able to pass down real estate and it's really just been in the last couple of decades that we've started to really see more equality across different races in terms of access to good careers with 401(k)s know that if you could eat if you could say that we even achieve that. Yet certainly it's better than it was 20 or 30 years ago, but if you go back one working generation the people that are dying out now.

A lot of those people that have these retirement accounts are white so this is kind of interesting because in a way it's almost like this is going to even the playing field a little bit. You no longer the money that you save in your IRA is not ever going to get passed down to your grandkids because Zach and Kam are going to have to clean it out within 10 years of you dying are not bells going out with you so within 10 years of Bev dying with no fence none taken your older and you live harder than her. I think maybe that's not true. Maybe Sheila started. In any event, I'm a mole that I'm immature. After you guys are both gone, died 10 years cleaned up so that money is it's not to be generational wealth and the Stutzman so you can see how now we have all this money that's getting injected into the economy and tax revenue is coming in and you're not passing some of this.

Not obviously, there are still ways to create generational wealth with real estate and nonretirement account assets, but just interesting when you think about for a lot of people.

Most of their wealth is in their 401(k) or IRAs that used to be 401(k)s of the rollover just levels the playing field a little bit likely to have old money yeah yeah this kinda interesting when you look at it from that perspective. So we'll see how it all unfolds like I said I don't hate it. It just it's going to require some planning, some things we need to think through as it relates to how we do things during your life, but should we be converting money to Ross while you're still alive.

If not, how are we planning this needs to become a more generational conversation. If the kids are going to inherit $1 million.

There you have to take out within 10 years.

They need to know that like they need to be planning toward that so that their financial plan can be designed accordingly and if you think about it most of the people who are inheriting IRAs are in their 50s because the parents just passed away in their 80s and so your inheriting this in your prime earning years and then you also have to take out all this extra money that's going to be taxable income if the take out IRA so just is going to require some planning and it's going to kick some people up into another tax bracket.

If you don't plan to handle it. So now absolutely well. Another thing in it. Would you talk about the elimination of the stretch IRA appreciate your explaining that great job explaining it.

And also there's another component of the secure act and that is the raising of the RMD a explain that if you would. Well let's explain in the context of you because he really you are so close to have gotten in on the wire you missed about three weeks or something right so in June, your your birthday is June what tent June 10 20 days so June 10 of last year 2019. You turned 70 very big secret. Everybody are a lot of people out there right now going kidney. You are now what we call well into your 70s here six months later, but you turn 70, June 10 of last year which means you were 70 1/2 on December 10 at last he got the right you got in writing to the deadline, which meant you had to make a withdrawal you have taken our India required minimum distribution from your IRA before the end of last year so you took your first one in December. I was very proud to help you fill out the form and make sure that check out to you a great honor. So if I'd been born three weeks late.

If you had been born July 10 instead of June to the first of all, you would not have been 70 1/2 until now.

So you wouldn't of had to take your first withdrawal. Until this year, but always they changed the law as part of the secure act. The RMD age is now 72, so in the year that you turn 72 now you will have to take your first withdrawal. Unless you are already 70 1/2 before the end of last year so at first blush like old Ron will have to take one in 2020, because he will be 72.note once your hit RMD age you're like grandfathered in. Under the old system so you have to keep your servant things are grandfathered in. That's a good thing this is just the opposite, correct.

Now I should clarify.

You are required to withdraw money from the IRA and pay your taxes on that withdrawal. You're not required to spend it there not just taking money away from you and and setting up*you can have this for retirement.

You have to know you just have to pay the taxes on so if you if you take out your entire RMD and go blow it all and then blame the government for it. Well, that's not their fault. They only took like their 25% of so just keep that in mind. So how does this age change affect was people for a lot of people it can be a good thing because if you haven't yet reached RMD age and now you put off another year to that's can help our tax planning lot because it gives us a couple more years that we can maybe get some money converted to Ross if that fits in your situation may be more money that you'll just be drawing down for your income anyway just buys us a long time to get those balances reduced a little bit so that when you do have to start taking withdrawals is not quite as much to make a huge difference for a ton of people. But I do have several clients where we laid out a plan where they're spending their decade of their 60s converting a lot of money to Roth from Iraq will now we got a couple extra years for them to keep playing that game so it's going to be helpful in some cases, not a life-changing difference, but it makes sense that they would change this because you know as life expectancies increase. It would make sense at some of these ages keep getting older. Some of it before you have to start taking money out so it makes sense. They made that change. It's been 70 1/2 for a long time RMD age now is 72 so a lot of discussion needs to happen around that if I would say if you're at least 60 and you haven't really thought through all the strategies you probably need to have a conversation about it you know if you're 45. You have a lot of other things you need to worry about before thing about RMD's.

But I say for 60 or older and you'll have a good plan in place for how you deal with this. No time like the present.

So there you go there's a breakdown of the secure act. I've emailed several existing clients who were going to be very immediately affected by this just a can give you heads up on things you need to be think about.

We have many others who we still need to have a conversation with. I just haven't had time to get everybody yet.

I would have the ones that were most pressing so this is certainly conversation if your client that we will be having in the upcoming year. If you don't work with us already and this sounds like something you need to have a conversation about well no time like today to reach out and schedule a conversation you can go on the website Rosewood wealth management.com and schedule a visit there or if you want to just call us 91939134469193913446 will set up a time to talk to you and to Mr. Stillman's opus. Have a great day Carolina went towards doing business as Rosewood wealth management is a registered investment advisor in the state of North Carolina material presented is intended to be general information and should not be construed by any consumer is the rendering of personalized investment advice