Episode 30 — What Could the Secure Act Bring to Your Financial Life? — Part 2
With all of the positive changes that new legislation can bring to our lives, it’s important to also consider the less appealing changes that can come with it.
After uncovering the new possibilities that the SECURE Act could offer us in part one of her mini-series, Danielle Howard is back with a critical eye to explore its potential downsides and discuss options for adjusting your financial decisions accordingly.
In this episode, you’ll learn:
● What the elimination of stretch IRAs could mean for your legacy planning
● About proposed changes to distribution rules and its tax implications
● Strategic planning ideas to navigate some of these downsides
● The importance of working with a fiduciary to make informed decisions based on your personal situation, values, and goals
● How Danielle is walking the walk in finding her next best self
● And more!
Listen now to learn more about the SECURE Act and the changes it may bring to your financial life!
[00:00:02]Welcome to the Wealth Done Differently Retirement Podcast. Danielle Howard a certified financial planner shares insight into the financial tools techniques and temperaments needed to make the most of your retirement dollars and relationships. Danielle bridges the gap between Wall Street and Main Street bringing complex financial topics down to earth. Danielle will educate and inspire you as you define and refine your version of prosperity. [00:00:35] Hello and welcome to Wealth Done Differently Retirement with Danielle Howard a Certified Financial Planner. Today’s podcast is part two and Danielle introduced us to the secure act last podcast and we really talked about a lot of the positives that she was seeing from it. Some of the things that could be positive in that legislation. And today it is part two which are the possible downsides. It’s kind of you’re not feeling so secure with the secure act. I think I phrase it as not sure act but we’ll see what we say when we get into the Information today. Again I’ve got my I’ve got my desk straightened out I’m in class ready to listen to you. All right where do we start today? Again. [00:01:20] I just I want to make sure that people understand that their situation is, is truly unique and to themselves. And that my job here on this podcast is to give you some insights some wisdom to plant some seeds to encourage you to do some homework. Do you look at your own what is best for your personal situation and that you are unique and that you want to be working with an advisor so don’t take anything I say to heart to deeply make sure that you’re having conversations with your professionals to make sure that you are doing what is best for your personal situation. [00:02:01] Exactly. Don’t just run with it. Talk to somebody who knows that’s exactly what that’s Danielle or whether it’s somebody that you’re working with talked to somebody who knows what they’re talking about. [00:02:10] Perfect yes. So we’re diving in this week to maybe not feeling quite so secure as we wanted to be. There’s there’s always these clouds on anything that goes goes through Washington you know we want to make sure that we’re using it wisely. But the reason things get through legislation is because there’s money behind the momentum and and we need to be careful. So we’re going to talk about some potential downsides of the of the secure act. All right. Where do we start today then let’s just a quick review. We talked about what it was the setting every community up for retirement Enhancement Act of 2019 bipartisan. It passed with flying colors which is is rare and on its way to the Senate now. And I think again there’s there’s another version of this that the Senate is working on. So somewhere in between these two elements they’re going to make some changes and we want to make sure how we how we understand all of this. But the downsides that we’re going to be looking at today is one of the things that they are looking is eliminating the stretch IRA also known as the legacy IRA. Now the stretch IRA is a tool that has been used for, for many years to extend the life of an IRA over one or several generations for non spouse beneficiaries. And yet now there’s a lively discussion out there as to whether IRAs should be used as a way to pass on wealth or are they really only a vehicle that should benefit the IRA owner. And I can take that discussion off line and we can you know delve into it. I think it is it’s a very personal choice as to what people are trying to accomplish for themselves. [00:04:11] Yeah I mean I think again it’s just like you said the beginning. It’s good information but you’ve got to know how it fits your personal situation every time. [00:04:18] Right. I was fortunate and that my my Aunt worked very hard she was one of those older beneficiaries of a really good solid pension she she was receiving my my uncles who worked for the railroad and the amazing pensions back then. And so her I her personal IRA grew and she was taking the requirement of a distributions but because she was receiving a really good pension and she lived a modest lifestyle and you know when she passed away at a ripe age of 94 after jumping out of a perfectly good airplane on her ninetieth birthday 80th birthday I’m sorry. Idea but she left some inheritance for my two siblings and myself so I benefited from inheriting her IRA. We inherited as non spouse beneficiaries. So the way I need to take money out of this is based on my life expectancy. So every year there is a required minimum distribution that I need to take based on the account value as of December 31st of the prior year and I need to make sure that every year I take that out but it’s based on my life expectancy not hers so much much younger. If it is properly managed and depending on how much I could take more of it out. But yeah again the minimum amount I can take out. It could last my whole lifetime and it could go on to my beneficiaries. What this law that is is changing. Basically the government knows that there’s the biggest pot of money out there for them to tap into is sitting in IRAs and 401k’s and retirement plans. And when somebody inherits it they many people just cash out the whole thing. But when you cash it out you have taxable income is taxed as ordinary income it’s not capital gains it’s ordinary income. So you’re going to be taxed on this right now because I can take a you know just taking that required minimum distribution. Yeah. It doesn’t increase my income a whole lot. Just just a little bit. The new distribution rules are going to change that. They’re looking at you need to pull all money out of an IRA for a non spouse beneficiary within 10 years of the IRA owner’s death. [00:06:54] Well that’s a big change. [00:06:56] Yeah and that the Senate’s version proposes a five year distribution but it exempts retirement balances that are under four hundred thousand dollars so I guess we’ll see how this works out in the in the wash. But you can anticipate that there’s gonna be some version saying you need to take this money sooner than later. [00:07:16] Yeah. Imagine if you if you inherit that at 40 years old and you know you’re working in the prime 40 45. All of a sudden you have to take that over 10 years that increases your income tremendously your tax burden goes way up. [00:07:30] You got it. Oh yeah. You know it’s possible a raising taxes on the middle class savers right when they’re in their peak earning years. I see this as a potential downside. And you know there are rules around that with if a child’s owner. Sorry if the owner’s child is still a minor or the beneficiary is chronically ill or disabled or if the beneficiary is no more than 10 years younger than the I.R.A owner. Yeah there’s there’s ways to get around this and the surviving spouse does not is not impacted by this 10 year distribution rule. However everybody else non spousal beneficiaries the bulk of people who will be inheriting a tremendous amount of amount of wealth over the next 10 to 20 years. It could really impact them. So we have to take a look at our current tax environment the tax laws that changed in 2018 where we basically have you know there’s seven different brackets ten twelve twenty two twenty four thirty to thirty five and thirty seven. Overall taxes went down for people however on December 31st of 2025, twenty three provisions from the tax cut and Jobs Act are going to expire and two of the big ones that will impact especially people who are beneficiaries of IRA’s is the tax brackets are going to go back up. So not only are you in your prime earning years your taxes are going to go up just because the tax laws change if they don’t. The sunset provision right now 2025. That’s all going to change. And the other piece is the standard deduction that just recently doubled is going to sunset. And so for many people who have taken advantage of that doubling of the standard deduction to get them into a lower tax bracket that goes away as well as tax brackets just going up and then you add that element of you’ve got to pull money out of the IRA with either within either 10 years or five years you put you. Pushing yourself into a higher tax bracket and more of it’s coming out is as ordinary income you know. So I think this is something that people really need to create awareness around and do some strategic planning. That can be huge. [00:10:18] Absolutely. [00:10:20] I think this you know the secure act is going to require this inherited plan to be distributed within 10 years. It’s going to raise revenue because tax collections on that inherited gain. Or is it going. Yeah it’s going to happen earlier and at higher tax rates. Again just creating that awareness and depending on a personal situation it could possibly raise taxes on savers who would otherwise you know benefit from an inheritance and not pay taxes until they have to retire. Withdraw it a little later on or in in lower amounts with those required minimum distributions. [00:10:59] Yeah this is this is great information. Everybody needs to hear it. Unfortunately it’s not the happiest conversation but I do appreciate it. What’s next on this list. [00:11:08] Well I think there’s some strategic planning ideas that you know you can consider to possibly work work around this. And as I said at the very beginning take nothing I say as a blanket recommendation for you or for every IRA or retirement plan owner but if you time things correctly you might want to consider a Roth conversion. This is an effective planning tool especially right now when tax rates are historically low. And if you believe that tax rates are going to stay low then don’t worry about it. I personally am looking at the national deficit don’t think that we’re going to have low tax rates in the future and ongoing. So if you feel that you know we’re going to see higher tax rates not only because of potential sunset but just because you know we need to get the national debt under control. And that’s one way and increase spending whether it’s for Medicare whether it’s for military whether it’s the other entitlement you know as long as that spending goes up where are they going to get it primarily from taxes. If you think the tax rates are low now and they’re going to go up you may want to consider a Roth conversion. That is a way you know you’ll pay the taxes now but you’re going to pay them at a lower rate. You get it into a Roth IRA a which means down the road either you personally or your beneficiaries would take that money tax free. Setting yourself up for that legacy element you would still have to take it within that time yet you know that 10 year time frame or five year time frame. But if it’s in a Roth and you have take advantage of you know a growth economic environment those distributions are going to come to you tax free. [00:13:09] Got it yeah that’s always a positive. [00:13:11] Now you may want to look at the type of beneficiaries you know your family’s situation you know ongoing strategic planning looks at you know creating flexibility it’s review your beneficiaries you know if you do have a Roth IRA and you have a beneficiary who is in a higher tax bracket and you think is going to continue to be in a tax bracket maybe you look at your beneficiary designations and focus that Roth on you know that they get that and then maybe you have a traditional IRA and you have heirs that are in lower tax brackets and you want to you know shift your beneficiary designations more to focus on them. [00:13:54] Bottom line nothing is, is static and set in concrete. [00:14:00] You can make changes to this ongoingly and this is why you want to be working with your, your advisors to take a look at what is your what are your needs now for liquidity and lifestyle and what are you trying to set up for, for legacy purposes down the road. [00:14:17] What’s next on THE LIST Danielle. [00:14:19] A real creative planning tool for those who are philanthropically inclined would be to look at using a charitable remainder trusts. You can have your IRA a fund the trust at death and the beneficiaries would get regular income stream from that trust. Similar to required minimum distributions from an inherited IRA. And it could be for a certain amount of time or for the beneficiaries lifetime. The assets are only taxed when they leave the trust so they’re not constrained by that 5 or 10 year payout then upon the beneficiaries death the trust’s remaining assets would go to a charitable organization of the original IRA’s choosing hopefully it would stay that way for the beneficiaries perspective. You need to look at some if there’s some intricacies around here and again based on a person’s situation may be a viable tool to navigate that five or ten year payout from the traditional or Roth IRAs. Get around that. Yeah I think I think again it’s about creative planning but based on what is your true vision of prosperity. Knowing that that that wealth incorporate so much more than just the dollars wealth in its true meaning means wellness in all areas of life and putting the financial elements to to support you in that true holistic wellness is important and using whatever tax legislation whatever tax laws are currently in place. Whatever economic environment is currently playing out to your advantage is that ongoing strategic planning process. [00:16:21] And that’s what I want. Really. I really want everybody to hear on this podcast is ask yourself this question How much of this the secure act did you read up on how much of the legislation did you study how much legislation do you normally study. And for me it’s really close to that zero percent zero. I learned about the secure act from another gentleman that I was talking to who is a financial adviser. You are giving an incredible overview of it even deeper than he and I got into a discussion about this is where I’m getting my information right. And this is where your audience is getting their information. It needs to be something where you you need to work with professional because if you’re not going out and studying all these different changes and doing everything yourself you could really make some mistakes. And and I know that I could make some serious mistakes if I don’t know all the ins and outs that’s why I do rely on talking to Danielle and be able to have conversations like this and get getting educated. So Danielle I just wanted to say that I know that I kind of threw us off the rails here but it’s so important for people to be able to talk to a professional and get this gain this understanding because we don’t do this on our own. That’s exactly what you’re passionate about and learning and teaching and passing on this information so I appreciate it. Thank you. Yeah. And so again I guess I didn’t mean to derail us. What’s next on the agenda today. [00:17:49] Last week we talked about annuities and the employer defined contribution plans. Your 401K’s I think it is those kind of sitting on the wall going well there’s some good sides of this and that people can get that a you know payment that they know that they’re going to have for the rest of their life. And then today we’re going to talk about the maybe the downside of that. There’s a lot of critics out there that are saying that the secure act amounts to a cave in to the insurance lobby. [00:18:24] Again I’m not in favor of some background music to this I’m not sure that it’s a new DVD. Yeah. OK. So they’re saying it’s a win for the lobby. [00:18:38] Well you know the insurance lobby is a huge contributor to the bill co-sponsors Committee Chairman Representative Richard Neal Democrat of Massachusetts. The main and the committee’s ranking member Representative Kevin Brady a Republican Texas so again I’m not going to get political on this. I just want to create an awareness that there’s a lot of money floating around Washington D.C. how things get passed and why those out there to be judged by somebody else. The idea behind this is it gives a fiduciary a safe harbor 2 to 401k plan sponsors with basically to allow them to offer annuities with to their plan participants. And I believe you know annuities can serve a place in a person’s plan. You know they are a tool but just like you know you go to Lowe’s and you look at all the different tools that are out there to help you build something you want to make darn sure that it’s the right tool for you to use. To build what you’re trying to build. You know annuities are expensive. They’re complex and usually pretty darn illiquid. And you know you want to know how is this going to serve you and your situation before you get into one whether it’s in your employer sponsored plan or outside of it. And I think you know the proponents say you know people would rather know that they’re going to have a set amount of money every month you know or be more than you. When I have people who have to plan and be intentional of what to do with the lump sum amount. Everybody’s in a different situation. And I think it’s just important for people to understand their options and then based it on what’s important to them. [00:20:32] My biggest concern is that I remember my first job and possibly probably my second job as well when I had to sign up for the 401k. I had the opportunity to sign up for my employer sponsored plan. I didn’t know a lot right. I didn’t know much. And so I knew that there was three things I could choose from and it was basically aggressive medium conservative. Those were my choices for the 401K and I just picked one. And I think I turned to a buddy which should be picking here and then they’re like well you’re young pick aggressive. OK. So I did. That’s really the research I did. It was like 17 seconds. And it was not a good idea. So my concern is you know with annuities in an employer sponsored plan there’s a lot of different types of annuities out there. How are people going to educate themselves if this is a check box. Do you want an annuity check this box. Okay. That’s great. I don’t think people are going to be able to do that research you’re going back to your analogy. It’s like walking out of Lowe’s or Home Depot with a beautiful box of screws and a hammer. [00:21:30] You’re not going to end well if those are the two things you’re walking out with because you’ve made the wrong purchase one way or another. You needed the nails or you should have gotten the drill. [00:21:41] Some just don’t match up. So what are your thoughts on that as far as how much education is going to be done before people check the box and say yeah I’ll take an annuity. You know it’s like a side of fries. [00:21:50] I think that’s the important piece. What I what I see now is is folks that have large 401K.. Well people in the 401K world that are participating in employer sponsored plan even though these plans are supposed to be educating people many times they don’t go to the depths or people are just busy and people folks just don’t said that as a priority to go you know retirement. Oh that is so far down the road. I don’t really even need to think about it. Just check this box for now. And it doesn’t come into their awareness until they are on the cusp of making a pretty big transition. By then many things have been set in stone for so long it’s like hardened concrete. And you’re you know are you. How are your feet immersed in it and are you about to be thrown into a pond and sink or is it something solid that you’re able to walk into here. Your future on you know I think you know buyer beware and I think the more people are willing to ask questions or get their trusted advisers involved and really you know play out what’s important not only to them in their lives now but what they are thinking about down the road you know. And then a lot of this stuff can be beneficial. I think with you know looking at especially the stretch IRA issue that not only covers you know what’s needed in your own life but what are you looking at as far as passing on your legacy. And I look at legacy planning it’s not just about the money what what values what life story is what are your hopes and dreams for you or for your heirs and what’s the best way to prepare them you know. So being proactive in a way that you’re aligning yourself with the team you’re building a team that is in that what we call the fiduciary capacity that is really truly seeking out what is in your best interest and asking the right questions. And a lot of people don’t even know what the right questions are. I did a podcast on that a while ago. So let’s keep educating people. Let’s start you know being willing to talk about money in new ways when I say doing your dollars differently in retirement that the distribution phase is entirely different than that accumulation phase. And it’s one thing to be in the accumulation phase and dealing with this legislation changes or tax law changes. It’s a whole different animal once you move into the distribution phase and are looking at what’s the best way to take Social Security and how does taking social security impact my ability to, to work. Now if I can continue to contribute to an IRA you know that the moving parts they just added a whole bunch more moving parts. [00:24:53] Yeah and that’s exactly it and we’ll talk about that here at the close of the podcast about working with a professional. But I want to go back to something that before we even started the podcast you mentioned something that you wanted to talk about today and that was your next best seller. Yes but you have something for us. I wanted to make sure I didn’t forget that. What have you got for us. [00:25:15] Well I think you know I have to walk my walk before I can talk the talk and I’m all about helping people create their next best self and to look at what is bringing meaning and purpose and joy and excitement to their life. And I just want to toss out the idea you know on the podcast. Moving forward my hope is to share some tidbits or what am I doing to limit myself and I am on the cusp as this podcast is probably going to be posted in mid-July. I will be celebrating a birthday and. And in two years I’ll be celebrate breathing a pretty big one on that sixtieth. So I’m starting to think you know the Daniel Pink’s book when he talks about people tend to do big things there at the end of the decade or at the beginning of the decade. And I am really thinking very hard. Believe me I’m having to think about it hard because it’s a pretty big fight to hike the Colorado Trail and do half of it in a summer of 2020 and then finish it off in 21 two to really celebrate my my sixtieth and my thought is that it’s a five hundred and forty eight miles. [00:26:45] Wow. [00:26:46] That’s amazing. Absolutely gorgeous gorgeous Colorado. And I’m not overly excited about spending a whole lot of nights on the ground but the idea of asking people who’ve spoken into my life and who have helped me become the person I am to join me at different places along the trail whether it’s a night at an Air B and B or at a restaurant with a girls gathering or having you know family or dear friends join me for a day and we all sleep on the ground. I don’t know. So yeah it’s it’s kind of scary speaking it out in public like this is going oh my gosh now I’m kind of committing to it and basing my. We’ll see if it happens. But anyway I just want to toss that out and I encourage everyone to really take a look at what does it what does it mean to create your next best self to face some of your fears to enter into this fall season of life in and in a way that keeps you engaged that keeps you thinking that it isn’t just you know off the shelf traditional way of looking at retirement that we get the opportunity to do it completely differently. [00:28:04] No. Absolutely not. That’s great. That’s fantastic. I look forward to hearing about the adventure seeing pictures hopefully joining you along the way somewhere. [00:28:12] But I will be more than happy to ride my motorcycle 500 some odd miles but don’t know if I could do a hike like that. That’s it. It’ll be great. [00:28:21] Danielle I want to wrap this up. We’re out of time today but kind of going back to the annuity discussion and the 401K discussion and all these different things are so much that people need to know and understand and they could do all their research but if they’re like me they just don’t have the time and that’s not what our desire is. I know that professionals like you do this so that they can educate their clients and, and I got a confession to make him a very honest person. I’m prideful of that but at least twice a year I lie through my teeth Danielle. Yes. I mean really. And here’s what the lie that I constantly tell was when I update my phone. It asks me if I’ve read the hundred and forty seven page document that they put up. [00:29:04] There you go. As a welcome disclaimer whatever they want to call it. Have you read it. You bet. [00:29:09] Yes. Just please install it on my phone and stop bothering me right. That’s the thing. So I lie a couple of times a year because no I don’t read that I don’t have time nor desire. And honestly I would fall asleep. That’s just all there is to it. So they need to read. People need to reach out to professionals like you because let’s be honest with ourselves we’re not gonna read all of what the secure act has and then compare it compare and contrast positive negative and I know that’s this podcast just like the last one but lots of questions give them the contact info please because they need to call somebody and obviously I prefer to be you. [00:29:44] Thank you Aric. You can reach us for a one on one one on one. Take a look at your personal family situation and talk to us about what a journey of financial health looks like at WWW.wealthbydesign4U.com to listen to other podcasts or read some of our, our blogs look at complimentary webinars or are doing your dollars differently, Of Course you can find that all out at DanielleHoward4U.com. [00:30:20] Fantastic. [00:30:21] Thanks again for your time today. You bet Aric. Thank you. [00:30:24] And thank you all for listening to the wealth done differently. Retirement podcast with Danielle Howard. If you have not subscribed to the podcast yet please click the Subscribe now button below. This way when Danielle comes out with a new podcast it’ll show up directly on your listening device. This will make it much easier to share these podcasts with your friends and family. And if you have a friend or family member or co-worker that does read those updates that these these phones send out don’t bother sharing the podcast because obviously they do tons of research and they’re going to be fine. But I don’t think any of you have anybody that can be honest and say they’ve read the whole thing. So share this podcast with them let them listen and then formulate those questions. You guys can have great discussions and then y’all can call Danielle on speakerphone and get some true good answers. Again thanks for listening today For everyone at Wealth Done Differently Retirement. This is Aric Johnson reminding you to live your best day, every day. And we’ll see you next time.