SECURE 2.0 - All you need to know...

Welcome to another edition of the what's Next Retirement Podcast with Craig Weir. Life is full of transitions that have a financial impact now and in your future. When finances are affected, there are always questions to ask and choices to make. As an independent certified financial planner for well over 30 years, Craig has helped Americans make decisions that give them their best financial futures. The experiences with so many clients has given him a unique perspective to help with what's next for you as you navigate the unknowns of your own life. What's next? Answers to the retirement issues on your mind.

Hi there, this is Craig Weir with what's Next for Retirement? Hoping to give you some really good info today on a brand new subject that's out and trending all over the Internet. The Secure Act 2.0 just got passed by the House and the Congress and there's a lot of articles and things out there. What I hope to do in this brief podcast is just to kind of distill it down to really, what do you need to know out of that? For most of the people that listen to my information and follow us, they're pretty close to retirement or already retired and looking for ways to really save taxes and to get the most out of their retirement assets in their future. So we're going to talk to you today. So there's two elements of this that I really want us to kind of dig into and I'm just going to jump in with both feet. You know, there's, we want to talk about required minimum distribution changes and we're going to talk about the future of Roth IRAs. You know, a lot of people fear doing Roth IRAs and the big conversions because they think that the Roth IRA is going to change and somehow the government is going to take that away and they use that as a justification for not converting. And you know, I don't have any IDEA what the 435 people that we elect to both houses of Congress are going to do in the future. But we can listen to what they, we can pay attention to what they do and the actions that they take to kind of get clues of what is likely to occur. And, and then we just kind of, you know, we pay our money, we take our chances, but a lot of people are afraid of things that really just aren't, aren't going to exist out there. So I want to prove to you that there's this groundswell of approval of Roth IRAs, and probably that's not something to be afraid of. So let me just kind of dig into this. First of all with saying this. If you're already taking RMDs, so you're already 72 years old, there's, there's really not much in the new Secure 2.0 act that's going to affect you. Unless one particular year you happen to fail to take an RMD in that particular year. And I'll get into that more as we go on. So if you're already 72 or above, there's not a lot different, but that doesn't mean there's nothing in this podcast for you. There are a couple of elements that you may want to listen to that could impact you as it relates to either, you know, the penalties that exist in the future or if you're charitably minded and you do a lot with charity, that there's some stuff in there for you as well. Okay, so I've kind of broken this down into, I guess, five of the more significant points that are going to relate to those of you that generally follow the kind of information that I like to put out. If you're listening this, you probably are what I'll call the IRA millionaire. You're the man, woman, couple that have amassed a million or more sitting in your IRAs. It's all tax deferred. You probably are not taking very big distributions out of it and you may never really tag into it unless you want to take a big trip or buy a new car or something like that. So that's kind of my definition, the quick and dirty definition of what is a Roth, I'm sorry, an IRA millionaire. So I've got this broken down into really just five of those big points. But we're kind of first, I want to talk about RMDs and the impact of the Secure Act 2.0 on you. And then I want to talk about the future of Roth IRAs as evidenced by some of the components of this new bill. And then there's kind of a special tax planning bonus that that is kind of built into here. And then I'll also tell you where you can kind of plug into some additional resources to learn more. Okay, so let's talk about RMDs first. Beginning January 1st of 2023, the RMD age is going to go up to age 73. And as you probably know, currently that is age 72. It used to be 70 and a half. The Secure Act a few years ago raised it to age 72. And now the Secure 2.0 is coming in, raising it to age 73. So you have, and there's more to that story, as you know, if you're following this. But let me just build the. Build the case for you slowly. So that means you have one more year to defer to age 73, or you have one more free year to get your conversions implemented. And as you know, I'm a big fan of the second one because the math just seems to work out in your favor to get the conversions done. So if you're under age 73, you just really got a gift. If you're already 8, if you're already 72, then just keep doing what you've been doing. Nothing's going to change. The rates are published, you use the unified table and you'll figure out what your conversion is and you got to take it. But if you're currently age 64 or under, you're going to have actually all the way out to age 75. So if you turn age 75 in 2020, in 2033, you don't have to take RMDs until age 75, which is really awesome for the same reasons, you know, the mainstream media and those talking points are going to say, hey, you just have longer to defer it. I think that's a big mistake for most of the people that are IRA millionaires, it's a big mistake because all you're doing is now you're kind of just saying, well, I still have to work on the RMDs at age 75, but now you have fewer years over your remaining lifespan to do it. So your RMDs are just going to be larger. You, you just get to defer it and have bigger RMDs than the average. So, you know, if you were converting back in the old days where you started to have to do RMDs at age 70 and a half, what they've just done is they will have extended that five more years. Well, that's five more years of deferred growth, and I might add, untaxed deferred growth compared to, if you do Roth conversions, you can get all that money moved over or the right amount of money for you moved over to where you don't ever have to pay taxes on it again. So when you see them talking about this extended RD age, what I would do is I would just, in my brain, I would be planting the seed that, okay, what I'm doing now is I've got an extra year or two or three to be able to actually get RMDs done sooner rather than later. If you're already doing conversions this doesn't really change a lot if you're doing them in the most efficient, efficient way. Because if you do them in the most effective way and optimize those, your goal was never to get it done before RMD start. That would be a nice thing to accomplish. But the goal of an optimized Roth conversion strategy doesn't have Medicare impact, doesn't have age impact, doesn't have rmd, doesn't have an age of an RMD impact. It has has to do with what mathematically is the best for your circumstance that maximizes your net worth and also maximizes the amount of tax avoidance that you're going to get from that. So if you're currently 64 years old or under, you just got this. You've been given another few years to get the conversions done without having to do RMDs first before you do the conversions. So delaying taking those RMDs only causes more taxes, more Medicare premiums, and usually a lower tax adjusted net worth than if you had found an optimized way to get the conversions done prior to that. Alright, so that's the first two points. The last point having to do with RMDs is starting in 2023, the penalty for failing to get your required minimum distribution out goes down tremendously. Right? So for those of you that aren't aware, if you're currently, if you are supposed to take an RMD and you fail to do that, you've got a 50% penalty for having failed to do that. So let me translation is if you were supposed to take $50,000 out in your requirement, requirement of distribution and you don't get it done by the end of the year, then you've got a $25,000 penalty starting in 2023 because of this new secured 2.0, the penalty is still steep, but it's just 25%. So that penalty goes down from 50% to 25%. And they've even written into the new law as soon as the President signs it, that you can reduce that 25% down to just 10% if you're proactive and you get it done and submit a corrected tax return in a timely way. So what I probably should have mentioned at the beginning of the podcast too is that the House and the Senate have passed this, but at the time I'm recording this, President Biden has yet to sign it, but everybody believes that there's no reason for him not to sign it and he'll be excited to get it done. So it's probably Just a matter of working it to the top of his list. Okay, so a lot of changes in the required minimum distribution that you have to make. I believe the takeaway on that is that you've been given a gift of even more years to get the conversion done if you need it. But your target should never be to slow down your conversion amount because of the RMD age. Let's let me say that again, maybe a different way. We have discovered through years and years of a lot of calculation and a lot of clients in a lot of different circumstances that the optimal Roth conversion strategy has very little to do with your age, that you have to start taking required minimum distributions. It has more to do with mathematically and strategically what works best into your cash flow, your tax adjusted net worth, and avoiding the absolute greatest amount of taxes that you can. So the fact that they change the RMD age doesn't change your optimal strategy very much at all. All it does, it gives you more time to get it accomplished if you need it or if it's best for you. Okay, so, you know, I mentioned earlier too that, you know, we talk to a lot of people and a lot of comments on a lot of our social media and replies to email that we met, that we blast out as people have a really strong opinion that they should not do Roth conversions because Congress is just going to go in and change the laws and, and they will have done all their conversions, paid their taxes, and then everything changes. And like I said, I have no idea what Congress is going to do in the future. But they do things typically consistent with what they've done in the past. Sometimes they are inconsistent, but that takes a decade or two has passed and a decade different Congress with a different attitude makes different rules and changes. But when they do that, they normally put a line in the sand and they say, okay, if you do this, whatever it is that we're talking about, if you do it after this date, then the rules change. Seldom do they go back and make very sweeping. It applies to everybody. Now, I know one of the arguments is that, well, they did that with the IRA stretch rules, but that's. While I know that does impact families, it's different than going in and saying all of a sudden all this money that you had that you paid taxes on is now taxable again. I think that's a very irrational fear that in my history of 40 years in this industry tells me that the likelihood of something like that is pretty insignificant. In fact, if we had circumstances where something that huge occurred, probably we'd have a whole lot bigger problems in our life from our government than just that. So with that being said, we can look at what's happening and what they're doing with Roth conversions. And the Future for Roth IRAs I believe is bright. And I think that means that Roth conversions are very much something that people need to consider and take some really strong action on very quickly. So in the new Secure 2.0, there's a really big one here and that is that, you know, currently if you have Money inside your 401 that's in a Roth 401 account, inside your employer plan, you have to take requirements minimum distribution starting at whatever age you're required to do that. Now they are not taxable, but it's a way that they get those tax free dollars that are accumulated in the Roth 401k out of a tax free state and now into just put into a brokerage account or whatever it is that you want to do with it. Well, the cool thing is, you know, well, and I should say this, so our recommendation to people is when they retire, if they have money in their Roth 401k account, then you want to get that rolled out to a Roth IRA in your own name so that those required minimum distribution rules will never impact you. But starting in 2024, under the new Secured 2.0 Act, Roth 401 s are actually going to be exempt from required minimum distribution. So if you like your plan at your company and you like things as they have been, and you don't feel like you need any other investment alternatives available to you by rolling the money out, there's really no reason to do that. You no longer need to roll that money out to an IRA to escape RMDs because they're not going to exist. So that's a big bonus point in favor of Roth accounts in general. Even if they, I mean especially because they take it even in so far as Roth 401k accounts. The other thing too that is kind of telltale on the future of Roth accounts is one of the other things that they've done inside the act is for those that are still working, they're making it now to where employers are going to be able to provide employees the options of receiving their vested matching contributions directly into Roth accounts. Wow. Think about that. So all that money that used to be matched and go to your tax deferred account, now you're going to be able to have that go over to a Roth account. While you may, maybe you're only five or ten years away from retirement. You're also probably contributing the most that you've ever contributed. And so it's a real good alternative to really push your HR department to get them to see if they're going to make some changes and amend your plan document with your provider to make it to where that provision is something that you're going to be able to do. It's going to take employers a little while to work through the paperwork and to get the plans updated and all that kind of thing. But you can make your case to the HR that that's something that's important to you and maybe your voice and a few other hundreds of people who call in to do that will make a difference for you. Okay, so so far we've covered what's happening in the RMD world going forward. We've talked, I've mentioned to you that the benefit of that is not to allow you to defer it longer, but it gives you more years that you can get the your optimal conversion game plan implemented without the risk of having to take an RMD while you're still doing conversions. Which by the way, there's nothing wrong with that. But we've talked about that. I've tried to give you a couple of bullet points here so far that just say, hey, look, the future for Roths is not gloom and doom. It's really pretty bright. And Congress is putting their money where their mouth is and allowing people to do that. Now keep in mind, all this is done under the name of raising revenue, right? So you know, I can trust a couple things about most politicians aspirations and that is that they want to get elected next time. And so they tend to make decisions and do things that are, that are popular with the constituency giving you the Roth option serves two points. It's popular and it raises revenue because every dollar that goes into a Roth is money that gets taxed. And as we all know, the government is in dire need of tax revenue right now. So I mentioned kind of a bonus section here for you and that's a kind of a tax planning bonus that's thrown into this Secure Act 2.0. And it really applies most to those of you who enjoy making charitable donations. And you do significant charitable donations, as significant as certainly a relative term. To one person, $5,000 is significant. To another one, a million dollars is significant. But currently you can use something within the law called a qualified charitable donation, which allows you to move money directly from your IRA to a qualifying charity. And you can do that up to $100,000 each. So if you're a married couple, that means you could actually do $200,000 a year, has to come directly from the IRA and go directly to the charity. And there are some rules that you need to understand. So dig into that more than just what I just said to you. But when you, when you do that, when you do one of those qualified charitable donations, it fulfills your required minimum distribution of amounts to whatever degree it is. So if your RMD is 200,000 and you do 100,000, then it fulfills 100 of the 200. If your RMD is 50,000 and you do 100,001 to charity because you don't think you're ever going to need the money, then your RMD is taken care of. But that's also a charitable donation that you can make that is not, that does not count toward those maximum deductions, deductible amounts that exist in the IRS tax codes. And for those of you that make charitable donations, you probably understand what those are all about. For the rest that don't, I'm not going to bore you with all that stuff, but this is a real bonus for charitable givers because you know what they've done in the law is they've said beginning in 2023, you can actually redirect 50,000 of that hundred thousand, keep QCD limit to go to a variety of different kinds of charitable trusts that they name. It's a one time deal, right? So it's not like you can do it every year, but it's just a way to get to expand the way that you can give money to charity. And sometimes putting it into a trust is beneficial to you during your life and then it goes to the charity afterwards. Other times it's good for generating income to you. So there's a variety of things there that just are making the charitable giving a little bit more expanded in this. Okay. You know, so there's, there's really a lot more in the secure 2.0 bill. But I just wanted to boil it down to, you know, the actionable points. For most of the people that, you know, read my books and pay attention to the podcast and the email blast that we put put out. I've got a lot more resources that are available that you can see links in the show notes below. I've got two books that you can get off our website. One of them I believe is currently offered totally free as a download. The other is small price in our full color PDF that you can immediately download both the books just kind of blew me away. They both got number one on the bestseller list on Amazon, so they're easy reads. They're not real long technical books. The first book, Paying the Piper, is more about why do you want to do conversions in an aggressive format, and the second one is more about the nitty gritty of what do you actually do. And it's more the how to where the first book is why the second book is more how to. And it's called Roth Conversion Secrets and the links in the show notes will get you into those. Also, you can get in touch with us if you want to schedule a time to talk to one of our CFPs that are experts in Roth conversions. This is all that we do. We don't want to manage your money. We don't sell financial products. The only thing we do is develop Roth conversion strategies that optimize financial situations for the clients that we work with. So if you want to know more about all this information and you enjoy podcasts, if you'll subscribe to this what's Next in Retirement podcast, you'll get a lot more valuable information. You'll be notified as soon as a new podcast comes out and it'll help you to maximize your savings and hopefully live a more tax free life. So thanks for listening, thanks for tuning in. Click the subscribe button if you want to know when more of this stuff is out there and we'll be happy to help in any way we can. Have a great day.

Investment Advisory Services offered through Q3 Advisors this presentation is for educational and informational purposes only and is not intended to be individualized financial, tax or investment advice.