Announcer:
It’s time now on KROS for Financial Focus brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives securities offered through Cambridge Investment Research Incorporated, a broker dealer member FINRA, SIPC, investment advisor representative, Cambridge investment research advisors incorporated, a registered investment advisor, Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. Now here’s today’s Financial Focus program.
Nate Kreinbrink:
Good morning and welcome to this week’s Financial Focus brought to you each and every Wednesday morning right here on KROS. This is Nate. James, joining me today, first show of the new year for us with with the New Year’s and then the live show going on and then back to here. It’s our first show. It’s hard to believe we’re midway through January already.
James Nelson:
Yeah, exactly. It feels like it’s been awhile since we’ve been up here, but it’s good to be back.
Nate Kreinbrink:
It has been. I know the New Year and new resolutions. Hopefully everyone’s sticking to all those big things that they set out to do for the beginning of the year. Another change kind of getting into the start of 2020 was the implementation of the Secure Act. I know we had talked a little bit towards the end of 2019 how this was possibly going to be going into place. Well it officially did go into effect on January 1st of 2020 and it’s brought about some changes that I think as people that are already in retirement, as people transition into retirement will effect every single one of you with a lot of these things to go. And I think today we want to talk on some of those points and then how they can kind of relate to people already in retirement and how it can relate to people that are transitioning into retirement.
James Nelson:
Yeah, and that’s exactly it. I mean if you have a retirement account, whether that’s a 401k, 403B, IRA, this is going to affect you. This law, this is the biggest change we’ve seen in literally decades and it’s going to affect almost everybody. The biggest, probably negative that came out of the Secure Act is the stretch IRA is no longer a viable option. That’s basically gone for anybody who inherits an account. So Nate if you inherited an account under the old rules in 2019 you could stretch those payments out of that retirement account for your whole life expectancy. That could be 30 or 40 years pay out, reduce the tax exposure over a period of time and really stretch that payment out. That is no longer an option. Now it’s a 10 year payout. If you were to inherit that same retirement account, January 1, 2020 and moving forward, you’ve got 10 years to take that money out.
James Nelson:
Now you don’t have to take anything the first nine years, the account has to be liquidated by year 10, so you could take that over a 10 year period of time or you could just wait until the final year and liquidate it all at once. Take the tax hit all at once. There’s a little bit of flexibility there, but that’s an important point. Probably one of the most tax favorable items that we still had to the tax code was that stretch IRA, and that has now been eliminated and everybody has to have those inherited accounts cleaned out within 10 years. And like we always say some beneficiaries don’t have a problem liquidating those accounts in a couple of years, but it’s a nice option for those people who are viewing the inheritance as retirement money. It was nice to kind of stretch that out and pay little tax along the way. But the 10 year payout is the new law and something that we got to play by.
Nate Kreinbrink:
Right. And I think where that really comes into play and it’s been an issue with some of the financial planning that we’ve done through the years is if you inherit an IRA or a traditional 401k where it’s pre-tax, everything that’s coming out of there to you is taxable income to you. So again, you have parents, grandparents, whatever, where you inherited an account after they pass away, you’re going to be taxed on all that money. So everything that’s going to come out of there in that 10 years, even if it’s a pretty sizable account, you’re going to have to have that as income on your tax return in the next 10 years and get that out of there. And I think that planning, there’s still a lot of planning that can go into that where okay, if maybe in a couple of years we’re going to be in a lower tax bracket or if our income is going to be drastically reduced and seven years from now it may make sense to wait a little bit to take that out where you do have that smaller income.
Nate Kreinbrink:
But again, as James said, I mean by the end of year 10, 100% of that account has to be liquidated. So again, it’s really important to understand that. And I think another thing that goes into it is Roth accounts where this actually does still apply to Roth accounts as well. Now the difference being is you liquidate those accounts. It is not taxable to you when you take that out. But again, those accounts, if you inherit a Roth IRA, a Roth 401k, you still do need to liquidate those Roth accounts in that 10 year period. Again, it won’t be taxable to you, but you will need to get those done.
James Nelson:
Yeah, and I think it makes sense. Most people when they think about it, the IRAs are set up for retirement accounts. They’re not inherited accounts and they’re not supposed to be legacy accounts. You get the tax benefits by putting the money away in the 401k or traditional IRA or Roth IRA during your lifetime. It was never intended to be a beneficiary account where somebody can just sit back and collect checks off retirement accounts forever. That wasn’t the intention. So I think most people when they read the guidance a little bit, it makes sense this 10 year payout, it’s not as favorable as the old rules but still allows for some flexibility. And in 10 years isn’t a bad timeframe I guess for people to usually liquidate those accounts.
Nate Kreinbrink:
Right. And it is also important to note that this 10 year liquidation does not apply if you inherit it from a spouse or if a spouse turns it over to you or whatever. That tenure does not apply to you, you can basically treat that as your own account and be able to use it as your own. Obviously some of those other ones as far as if you’re chronically ill, disabled, things along those lines. Also if you’re a minor, if you’re under the age of 18 or the under the age of majority, they call it in a given state. If you are to inherit one of those, that 10 year window does not start until you hit the age of majority, whatever it is in your state. And then you have 10 years after that to liquidate that. So again, if you are married, you pass away, you give it to your spouse, they are not required to take that 10 years. So that planning still goes into effect. But again, if you are non spouse beneficiary and you inherited any of the one of those accounts, that’s where that 10 year window applies to.
James Nelson:
Yeah, very important. One of the other big changes is the change in their required minimum distribution age. So right now, while in 2019 we still had that goofy age 70 and a half, which nobody can figure out. But that age, 70 and a half was the magical date where you had to start taking money from those retirement accounts if you weren’t already doing so. So by this change with the Secure Act and January 1, 2020 that 70 and a half age has been pushed back to age 72 which is much nicer. It doesn’t take any math to figure out when I’m 70 and a half, which year, blah blah blah. It’s 72, it’s a nice round number and a lot easier for people to remember. So extra year, year and a half of tax deferral if you’re not taking money out. And again, if somebody is taking a reasonable distribution, they’re already meeting that required minimum distribution. Probably not a whole lot to worry about, but bumping that back to a nice round number, certainly nice from our standpoint.
Nate Kreinbrink:
It is. And I think like you said, it’s cleaner to be able to figure out exactly when that needs to start happening. Again as James said, that did go into effect for anybody turning 72 after January 1st of 2020 as far as being able to take that. If you turn 70 and a half on December 28th of 2019, unfortunately you still have to continue to take out your, your RMD like you would prior to any of these laws coming into effect. So again, understanding when that does and having it being able to take out that amount because again, if you don’t take out the amount that you’re required to take out at that given points, you’re penalized pretty heavily on any month that you don’t. So again, we want to make sure we understand that, know that if we have to take a little bit out, we can definitely do that.
James Nelson:
That’s a good point because yeah, if you were 70 and a half last year, and again some of these other provisions too, you’re still playing by the old rules. You’re not all of a sudden suspending an RMD for a year and now it’s getting bumped back to 72. If you turn 70 and a half, you’re still playing by the old rules. So that’s an important point. Another change here with the Secure Act for small employers, retirement plans became a lot easier to access and implement if you are the employer, you can kind of team up with other small employers, pool accounts together, kind of divide up some of the retirement plan costs on the employer’s end and make it easier to offer those retirement plans. So that’s a big deal. There’s a lot of small businesses that do not have anything in place right now. It’d be nice for them to offer it. They want to offer it to their employees. This may make that easier for them, more palatable for them and overall a better situation for all the employees.
Nate Kreinbrink:
Another quick little change too with it is being able to contribute to an IRA past age 70 and a half. Prior to this law going into effect, once you hit age 70 and a half, even if you were continuing to work, you were no longer able to contribute to an IRA. Now you’re able to contribute to that IRA as long as you have earned income. Now, once you hit age 72 you are still required to take that required minimum distribution out of it. So in a few instances, it still may make sense as far as being able to contribute to that if you have earned income, still having to take that RMD out. But again, it allows for some contributions into that account farther later on in life for people working longer, wanting to still put money away into those accounts.
James Nelson:
Yeah, that’s a big deal because believe it or not, there are still several people working at age 70 or later and if they’ve got extra money and want to contribute, they can still do that.
Nate Kreinbrink:
So we hit a lot of the topics today, there’s still a lot more that went into it. I think it was like 22,000 pages or whatever that went into this new act that went into it. So there’s still a lot of complications. Those are kind of the main ones that are going to impact a lot of people. Before we do run out of time. I did want to mention that every Friday, NelsonCorp Wealth Management is wearing jeans for charity. Money raised in the month of January will be donated to the Clinton Fine Arts Association Program, Adopt An Instrument. James, I appreciate you joining me this morning.
James Nelson:
Absolutely.
Nate Kreinbrink:
Again, Nate and James with NelsonCorp Wealth Management bringing you this week’s Financial Focus. Thanks for tuning in and have a great rest of your week.
Announcer:
Financial focus is a production of NelsonCorp Wealth Management in Clinton in Davenport. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives, securities offered through Cambridge Investment Research Incorporated. A broker dealer member FINRA, SIPC, investment advisor representative, Cambridge Investment Research Advisors Incorporated, a registered investment advisor, Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information, visit our website at www.nelsoncorp.com.