Wendy:
Sometimes people just think of IRA is money that's sitting out there in this pot, and I'm going to get to it eventually. But there are things that you can do now that can really maximize overall family wealth.
Doug:
Not from Rea & Associates studio, this is unsuitable on tour in Cleveland, a management financial services podcast for entrepreneurs, tenured business leaders, and others who are ready to look beyond the suit and tie culture for meaningful, measurable results. I'm Doug Houser. On this weekly podcast, thought leaders and business professionals break down complicated and mundane topics and give you the tips and insight you actually need to grow as a leader and help your organization thrive. If you haven't already, hit the subscribe button so you don't miss future episodes. And if you want access to even more information, show notes, and exclusive content, visit our website at www.reacpa.com/podcast, and sign up for our weekly podcast newsletter.
The Setting Every Community Up for Retirement enhancement Act, that's a mouthful, was passed late last year. Since then, its various provisions have been picked apart and dissected from multiple angles. Today, Wendy Shick, a principal in Rea's mentor office and Secure Act scholar, is here to explain some of the changes that are wrapped up in this legislation and how it will affect you and your employees. Welcome to unsuitable, Wendy.
Wendy:
Thank you. It's a pleasure to be here today.
Doug:
It's great to be here in Cleveland. So talk to me a little bit about the SECURE Act and what that did, what changes came from that, that are beneficial.
Wendy:
The SECURE Act was passed in December of 2019. And it impacts individual taxpayers as well as retirement plans. But I'm going to focus more on the individual and how the impact is for them, particularly regarding their IRAs.
Doug:
Okay. So the IRA, the individual retirement account. So did this put in some additional protections for individuals with regard to IRAs? Or what did it mean in terms of that, anything?
Wendy:
It didn't really change anything in regards to protection. They did change how things are going to be taxed and when you are required to take money out of your IRA now, as well as at the time when you do pass away. What happens to some of your beneficiaries? So those are some of the major changes that have happened.
Doug:
Okay. So and this was a follow on then to the tax cuts and jobs act, not a part of that, but succeeding legislation.
Wendy:
Right.
Doug:
What changes did it bring about in terms of the tax treatment with regard to IRAs and distributions and those types of things?
Wendy:
Okay. The first main thing that they changed was your required minimum distribution is now delayed until age 72. Before, it was age 70 and a half, and then you could also delay that a little bit. But now this rule makes it much simpler to deal with, so in the year that you turn 72, you take a distribution now. And that starts for people who turn 70 and a half in 2020.
Doug:
Okay. So into effect this year then.
Wendy:
Yeah.
Doug:
So did it change the amount of the required minimum distributions at all or how that works in any way?
Wendy:
No. It did not change any of the amount. The same amount is based on kind of a life expectancy table, and that changed ... I mean, excuse me, that stayed the same, so it did not change that. It just changed when you take your first distribution, the time, at age 72. But of course, you're always allowed to take it out earlier any time that you want.
Doug:
Sure.
Wendy:
But if you want to delay it, it's now age 72.
Doug:
Got you. So what about tax treatment other than that age change? Was there any change in terms of how those distributions are treated at all?
Wendy:
No. No change. What did change a little bit is there's something called a qualified charitable distribution, which is when you call your IRA brokerage holder and say, "Hey, I want X dollars, $10,000 to go to my favorite charity." And when that check would go directly from the IRA to your charity, there's a tax benefit to that. It's really not considered a distribution.
Doug:
Oh, okay.
Wendy:
It's not taxed as such. However, under this new SECURE Act, at age 70 and a half, before, you couldn't make any more IRA distributions, you were disallowed from that. But you are allowed to do that now, and so that can change that taxation and that benefit of that charitable distribution. It's kind of technical, so you'd want to talk to your tax advisor if you go ahead and do an IRA distribution after age 70 and a half, which is something new.
Doug:
So yeah, talk to you. Right?
Wendy:
Right.
Doug:
Maybe you can do a little planning about using that charitable contribution in that fashion.
Wendy:
Right.
Doug:
Are we seeing any more thought around that? It makes me think of the pooling concept because we changed the standard deduction and all that. And we're seeing some thought given to where folks are now maybe pooling their charitable contributions every two or three years rather than spreading them out. Is that-
Wendy:
Right. That's related to a donor advised fund, which is a little bit separate from this concept. But it can be related because again, like you say, the standard deduction has gone up higher. And so therefore, if you want to maybe get any benefit from your charity, if you do this direct from your IRA, you will have a tax savings. It's not much of a tax savings at the federal return, but you do save definitely on your high owe taxes. So it is a good thing if it makes sense for you, and you can talk to your tax advisor again on that. But that is really kind of the best way to still take advantage of your charity if you're over 70 and a half. If you're under 70 and a half, the donor advised fund is the better concept.
Doug:
Better way to go.
Wendy:
Yes.
Doug:
Okay. Very cool. Now talk about: Are there some new payout rules as well, if somebody passes away, or how those pass to individuals and that type of thing? Has some of that changed at all?
Wendy:
Yes. That's the second major area of change relating to this. So the general rule now is, of course, everything could kind of change from the general rule, but the general rule is your payout now happens in 10 years if your distribution, if your beneficiary's not your spouse. So if you pick your child or your grandchild to be your beneficiary, or friend, or another relative, then it's a 10 year payout, whereas before, it may have been 20 years, 30, 40, 50 years. They could've kept that money in the account. So this is a major, major change as well.
Doug:
So that can really change some retirement and estate planning thought if the beneficiary then is not your spouse.
Wendy:
Yes.
Doug:
You need to rethink maybe how you balance things or whatever the case might be.
Wendy:
Definitely. And we're really having, particularly if you have some people check, select their beneficiary to be a trust. And so all my clients that are doing that should be contacting their estate planning attorney just to make sure that makes sense because there can be different variables inside of the trust. And it may not be exactly what you thought it was going to be before under this new rule. And so there's a lot of talk, and a lot of estate planning attorneys will be wanting to review and make sure this is exactly how you intend things to be distributed and at the appropriate time.
Doug:
Okay. Yeah. I mean, that can have a big impact if you thought, "Well, I'm going to leave this part of the pie perhaps over here, and that payout can be over this period of time."
Wendy:
Yes, especially if you any of your beneficiaries were your grandchildren, in case your children had enough wherewithal to take and say, "Hey, just pass it down to my grandchildren," now that's going to be paid out to them in 10 years, as opposed, again, it may have been 40 or 50 years. And so that's a major, major change.
Doug:
Better watch out if that grandchild is undisciplined. Right?
Wendy:
That's correct.
Doug:
And they go spend it all.
Wendy:
That's correct, yes.
Doug:
Blow through that.
Wendy:
Yes.
Doug:
You never know. So now we talk about IRA in general. Now do these same rules apply to Roth IRA distributions as well?
Wendy:
Yes. The same. Yes.
Doug:
Traditional or Roth, either way.
Wendy:
Right. There's a couple exceptions to that 10 year rule. Again, as I talked, if your beneficiary's a surviving spouse, that rule doesn't apply to them. Also, if you have minor children, but not minor grandchildren, it could be a different, the exception as well of somebody who's disabled or chronically ill is another exception. And actually, that's it. Oh, and beneficiaries not more than 10 years younger than the IRA holder. So again, this is kind of a technical area, so you're going to want to check things out.
Doug:
Yeah. Like everything, it's in the thought maybe to try to make it more simple, but it's more complex anyway.
Wendy:
Yes, yes. And there's also another couple categories that take a five year payout.
Doug:
Oh, interesting. Okay.
Wendy:
So that's like if you name your estate to be your beneficiary, which normally isn't something that we choose to be, have it that way, but sometimes that can happen. And that's a five year payout, as well of some charities.
Doug:
Okay. Interesting.
Wendy:
So again, it's fairly technical area. And again, it's something to be discussed with your tax advisor as well as your estate planning attorney because you want to have everything coordinated.
Doug:
And that's a great point you make there, Wendy. And we always advocate that for clients. Get all of your professional advisors together at the same time. Don't have those conversations separately, say with you on the tax side, or your estate attorney, because stuff always gets lost in translation. Right?
Wendy:
Yes.
Doug:
And if you're all in the same room and all on the same page, you understand what's communicated and put it together and have the same understanding, it's just so much more efficient. So we're always big advocates for that.
Wendy:
Right.
Doug:
Talk a little bit about, I see and hear more prevalence for the Roth IRA. Are you seeing that as well? Maybe talk a little bit about that, the potential benefits there and what some trends are that you've seen.
Wendy:
Right. I listened to a number of different webinars on nationally known presenters in this area since the SECURE Act has come out, and even before. And they've got some different concepts that they're talking about, and some of them do revolve around Roth conversions. And that's an area that people can make significant impacts if they do pay a little bit of tax now, particularly depending on their age, let that money grow tax free forever, forever and even to your children and your grandchildren. It can be tax free forever. So it's very impactful. And if you're willing to pay some of the tax now, it can reap pretty big rewards down the road.
Doug:
Especially with the current tax rates being fairly favorable, again. I mean, unlike the traditional IRA, where you're contributing stuff that is tax free at the time, but you're paying tax upon the distribution, the Roth. Here, the benefit is pay that low tax rate now, and then, like you say, when those distributions come, they can be tax free. That can be a substantial savings.
Wendy:
Correct. And then if you're in the 10 year payout category, if you have a traditional IRA, you may want to take that money out systematically over that 10 year period so that you're not hitting it all into the highest tax bracket at the end. But with the Roth, you can keep that in there for another 10 years. And so under the rule of 72, if you have 60% or 70% of your assets in equities, under a normal period, over time, over a 10 year period, that money can double. So by leaving that money in the Roth IRA that full 10 years, if you had $200,000 in there, now it could be worth $400,000. That's again fully tax free, which is a tremendous benefit. So that's the difference between the traditional and the Roth IRA. And then again, being willing to pay some money upfront now to have that benefit later.
Doug:
And again, that's where you want to get your advisors together and talk through the planning aspect of that, maybe achieve some type of balance there and think through all those things.
Wendy:
Right. And you don't have to convert all your IRA funds all at one time. You can do systematic, even if it's $20,000 a year. If you're converting that to a Roth over time, again, that's going to ... Converts to tax free money.
Doug:
Yeah. Are we seeing more of that, where there are these conversions to the Roth, given the current tax environment?
Wendy:
Yes. And it makes sense long-term. I'm definitely seeing more of that. And that's kind of one of the things again, the national webinars that I've been listening to, that's an area that they're doing. And then kind of a little bit more technical on top of that, if you do a larger chunk of a Roth conversion, they're even suggesting purchasing a life insurance policy, like a second to die life insurance policy.
Doug:
Interesting.
Wendy:
To kind of make up for that loss of the money that you're paying out for your taxes now, and getting it back through another tax free vehicle with the life insurance policy.
Doug:
Interesting.
Wendy:
And so they're also talking about using charitable remainder trust as a way to kind of deal with this 10 year payout. So there's some different ideas out there that are coming forward as people take a look at this even more.
Doug:
That's a lot to consider. Right?
Wendy:
Yes. Again, sometimes people just think of IRA as that money that's sitting out there in this pot, and I'm going to get to it eventually. But there are things that you can do now that can really maximize overall family wealth with this.
Doug:
Right. And again, you have to take all those things into consideration. It's who those beneficiaries might be, what your thoughts are for them, what your plans might be in terms of any assets that you have, what you want to do for them, all those kind of soft issues, as we might call them, or people issues certainly play a part in that. It's all part of the whole pot, so to speak.
Wendy:
Sometimes what we're seeing is sometimes people are retiring a little bit early, and before they're applying for social security. So they may be living a little bit more off of their investments. And when they do that, sometimes their income tax brackets can be lower. That provides a great opportunity for a Roth conversion too. I've seen numbers of people in that particular situation, that they've kind of retired from their businesses and living off their income before they start some other money flow. And that's a great time to do Roth conversions.
Doug:
Okay. Okay. Now what about folks who, we're all active for longer now than we used to be maybe a generation ago, so what about folks who want to continue working post age 70 or 72 in some fashion? Does that impact any of these considerations as well?
Wendy:
Well, you can still, under this new tax act, you can still contribute to an IRA, as long as you're working. You always have to have employment income coming in. You can still continue to make a contribution to a traditional IRA under the new tax act after age 70 and a half now. But also, Roth contributions if you're still working have always been able to be done, even if you're over 70 and a half. So if they have making more money, they want to put more money away, there's some different just straight retirement benefit plans that are still available at that point and time.
Doug:
So again, a lot to balance and think through. It's all part of that whole kind of work life balance. And where do you want to be? We often see folks who go through transaction with their business, some type of liquidity event. And if they walk away completely, they really sort of struggle with that. So we're seeing more and more stay involved somehow, and still working and a part of the business. So I think all those things are beneficial.
Wendy:
Right. The government and the policies that they're having, and like this tax act, they are trying to make it more opportunities for people to save. They recognize that is an issue here in the United States. And that's part of the reason why they delayed your retirement distribution to age 72, was to be able to have a little bit more time to save if you can. And again, it's the government that knows that this is something that they want to stress. And they're making it possible to do that.
Doug:
Yeah, absolutely.
Wendy:
But then they shorten your distributions to 10 years, so it's typical once they give you one thing, they take it back from another pot. And that is definitely an area where the taxpayers ...
Doug:
There you go.
Wendy:
But the good part about that, I'll just throw this out on that 10 year distribution, yes, the money's being taxed sooner, quicker. But you are then converting that into the net amount after you pay your taxes. You are converting that to more traditional investments, which if you have qualified dividends or capital gains, long-term capital gains, that money will now be taxed at that lower rate.
Doug:
Oh, sure.
Wendy:
Whereas the growth inside of the IRA before was going to be taxed at your ordinary tax rate, which is traditionally higher than those rates.
Doug:
Good point.
Wendy:
So yes, you're being asked to pay that tax quicker, but it's then converting that money to a more tax beneficial investment in the future, as long as you don't spend it all. You've got to save. You've got to save some of that and then reinvest it in something at a lower tax advantaged rate.
Doug:
And assuming those capital gains rates stay lower compared to ordinary income.
Wendy:
Yeah. Well, they've pretty much traditionally have been lower than the ordinary rates. Whether they'll stay at this rate for sure.
Doug:
We're not going to predict. Right?
Wendy:
No. It's pretty good bet that they would be still at a lower rate than ordinary rates.
Doug:
You would think because then the incentives would be so very different throughout the economy if that weren't the case.
Wendy:
Right.
Doug:
What about anything else from a technical or tax perspective that folks should be aware of, Wendy, as we move forward into 2020 and beyond? If there's a key takeaway or something that you'd like folks to really focus on in terms of what's out there.
Wendy:
I think again, just to make sure you're touching base with your estate planning attorney and just making sure everything is set up as you want it. And then thinking of, again, the Roth conversion is just really powerful. And I think if you can take a look at that and talk with people and see if it makes sense to do some Roth conversions, again, even if they're smaller, even $10,000, $20,000 a year. Then when you're time to retire, you can take some of that money out. But you're going to be kind of helping in your tax brackets because you're going to have part that's nontaxable and part that's taxable. And you kind of want to blend that as best as you can.
Doug:
Yeah. So have that balance in that.
Wendy:
Right. And I'm also a CFP, which I'm excited about all these kinds of areas. So again, it's an overall look. It's just not: How's my tax impacted right now? It's what's happening overall and for your entire family down the road as these people, as the beneficiaries inherit your money. And what's the best overall?
Doug:
I think you said it well that CFP, that's where comes in the certified financial planning part of it. You're not just thinking about compliance. You're thinking about planning, and that's what all this goes to. And that's the fun part where you feel like you can really advocate and help people think about their future and their family's future, or whoever the beneficiary might be, whether it's charities and other things. So that's the great part.
Wendy:
Yes.
Doug:
And again, I would advocate, talk to Wendy. She is certainly an expert within our firm and a great resource that we have. When you get together with her, have a conversation along with your other advisors, your estate planning attorney, whoever it might be, you can really come up with a great comprehensive plan.
Wendy:
Yes, I would agree.
Doug:
That's awesome. So thanks, Wendy. Thanks for all your insight and feedback today, and some great tips and tidbits. And if you want more business tips and insight, or to hear previous episodes of unsuitable, visit our podcast page at www.reacpa.com/podcast. And while you're there, sign up for our weekly podcast newsletter for exclusive content and show notes. Thanks for listening to this week's show. Be sure to subscribe to unsuitable on Apple Podcasts or wherever you're listening to us right now, including YouTube. I'm Doug Houser. Join us next week for another unsuitable interview from an industry professional.
Disclaimer:
The views expressed on unsuitable on Rea Radio are our own and do not necessarily reflect the views of Rea & Associates. The podcast is for information and educational purposes only, and is not intended to replace the professional advice you would receive elsewhere. Consult with a trusted advisor about your unique situation, so they can expertly guide you to the best solution for your specific circumstance.
