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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 representative 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. Well, this is Nate. James joining me again on another beautiful Wednesday morning. I know we talked on the way up that it’s 80 plus degrees already. It’s going to be a warm one.
James Nelson:
Yeah, definitely going to be hot today, and it’s going to be hot the rest of the week, it looks like.
Nate Kreinbrink:
Yeah, it looks like it is.
James Nelson:
Summer is back.
Nate Kreinbrink:
… Summer is back. Stay cool out there and enjoy it while it’s here.
James Nelson:
Yep.
Nate Kreinbrink:
Because it’s hard to believe that we’re past the 4th of July already. We’re already seeing ads for back to school and all that fun stuff, so it will be here before we know it.
James Nelson:
Yeah, the kids can’t wait, right?
Nate Kreinbrink:
Exactly.
James Nelson:
Got to get back at it.
Nate Kreinbrink:
For today’s show, I know James and I were tossing around a couple different topics and kind of settled on one that’s been out on the news quite a bit but I think is out of sight for a lot of people, just because they don’t necessarily understand it or how it may impact them, and that is this Secure Act. It’s one of the first major retirement legislation changes since the Pension Protection Act of 2006. It hasn’t officially been passed yet, but if everything continues to go on as it should, there’s going to be a pretty good chance that this will come into effect here at some point in the future. I think today we just wanted to talk about and hit a few of the main points of it and how it could impact individuals, because a lot of these changes will definitely impact and strengthen some of the strategies that we have talked about in other shows as far as when they transition into retirement and beyond, as far as trying to maximize your money, reduce your taxes if at all possible, and how money is going to be transferred from one generation to another on the passing of an individual. Again, some of these key points will have a big impact. And then, there’s a couple of them I know that James wanted to touch on to start with here.
James Nelson:
Yep. Yeah, you’re right, Nate. I mean, this is the first bill that we’ve seen in a long time. It’s already passed the House 417 votes to 3, so huge bipartisan support. One of the rare items to have bipartisan support these days. It’s moved to the Senate and will most likely be signed into law later this year. And there are some major changes. The idea with this law is very good, that’s why there’s all this support behind it. It’s trying to make it easier for people to save money, make it easier for employers to offer retirement plans, and get Americans in a position where they can retire. That’s been the huge focus on this. There’s a lot of people that aren’t in a position to retire. What are we going to do about it, from Congress’s perspective, to get people there? That’s how the Secure Act was developed. So, really good intent, and hopefully good results.
James Nelson:
The first thing that they’ve made easier is just for smaller employers to access retirement plans and pair up with other small employers to basically form a larger, let’s say, 401(k) plan or SIMPLE IRA plan or retirement plan where you can maybe put 10 small businesses together to get that scale and to make it doable for those smaller employers. So, very good thing. We all know a lot of small employers don’t offer retirement plans. So, that’s the first big one. The other one that’s going to impact a lot of people is the required minimum distribution age. That’s the IRS law saying that at age 70 1/2 currently, you have to start taking money from your 401(k)s, IRAs, those qualified plans. That looks like it’s going to get bumped back to age 72, which is a good thing. Again, that 70 1/2 rule that we have now makes no sense, you know. Who came up with that 1/2 year? It’s just easier to have a nice round number like 72, and that was one of the things that was really being discussed in the House when this passed. So, that looks like it’s going to get bumped back to age 72, which is good. People can take an extra year or two to start drawing money out if they don’t need to, continue that tax deferred growth. And now we’ve got a round number instead of this 1/2 year we’ve got to worry about with birthdays.
Nate Kreinbrink:
Right. I think that last one that you just went over is going to have a huge impact on individuals and what it can potentially do for them. Obviously, we’ve talked a lot as far as being able to take advantage of a window of opportunity from your retirement up until that required minimum distribution age at age 70 1/2, and again, coinciding with taking social security and maximizing that at age 70. So, during that time, from retirement up until age 70, we always hit pretty hard as far as the opportunity to get those tax deferred assets, those assets that are in your traditional 401(k)s, traditional IRAs, out of that account and pay taxes on them at a lower tax bracket rather than continuing to defer them to your required minimum distribution age of 70 1/2, being forced to take that out at a certain percentage every year for the rest of your life at that point in time and then have it potentially bump you up into a higher tax bracket, bump you up to a higher level on your Medicare premiums, and have more of your social security benefit being taxed.
Nate Kreinbrink:
By extending that out, that’s just going to lengthen the window of opportunity, per se, of that time where individuals can get the money out of those tax deferred accounts in a lower tax bracket and have less of an impact later on in life. And potentially being able to manage those Medicare premiums, manage the amount of taxable income that they have in higher tax brackets. It gives you that extra year and a half. So, again, some great things on there. Usually when changes come out, people are kind of hectic and reluctant to accept them and see that, but these are ones that immediately could have a great impact on individuals as far as when it comes to retirement planning and, again, being able to maximize what it is that they have.
James Nelson:
Yeah, exactly. A couple other points here, just as we continue through here. The removal of the age of 70 1/2 where you can contribute to a traditional IRA. Currently, when you reach age 70 you can no longer contribute to a traditional IRA. That limitation looks like it’s going away. And, again, we think that just makes sense because you can still contribute to a Roth IRA when you’re over age 70 1/2, but not to a traditional IRA currently. So, that limitation is going to be removed, it looks like, and that’s a very good thing. Another big item that’s going to impact a lot of people is the removal of the stretch IRA. As it stands right now, if you’re a non-spouse beneficiary, you can inherit an IRA account or part of an IRA account from someone and you can stretch that IRA over a 20, 30, 40 year period of time, your entire lifetime, and just take out the minimum amount you’re required to and continue to have that tax deferred growth.
James Nelson:
As it stands with the bill that was passed in the House, that’s going to get limited to 10 years. So, no longer can you stretch out an inherited IRA over a 20 or 30 year period of time or longer. You’re going to be limited to 10 years. So basically, you’ve got a couple options. The first one is just take the lump sum, liquidate the whole thing right off the bat, right when you receive it. Or, this IRA has got to be liquidated in 10 years. That’s probably the biggest negative to this bill as we go through it, just from a beneficiary standpoint. They can no longer get that tax deferred growth for as long as they want. Now, it’s going to be limited to 10 years and the money is going to be forced to come out and pay the tax.
Nate Kreinbrink:
Right, and I think one thing to keep in mind with that change that James just mentioned is that it doesn’t apply to young children, to chronically ill people, disabled persons, and then spouses.
James Nelson:
Right.
Nate Kreinbrink:
So, if you’re a spouse and your spouse passes away, and you inherit their IRA, you can still basically assume that IRA is yours as far as titling it, and then stretch it out through your lifetime with that one-
James Nelson:
Correct.
Nate Kreinbrink:
… as well with that. So again, that would just non-spouse beneficiaries being able to take that and not stretch it out to their time. Again, that’s taking money that, again, once you inherit that IRA from a deceased individual, when you take money out of there, that means you’re going to have to bleed that account in 10 years. So, whatever that account balance is is going to be taxable income to you over the next 10 years, however you decide to take that out. Again, that’s going to open up a lot more opportunities for individuals to look at planning with some of these things because again, that income is going to come to you. You’re going to pay taxes on it on whatever tax bracket you’re in. So again, a lot of planning things that are going to have to happen with this when these changes do in fact come into play.
James Nelson:
Yes. And, you know, there’s a lot of moving parts here. We’re just touching the highlights. There’s plenty of other more subtle items within this bill that, again, it’s most likely going to be a law here before too long. Feel free to reach out to us. I mean, if you have got questions about your required minimum distribution, that age getting bumped back, we’d love to sit down with you and discuss that. If you’ve got questions about an inherited account that you currently have, how this is going to be impacted, feel free to reach out. And then, people that are still working and maybe thought that they couldn’t contribute to a traditional IRA and now it might be an option, let’s look at those numbers and see if that makes sense.
Nate Kreinbrink:
A lot of planning still to do. And again, just having a general idea of what these are and how it’s going to impact you and how you can use them to your benefit. I know when these changes come into play, there’s always things that you can do to use it to your advantage, and we want to make sure that we do that and take full advantage of anything that we can with that. Again, questions, give us a call. Did want to mention real quick that every Friday, NelsonCorp Wealth Management is wearing jeans for charity. Money raised in the month of July will be donated to the Fulton Windmill Educational Center. James, appreciate you joining me today again.
James Nelson:
Absolutely.
Nate Kreinbrink:
Again, this is Nate and James with NelsonCorp Wealth Management, bringing you this week’s Financial Focus. Thanks again for tuning in and have a great rest of your week.
Announcer:
Financial Focus is a production of NelsonCorp Wealth Management in Clinton and Davenport. The opinions voiced in this show is 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 representative 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.
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