Secure Act

Transcript

John Stillman: Welcome once again to Wright Money Tips with Isaac Wright. I'm John Stillman alongside Isaac, chartered financial consultant, President of Financial Dynamics and Associates and author of Navigate Your Way To A Secure Retirement. You can find them online at wrightmoneytips.com. You can reach out by phone at 804-777-9999. You can call that number or you can text that number, whichever you prefer. Isaac, what's happening man? How are you?

Isaac Wright: I'm good John. Sitting here second half of the year now man. So certain things are coming down the pipe when it comes to our government and how they want to help us manage our money. Whether you want to take that to be sincere or not, but I think we have a good little hit today on a very big act that's set to move forward.

John Stillman: Well, I don't know that we've necessarily ever established ourselves as people breaking down legislation that's currently in committee on Capitol Hill. But I guess today, there's a debut for everything, right? So here we go. There is something called the Secure Act, which has made it through the House with just overwhelming bipartisan support. I think three people in The House voted against it, so nearly unanimous in the House. And then it's, I guess, in committee with the Senate right now. We're told it should be on Trump's desk to sign by end of the year. So I say all that with this context, we're talking about what is currently in the bill, but obviously, it could get changed in the Senate and then get sent back to the House. We'll have to see how that goes. So just keep in mind we're talking about the bill as it's currently constructed today. It could change.

John Stillman: But some really interesting things in the bill that I think could have a big impact on a lot of people who are retiring someday, retired already, dying soon. Basically everybody, it could affect everybody.

Isaac Wright: I was going to say, I don't think it's really going to play favorites here, but yeah, I mean you're right.

John Stillman: So let's kind of break down some of the important pieces of this bill. First of all, it's going to eliminate the stretch IRA and you say, oh wow, I'm really sad the stretch IRA is going away. Wait, what's the stretch IRA? So maybe you should explain to us Isaac, what is a stretch IRA? And then how is this bill changing that dynamic?

Isaac Wright: Well for people, and we're getting questions about this. We have people calling in from our program and so forth and people popping in from the office and clients. And I think it's important to kind of talk about this Secure Act because it's going to really influence and affect most all of us. So when we get to the end of the year, and if it stays somewhat in, let's call it congruency with what it looks like today, you are no longer going to be able to have a non-spouse beneficiary inherit your qualified money, your IRAs, your Roth IRAs and turn around and let them stretch that over their lifetime. So some people were sitting in a position where they wanted to pass money on to their kids, their grandkids, so forth, and allow them to be able to have a provision where they could take that money over their entire life. That would minimize taxes under most circumstances because they could spread that money out for many years.

Isaac Wright: Now that's now set to change where you're looking at a 10 year maximum timeframe to be able to take the full distribution from this money over a period of that 10 years. So just keep in mind that for large retirement accounts, that's going to likely mean a higher distribution amount for beneficiaries that could easily change their tax situation. Cover that a little bit later here. But the main thing that everybody needs to know is not when it comes to your spouse. This is not to do with having inherited money where your spouse inherits the money. This is again a non-spouse beneficiary having a situation where they are no longer able to take distributions over their life expectancy and they're going to be forced to take it over a time frame.

John Stillman: So to use a real life example, Isaac, let's say you inherit an IRA from your aunt Louise, who passes away and leaves you $1,000,000 in an IRA. Now you are 40 years old, which means you're going to have to take a small percentage of that $1,000,000 each year. Let's say you have to take, I don't know, 1.5% is at age 40, what you have to take, okay. So that's $15,000 a year, let's say, 1.5% is what you have to take out. That's with the stretch IRA. What this bill is saying is you now have to take out that $1,000,000 over the course of 10 years, meaning you would have to increase your income by $100,000 a year for the next 10 years. You can see how this would have an impact on your tax planning for the next year.

Isaac Wright: Yeah, I mean that's a great simplified example and I think for depending on your age, again, instead of having that money being able to be distributed over maybe multiple years, multiple decades, you're having a scenario where you're going to have to fast forward that money over to yourself in a shorter timeframe. There are a few caveats to this, so please in mind until this bill gets passed, who knows? But this, looking to be highly probable that this is going to be the situation and I'll tell you why this is likely going to occur, is because the bill is also set to extend the minimum age before you have to start collecting your required minimum distribution from 70 and a half to 72. Which allows people literally, let's call it a couple of years, to delay taking distributions from their qualified plans. And obviously when that occurs, that is a lack of revenue that's going to the government. So they're going to have to have some offset to that. And that's why you're seeing this accelerated benefit in my opinion, pop into the equation.

John Stillman: Yup. So that is an important thing to note. If you're approaching 70 and a half and probably going to have to start taking those required distributions out each year, well you might be buying yourself a couple of years here before you have to start doing that.

Isaac Wright: One thing I will say is if they do pass this and extend the minimum age to 72, that will open up some planning options for a lot of people because whether or not, maybe before you were already estimating you were going to have to take a minimum distribution. Maybe now, instead of taking that minimum distribution, you can turn around and convert that money to a Roth IRA, still cover the tax but necessarily not have to take that money back into a taxable account. So Roth IRA money for those of you don't know, anything you have into a Roth account through a conversion. As long as you leave that alone for five years, you can pull everything including the earnings from that tax-free barring that you're over 59 and a half. But I just want you all to know that there are a lot of moving parts that I think always in the midst of some of these type of congressional moves, offer some opportunities and that's one thing we are doing for clients.

Isaac Wright: And I think most people now than ever before need to have a true financial planner. Not somebody that's just going to pick investments, but understand the rules of the game about how those are, let's call it, how the tax and how the transition of some of this money is going to work.

John Stillman: Very important that you're working with a professional anytime when you're talking about complicated matters of tax planning and retirement planning and estate planning like this. But especially when the rules change on you, it's really important to work with somebody who knows what they're doing. Just like at the beginning of 2018 when the tax laws changed, well there were a lot of opportunities there that you may or may not have actually taken advantage of if you were getting the right advice. So if you had somebody who was proactive and saying, hey, here's how the laws are changing, let's do this, you're in a much better position than somebody who comes along a year or two later and says, oh, you should have done this. Wish we'd been thinking about that. So very important to be working with somebody proactive.

John Stillman: Obviously Isaac, we're talking about the consequences of this particular legislation and how it might factor into the planning of folks that you work with, but in general, do you have an opinion about this bill? I mean one way or another, do you like it, dislike it, don't really care? What's your take?

Isaac Wright: The best way I can explain this is I think it's inevitable. We need more revenue coming in from a tax perspective, so they're not going to allow beneficiaries that are not spouses, in my opinion, whether this gets passed exactly the way it's true to form now or not, eventually they need to have the accelerated tax revenues. So you're looking at that situation first and foremost.

Isaac Wright: The main thing with the bill in my opinion is this, is it's going to also change some estate planning. People sometimes, depending on the size of their IRAs, and how they would like to put "strings on the money" can also set up a trust planning where IRA money can be distributed and have rules going through a very well developed trust where money can be paid out to beneficiaries. And in the past, again, that could all be based upon life expectancy, but now you may have a situation where that trust has to be maybe wrapped up within 10 years and maybe some additional tax planning, some trust planning may be involved here.

Isaac Wright: The main thing, my overall thoughts are on this situation, on this legislation, the Secure Act 2019 is if they do come to pass this and we're having these conversations now with families we serve, is considering converting more of your retirement money to Roth accounts. Roth accounts are still going to have a 10 year pay out provision, similar to what I covered at the top of the podcast here. But at least with Roth IRA money, you're not getting to get hit, or at least your beneficiaries, with maybe a very large amount of taxes. Because I do believe very honestly that taxes are going to look very different here in the next 10 years, 20 years. So generations ahead of us may have to pay a significant amount more in taxes. That's my personal opinion, but historically speaking, we're in a very low tax situation now, so I don't think I'm saying anything that's too off base.

John Stillman: Well I think it's like the great Supreme Court Justice of old Antonin Scalia. He said "That's just my opinion on the matter, which by the way happens to be correct." And I think that's exactly what you're saying about tax rates. This is just my opinion. Tax rates are going to go up, but they are.

Isaac Wright: Yes. Yeah. So that's my main thought. Secondary to that though is you may want to revisit your beneficiaries and who is actually inheriting money knowing these rules. So this may be a situation where you want to revisit how money's being distributed out to family, to people that you care about, to organizations, trusts, planning for anything else when it comes to charitable inclinations. Again these are going to be updated conversations you're going to want to have and as I'll say as we wrap up this, just a little update on the Secure Act and I think it's important for people to start getting their head around this because it looks like it's going to go through. Is work with a financial planner and a firm that can help support you with some of the technical matters that we've covered here today.

Isaac Wright: In addition, just to not having a investment only view about your money, you've got to have a financial planning view when it comes to the, what I call multiple accounts that many people have today from IRAs, Roth IRAs, taxable accounts, savings, checking, bonds, stocks, you name it. And if you don't do this correctly, or at least be in a position where you understand your pros and cons, you're going to set yourself up to where I think Uncle Sam could be a larger beneficiary than you otherwise would want.

Isaac Wright: So I think that's a great way to wrap that up, John, is just think that as this act, we may come revisit this on the podcast here once they actually pass this. But I think you've got to get your momentum towards this because of how overwhelmingly it was supported through the House and likely the Senate. So it's going to be, in my opinion, to some degree, if not maybe completely close to what we have today, some of the rules to the game.

John Stillman: In the show business world, I think they say stay tuned. More to come on a future episode. So we'll keep our eye on this for you. Let you know what you need to know when the act passes, exactly what's in it and how it affects your situation. If you'd like to get in touch with Isaac and the team in the meantime, the number to call 804-777-9999. You can also text that number if you prefer. 804-777-9999. Thanks for tuning in. We'll talk with you again real soon.

Announcer: Information is for illustrative purposes only and does not constitute tax, investment or legal advice. Always consult with a qualified investment, legal or tax professional before taking any action.

Announcer: Advisory services offer through J.W. Cole advisors, Inc, JWCA. Financial Dynamics and Associates Inc and JWCA are unaffiliated entities.