How The SECURE Act Will Change Retirement
After it simmered in Congress for a year, the SECURE Act is now law. If you have a retirement account of any kind, or will one day inherit a retirement account, this will affect you.
John Stillman: Isaac, the Secure Act, I think a lot of people are a little bit dizzy because it came seemingly out of nowhere. The reality is they talked about this all throughout 2019. For those of us in the financial world, we kind of knew it was coming, but if you're just a normal person who doesn't pay attention to this kind of stuff, which why would you, it feels like it came out of nowhere. So there are a lot of points to it, but really for most of the folks that you interact with, there are two things that we really want to focus, on because almost everybody is going to be affected one way or another by these two things. One of those is the changing of the RMD age. So explain what that's all about.
Isaac Wright: Yeah, well and I think John, before I cover that, you and I, we had talked and had a podcast about the Secure Act earlier in 19, just getting people prepared for the fact that it was going to likely become reality. And even though it happened at the midnight hour per se when it came to passing through Congress and legislation in general, these things are now right here on us in 2020. So number one that I want to cover as far as if you're in a retirement or a retiree or looking to retire soon, this Act really changed the ballgame for some of us here and actually probably eventually all of us to be honest. But number one is the minimum distribution now has been changed from age 70 and a half to 72. And for those that don't know what a required minimum distribution is, it's an amount of money that the government basically requires you to take once you hit a certain age. And that used to be 70 and a half, it was a percentage of all of the money you've accumulated in what's called qualified accounts.
Isaac Wright: Now, there were some very small percentage of loopholes there, but for the most part, 90 plus percent of people were having to take minimum distributions at 70 and a half, now, they're extending that to age 72. So it's allowing your IRA money's, your qualified accounts, tax deferred accounts that are again qualified 401ks, 403B's, 457 plans just a little bit longer to grow before the government requires you to take that money. So they are encouraging you, again, thinking about life expectancy, that you may need this money for a longer period of time and allowing you to work longer, let's call it deferring these minimum distributions, I think will be a benefit for most people.
John Stillman: So I think a lot of people would say, "Well it's an extra year and a half. What does that really matter?" Well, there's a lot that you can do in that year and a half in terms of maybe getting money converted to Roth or just like you said, letting your money grow a little bit more before you have to take it out. It could make a big difference for you.
Isaac Wright: Well, I think many people know and are aware that the government requires you to take money out of your retirement accounts, especially as you get closer to these ages. But one thing, just to kind of keep in mind, if RMDs now are being pushed to 72, if you have already turned 70 and a half as of 12/31/2019, you are not eligible for this. You still have to maintain your minimum distributions starting at 70 and a half. So this new plan is only effective for those that are younger than 70 and a half as of 12/31/2019.
Isaac Wright: And then also you're able to continue to put money into IRA accounts after the age of 70 and a half if you're still earning income. It used to not be the case. So again, the government understands that life expectancies are increasing. They want to give the ability for people to continue to put money into their retirement accounts if so, they're eligible to, let's call it.
Isaac Wright: The last thing I want to say about this is, some people do this and some people are not aware of this, but you're also able to make qualified, charitable distributions from your IRA and qualified accounts over direct to a charity and bypass the tax. You can gift that money directly from your IRA accounts, and granted with minimum distributions at 72, a lot of times people that didn't need income would take minimum distributions and give it away through this type of situation. Well, they never changed that from 70 and a half to 72, so you actually can continue to gift money up to $100,000 per year through a qualified charitable distribution. So I just feel like it's important for people to know a couple of the small hinges that again, you heard me say many, many times swing larger doors. We're going to be talking a lot about this with clients and people and families that come in, that are looking for help and advice and a relationship. So I think again, just to summarize that minimum distribution shift also created some opportunities.
John Stillman: That should be the name of your next book, Isaac Small Hinges That Swing Big Doors. That is kind of your trademark phrase. All right. That's mostly good news. The RMD age now being 72 instead of 70 and a half. The thing that most people aren't going to be as excited about with the Secure Act is the elimination of the stretch IRA. So I guess explain for most people who don't know what a stretch IRA is, that's to be the overwhelming majority of the population, they're familiar with it, maybe just don't know it by that name and then explain what the new rules are.
Isaac Wright: Well, under the old rules for people that again, before 12/31/2019 if somebody passed away, you could still do this, you could have a non spouse beneficiary take over your IRA and be titled as an inherited IRA and then they could turn around and take this money over a long period of time based upon life expectancy. Well, that's now completely shifted effective January 1st of 2020. Now you have what's called a 10 year provision. So basically, you have to pay out money from all qualified plans within 10 years.
Isaac Wright: Now there's not a minimum distribution anymore. You may have a year, two or maybe even eight or nine years where you can just let that money continue to grow, defer, you're not required to pull any money out, but you are absolutely required to empty that account in 10 years. So just keep that in mind because basically, you're no longer able to shift this money around for 20, 30, 40 years based upon the life expectancy table, really doesn't matter about life expectancy anymore. This is probably going to trigger larger amounts of income tax dependent upon who the beneficiary is, that's number one, and I think that's going to be a main topic of conversation, we could sit here and talk about that for 20 minutes.
Isaac Wright: I just think people need to know two main things when it comes to the inherited IRA provisions, it's now gone from a life expectancy table, down to a 10 year provision. So within 10 years, that money has to be emptied out of any and all retirement accounts.
Isaac Wright: Number two, lot of you have legal documents, specifically trust, that may have been based upon language under the old rules of having money distributed over a life expectancy. And dependent upon the situation and what you're trying to accomplish in the trust, you may want to look at the language in your legal documents, specifically your trust to say, "Hey, does this give the trust the ability not just to distribute money, but based upon maybe these new rules, does it also maybe make sense for the trust to accumulate some of these gains and earnings to where if maybe in other words, if a beneficiary is going to get hurt by taking money out in this fashion, maybe have to update some of the language around your legal documents."
Isaac Wright: Again, this is very difficult for some people knowing that this came down at the last minute to say, well how come we haven't talked about this for, like you said at the beginning of the show, John, how come this hasn't been around as a conversation piece for maybe a year, two years? Well, it kind of has been. Nobody really thought, of course the government really can't accomplish much of anything, it seems like anymore. But this did go through. So I just want people to know this. If you have any concerns about your retirement accounts, if you have any concerns about these new rules around the Secure Act, please reach out, give us a call, (804) 777-9999. You can visit the website here, financialandestateplanning.com.
Isaac Wright: But I think John, I hope this has been helpful. Just wanted to give two main points of some pretty big changes coming down the pipe.
John Stillman: I think the biggest takeaway from all this is that you just need to have a conversation about how it affects you, because almost everyone is going to be affected by this, but it's going to affect everybody probably in different ways, some positively and some negatively. And there is no magic bullet that we can say, "Hey, the law has changed. You need to do this." Well, the thing you need to do is have a conversation about what you need to do. It's kind of nuanced and a little bit complex in terms of how it's going to affect you specifically. So you just need to talk that through with somebody that knows what they're talking about. As Isaac said, that number to call if you'd like to get in touch, you can also text if that's easier for you, (804) 777-9999, that's (804) 777-9999.
John Stillman: That's the Secure Act. It's law now. Get some help. We're happy to answer whatever questions we can. (804) 777-9999. Thanks so much for tuning in to Wright Money Tips. We'll talk with you again soon right here.
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