The Rules Have Changed: What the SECURE Act Means for You

Hey y'all, a little bit different format for the podcast. For this particular episode, as you may have heard, the SECURE Act is now law. It passed through Congress. Trump signed it near the end of the year. It's something I'd plan to talk about on my next podcast, but then Ron and I tape a segment about it for my radio show that will air this weekend.

So I thought, probably easier to just let you hear that conversation. This is something that will be important to almost everybody. Almost everybody is going to be affected in some way by the SECURE Act. Some more immediately than others, but in the grand scheme of things, almost everybody will feel the effects of this.

So here's our conversation breaking down everything you need to know. I hope everybody has heard about this at least, but I want to ask you to explain it in the news. Lately, there has been a lot of talk about the SECURE Act, which was passed into law at the beginning of the year.

What do people need to know about the SECURE Act and how it's going to affect them? Well, it's so weird that we're finally sitting here talking about it being a law because they started talking about this at the beginning of 2019. It passed through the House in early 2019. And they said the goal is to have it on Trump's desk to sign by end of the year and then it would go into law in 2020. And they were talking about that last January and February, but then we basically never heard anything about it for the entire year. And then the Senate passes it in December and Trump signs it like three days before the end of the year and boom, it is indeed, just as they said from the very beginning, now a law here in 2020. Well, it seemed like it just happened to the last minute, which a lot of people are wondering about. Well, most people, yeah, if you're the average consumer of news, yeah, it did come out of nowhere. I mean, in the financial industry, they've been telling us about it for a year and we were kind of wondering, all right, is this ever going to happen or not?

But it finally did. So there are several components to the law. Some of them aren't going to affect the average person. Two of the components are going to affect nearly everybody.

So those are the two I want to focus on. The first thing is they got rid of the stretch IRA. So let's explain what a stretch IRA is. Ron, let's say your mom had died and left you a million dollars in an IRA. Oh, that would be nice. But that didn't happen.

Well, that's why I said let's pretend. So with that million dollar IRA, you would have had to make some withdrawals every year. Not huge amounts, but you might have had to take out 8, 10, 12,000 depending on your age. And as you got older, you would have had to take a little bit more out each year because the government says you inherited this.

We want our tax revenue from it. You're going to have to make some withdrawals. But those withdrawals weren't really enough to substantially change your taxable income in that year. Yes, it was an increase, but it wasn't blowing things up for you because you could stretch those withdrawals out of the course of your lifetime.

They got rid of the ability for you to stretch it out over the course of your lifetime. So now if you inherited that, if your mom had died in January of 2020 and you inherit that IRA, you now have to take it out in 10 years, the entire million dollars. Boy, that's a lot of difference. So you could say, all right, well, I'll take out a hundred thousand a year if you're really thinking ahead, but that's still a big hit to your taxable income. If we add 100, I know that they pay you handsomely to do the morning show every day, but still adding a hundred thousand dollars to your taxable income for the year is really going to bump you up a tax bracket or two. Right?

I would think so. That's one problem. The other problem is most people aren't going to plan that well. And they're going to say, well, I don't need any money from it this year.

I don't want to pay any extra taxes. I'm not going to take any money out. And so you get into year seven or eight and you haven't taken any withdrawals yet. And now you have a million dollars or if it's invested properly, more than a million, right? Because it's been growing and compounding for that partial decade. And then one year you're going to wake up and say, oh crap, I have $1.3 million that I have to drain out of here in three years. That's quite a bit of, you're going to lose, you know, like 40% of it to taxes between the state and federal. Well, it's going to be a big jolt for a lot of people when they figure that out.

Yeah. So this is going to become an estate planning conversation that a lot of people need to have. Now, if you inherited an IRA, if the person died prior to the end of 2019, you're still under the old rules. But if anybody dies from January 1st of this year on and they have an IRA that they pass on to their beneficiaries, they're now under the new rules. You have 10 years to clean it out. So we really have to be careful in how we're planning estates and thinking about all this stuff. Now you say, why, why did they do this? I think there are a couple of components and maybe a couple of unintended consequences. I don't hate it by the way.

I don't hate it. First of all, with the stretch IRA, you know, you're, you're deferring taxes by putting the money in there and then you continue to defer the taxes when you pass it down to the next generation. And if they don't drain the whole thing in their lifetime, the taxes are just getting deferred generation after generation.

And that revenue is never being realized. This way they know that if you defer all this money, then your kids are going to have to fork over that tax revenue within a decade of you dying. So it does help the government get some immediate revenue in such a way that it's not hurting anybody from like a sales tax or a property tax or a raised income tax perspective. It's just essentially money that you have to pay out of your inheritance. It's like an estate tax, but for people who have an estate of less than $12 million basically. Now you should note, this does not apply to spouses. If you die and you leave your 401k to Bev, she doesn't have to clean it out in 10 years. She still has the remainder of her life. We're talking about when it passes to kids or whoever the other beneficiary is.

Next generation or whatever. So now note that spouses are exempt from this. Now another, and I don't know if you would call this an unintended consequence or not, but I think it is a consequence. You know, you think about generational wealth and how historically a lot of the passing of generational wealth has been basically white people, right? Because you go back a hundred years, not that many people, non-white people owned property, right? So at the very least only white people were able to pass down real estate. And it's really just been in the last, I don't know, couple of decades that we've started to really see more equality across different races in terms of access to good careers with 401ks and all that. Now, if you could, if you could say that we've even achieved that yet, but certainly it's better than it was 20 or 30 years ago. But if you go back one working generation, the people that are dying out now, a lot of those people that have these retirement accounts are white.

So this is kind of interesting because in a way it's almost like this is going to even the playing field a little bit. You're no longer, the money that you save in your IRA is not ever going to get passed down to your grandkids because Zach and Cam are going to have to clean it out within 10 years of you dying. Yeah. Or Bev's going to outlive you. So within 10 years of Bev dying, let's say. No offense.

None taken. You're older and you live harder than her. I think, maybe that's not true.

Maybe she lives harder in any event. I'm old, but I'm immature. After you guys are both gone, they'll have 10 years to clean it out. So that money is, it's not going to be generational wealth in the Stutz family. So you can see how now we have all this money that's getting injected into the economy and tax revenue is coming in and you're not passing some of this, not obviously there are still ways to create generational wealth with real estate and non-retirement account assets, but just interesting when you think about for a lot of people, most of their wealth is in their 401k or IRAs that used to be 401ks that they rolled over just levels the playing field a little bit. Yeah.

It's likely to have old money. Yeah. Yeah. This is kind of, kind of interesting when you look at it from that perspective. So we'll see how it all unfolds.

Like I said, I don't hate it. It just, it's going to require some planning, some things we need to think through as it relates to how we do things during your life. Like, should we be converting money to Roth while you're still alive?

If not, how are we planning? I mean, this needs to become a more generational conversation. If the kids are going to inherit a million dollars, they're going to have to take out within 10 years. They need to know that like they need to be planning toward that so that their financial plan can be designed accordingly. And if you think about it, most of the people who are inheriting IRAs are in their fifties because their parents just passed away in their eighties.

Yeah. And so you're inheriting this in your prime earning years. And then you also have to take out all this extra money that's going to be taxable income that you have to take out of the IRA. So just is going to require some planning.

And it's going to kick some people up into another tax bracket if you don't plan to handle it somehow. Absolutely. Right. Well, another thing, you know, you talked about the elimination of the stretch IRA. Appreciate your explaining that. Great job explaining it.

And also there's another component of the SECURE Act, and that is the raising of the RMD age. Explain that if you would. Well, let's explain it in the context of you, because you are so close to have gotten in under the wire here. You missed it by like three weeks or something. All right. So in June, your birthday is June what? 10th. June 10th. You missed it by 20 days, man. So June 10th of last year, 2019, you turned 70. All right. Big secret. Everybody already knew.

A lot of people out there right now going, are you kidding me? You are now what we call well into your seventies here six months later. But you turned 70 June 10th of last year. Right. Which means you were 70 and a half on December 10th of last year.

That's exactly right. You got in right under the deadline, which meant you had to make a withdrawal. You had to take an RMD, a required minimum distribution from your IRA before the end of last year. So you took your first one in December. I was very proud to help you fill out the form and make sure that check got to you. Thank you so much.

A great honor. So if I had been born three weeks later, if you had been born July 10th instead of June 10th, first of all, you would not have been 70 and a half until now. Yeah. So you wouldn't have had to take your first withdrawal until this year. But oh, wait, they changed the law as part of the secure act. The RMD age is now 72. So in the year that you turn 72 now, you will have to take your first withdrawal unless you were already 70 and a half before the end of last year. So at first blush, it's like, oh, well, Ron won't have to take one in 2020 because he won't be 72.

Nope. Once you already hit RMD age, you're like grandfathered in under the old system. So you'll have to keep taking it. Usually when things are grandfathered in, that's a good thing.

This is just the opposite. Correct. Now I should clarify, you are required to withdraw money from the IRA and pay your taxes on that withdrawal. You're not required to spend it. They're not just taking money away from you and saying, oh, sorry, you can't have this for retirement. You have to go.

No, no, no. You just have to pay the taxes on it. So yeah, if you, if you take out your entire RMD and go blow it all and then blame the government for it, well, that's not their fault.

They only took like their 25% of it or whatever. So just keep that in mind. So how does this age change affect most people? Well, for a lot of people, it's going to be a good thing because if you haven't yet reached RMD age and now you can put it off for another year or two, that's going to help our tax planning a lot because it gives us a couple of more years that we can maybe get some money converted to Roth if that fits in your situation. Maybe more money that you'll just be drawing down for your income anyway. It just buys us a little time to get those balances reduced a little bit so that when you do have to start taking your withdrawals, it's not quite as much. Not going to make a huge difference for a ton of people, but I do have several clients where we laid out a plan where they're spending their decade of their 60s converting a lot of money to Roth from IRA. Well, now we've got a couple extra years for them to keep playing that game. So it's going to be helpful in some cases, not a life changing difference, but it makes sense that they would change this because as life expectancies increase, it would make sense that some of these ages keep getting older before you have to start taking money out.

So it makes sense that they made that change. It's been 70 and a half for a long time. RMD age now is 72. So a lot of discussion needs to happen around that. I would say if you're at least 60 and you haven't really thought through all these strategies, you probably need to have a conversation about it. If you're 45, you have a lot of other things you need to worry about before thinking about RMDs.

But I'd say if you're 60 or older and you don't have a good plan in place for how you're going to deal with this, no time like the present. So there you go. There's a breakdown of the SECURE Act. I've emailed several existing clients who are going to be very immediately affected by this just to kind of give you a heads up on things you need to be thinking about. We have many others who we still need to have a conversation with. I just haven't had time to get to everybody yet.

I wanted to hit the ones that were most pressing. So this is certainly a conversation if you're a client that we will be having in the upcoming year if you don't work with us already. And this sounds like something you need to have a conversation about. Well, no time like today to reach out and schedule a conversation. You can go on the website rosewoodwealthmanagement.com and schedule a visit there. Or if you want to just call us 919-391-3446. We'll set up a time to talk. Thanks for tuning in to Mr. Stillman's Opus. Have a great day.