On December 20, 2019, the Setting Every Community Up for Retirement Enhancement Act, or the SECURE Act, became law. While many of us have heard about this in the news, what may not have been immediately apparent is the significant impact this new law could have on your retirement plan and financial goals. Scott Sturgeon, of the Mariner practice management team joins us to help simplify the details and explain who is impacted in what way.

Transcript

Brian Leitner: Hello and thank you for downloading another episode of Your Life, Simplified. My name is Brian Leitner, and I’ll be the host of this podcast. We have a very special podcast for you today, because we’re talking about the SECURE Act, which is a new piece of legislation that has recently come out. The SECURE Act stands for Setting Every Community Up for Retirement Enhancement. And there are a lot of reasons that this legislation has been passed. If we think about retirement and those who are living longer and the fact that the government is looking for ways to raise revenue. In fact, in this act alone, the government expects to raise between $15 and $ 16 billion in tax revenue over the next 10 years. Whenever a new piece of legislation comes out, everyone wants to know how they’re going to be impacted, whether this is good news for you or bad news for you. So today’s guest is Scott sturgeon to help us walk through who the winners are, who the losers are and things that we can think about to enhance our overall financial plan as it relates to some of these changes. Scott, thanks for joining us today.

Scott Sturgeon: Thanks for having me.

Brian: We’re thankful you’re here. You’re somewhat new to the podcast, although you’ve been working behind the scenes for sometime. We appreciate you showing your face.

Scott: Moderately terrifying to be on this side of the mic, but you know, I’m going to embrace it. We’ll get through it.

Brian: You’re doing great so far.

Scott: Thank you.

Brian: Just by background, would you spend maybe 60 seconds on your background and expertise and what you do for Mariner?

Scott: Sure. So again, Scott Sturgeon, I am by training an attorney. I have a law degree and a master’s in business and finance and also recently acquired my CFP designation – certified financial planner, was an advisor for a couple of years and then transitioned over here to Mariner and haven’t really looked back ever since – It’s been great.

Brian: So Scott is great to have you. As we walk through this, maybe let’s start with the winners. What are some of the wins as it relates to this act and who’s really going to benefit?

Scott: I think you hit the nail on the head in your intro going over the reasons why this act came about. You know, real winners and losers – I think it really depends on who the individual is and what their individual financial picture looks like. You know, overall there’s a confluence of two factors here that are really contributing to why the act came about. Number one being, you know, you mentioned people that are living a lot longer and a number two, a big one that you know, is maybe news to no one that there’s this pending crisis is the word I hear mentioned a lot, but quite simply, there’s a big disproportionate population within the United States who don’t have enough retirement savings. The goal I think of this act is to address some of those shortcomings, but as you mentioned, there are winners and losers within that. Just to start off, there’s a change to IRAs in general. We had the age for required minimum distributions that are forced to come out of an IRA, or heavily incentivized to come out of an IRA, at age 70 ½, changed to age 72. Seemingly a small change, 18 months, you would not think is that big of a deal. I thought of this as, for example, you’re getting stocks for Christmas, it’s very practical, but maybe it’s not the biggest change, but it is helpful for individuals to have that added time to put funds into a tax-deferred account to allow that to grow over time. Hopefully some benefit to be derived there.

Brian: So the old age was 70 ½. Now it is 72 and this is really for those who are not currently taking RMDs. Again, they’re grandfathered under that, right? This is for those in 2020 who are turning 72.

Scott: Right. If you turn 70 ½ on December 31, 2019, awesome work, you were literally one of the last individuals who unfortunately have to start RMD’s sooner. If you turn 70 ½ on January 1, 2020, even better, congratulations, because you have to wait for basically two years almost before you have to take that money out of your IRA.

Brian: So great opportunity to continue to let things compound. Again, it may not be for five years, but I mean for the period of time that it is, I think every little bit is helpful.

Scott: Oh, for sure. Not to go back to my sock analogy again, but, it’s just very practical. I think 70 ½ is kind of confusing. There are a lot of rules that go into when RMDs are forced to come out of an IRA. So I think clients in general we found – regardless of where you are, it’s confusing, and 72 is a much more of a “line in the sand” number. It makes it much easier to determine when those funds need to come out. I think it simplifies a lot of things and really is an overall positive.

Brian: One of the other positives was the ability to contribute to a IRA on an ongoing basis even after 70 ½, is that right?

Scott: Right. So that was a decent change prior to the SECURE Act, once you turned 70 ½, and you started taking those RMDs, those required minimum distributions, you could no longer contribute to your IRA. That changes with the SECURE Act. Basically with the new age of 72, you can keep contributing to that IRA as long as you’re working. You can keep contributing to that account, the benefit there being – basically you’re able to keep growing those dollars over time. We see people working longer. One stat I pulled was, the average life expectancy currently in the U.S. is 79 years of age. They’re expecting that to be about 84 by 2050. Obviously women tend to live a little longer and men a little shorter. But I think, being reflective of that, the increased age, falls right into the lap of individuals who are probably going to be working longer, and it won’t be uncommon for them to be working past 70 I think, moving forward.

Brian: I think it’s a great point. I mean, you know, we live in a gig economy now, right to some degree. The word “retirement” is changing, as we all know. And it’s graduating and they’re doing something a little bit different. So maybe they’re not working the same hours they did or even in the same career, but maybe they’re doing some consulting on the side, maybe they’re driving for Uber. I mean all these different things just to keep their mind active and just to have something to do. To be able to contribute there, continue to grow that nest egg, again, that’s a great benefit.

Scott: Sure. I call it a win.

Brian: That’s a win without a doubt. A couple other wins that the Act provides for. Do you want to talk about the penalty-free distributions for children?

Scott: Yes. One of the changes that came about with the SECURE Act is that individuals can now withdraw up to $5,000 penalty-free from an IRA or a 401(k) to pay for childbirth costs. Which is kind of weird, it doesn’t seem to make sense. At the time I first read it, I was like, well, there are better accounts to do that from. There are HSAs – health savings accounts where money can be withdrawn for medical expenses almost at any time. But there are limitations to those and who can actually have them. Maybe note for Congress: if we went to redraft this a little bit, maybe we make HSAs a little more expanded. Just my suggestion – call your congressman. But, but really the crux of this I think is that when we look overall within the United States, unfortunately there’s kind of this creeping medical debt issue. Medical costs are obviously very expensive. There is certainly a subset of the population in which having the ability to pull funds out of that retirement account might be a better option than going into debt, potentially having high-interest costs associated with that. I mean, I would say overall, it’s not a great option but it is an option to have.

Brian: It’s going to disrupt the long-term savings plan that you have for retirement. But at the same time, if people don’t have access to other funds, this is a great opportunity. So, hopefully people don’t abuse it, but there’s also the American dream. I want to have 2.2 kids. I want have a house, I want to have… so anyway, just at least it provides for greater flexibility.

Scott: Yes. That’s, that’s a huge one. It’s, I think overall, there’s a stat I pulled that 60% of investors between the ages of 18 and 34 have withdrawn some amount from the 401(k) to cover costs. Clearly there’s an issue there. I guess the question is, is there a way to make it such that there are better options to satisfy needs? Medical debt is one of the biggest debts that consumers carry. So having that option there is a decent one, I think.

Brian: Speaking of medical debt or debt for that matter is a great transition to the next win. And the next win being the ability to take distributions from 529’s to pay off student debt. Can you talk about that for a minute?

Scott: Yes. This was an interesting one with the Tax Cuts and Jobs Act from 2017, we saw an expansion of what 529 plans can do. Just a quick brief on 529’s. It’s a tax-deferred investment savings account that individuals can put money into. It allows them to save for college for their kids – they can then pull that money out. Let’s say I just had my kid or my kid is age two or three. I put that money into the account, it grows over 10-15, however many years, until they get to college. I pull the money out to then pay for their college expenses. That’s great. The TCJA, the Tax Cuts and Jobs Act, expanded that a little bit, which is nice. It allowed for secondary education costs to be covered. So high school, even private school tuition. This is an expansion on that even further. Basically saying that individuals can withdraw up to $10,000, or use $10,000 from their 529 plan, to pay for student loan debt. The interesting thing about this is there really isn’t a federal tax benefit to doing this, but essentially individuals can put that money into a 529 plan and may get a state tax deduction for it. From my perspective, the real winners of this, and maybe it’s a few hundred dollars in state tax deductions they can get out of it, but real winners are going to be younger individuals who are maybe relatively fresh out of school. Maybe they’re a physician or a dentist or an attorney or something. They make too much money to deduct student loan interest expenses. But you know, they really don’t have any other options. This is kind of a nice little potential tax break at the state level for them to have.

Brian: Should you get in that jam and should you have that as a situation, which frankly is becoming a crisis in this country and has been for some time, right?

Scott: Without question. It’s always interesting to kind of look at, there are always both ends of the spectrum of this. We know that student loan debt is this huge burden in general on a lot of people in this country. But at the same time, there are individuals who may have a small tax break or benefit from taking advantage of that. So that’s a win.

Brian: So Scott, great point. As it relates to the deductability or the tax-free nature of the 529, a lot of that is going to be state specific and individual specific, but those are great points. Any other wins as relates to the SECURE Act for folks?

Scott: You know, just a really quick offhand one; there were changes allowed from the SECURE Act that basically expanded the opportunity for part-time workers to become enrolled in employer retirement plans. They were not necessarily restrictive, but basically it enhanced the ability for someone working part time at a restaurant or even if you’re retired and working part-time somewhere dependent on employer, basically the ability to enroll in those plans has been expanded. So maybe where you didn’t have access to a 401(k) before – you do now. Any opportunity to take advantage of the tax deferral and the benefits that come with that I think are a huge win.

Brian: Thanks again for downloading this episode of Your Life, Simplified, which is produced by Mariner. At Mariner, we are here to serve as your advocate. We help people chart a course to reach their personal and financial goals so that they can have greater peace of mind that may lead to a more fulfilling life. We do this by always putting our clients first. Because as a fiduciary, we’re required to provide guidance that’s in the best interest of clients. As you listen to this podcast and have questions about your own financial situation or would like a second opinion or even you have an idea for a future podcast, please email us as [email protected]. If you found the information on this podcast valuable, please share it with a friend or family member who you think might benefit from this information. And please don’t forget to subscribe to this podcast so you don’t miss an episode. Thanks for listening. And now back to the episode.

Brian: So Scott, we talked about a lot of wins and good things from the SECURE Act, but the reality is, there are some bad. There’s something referred to as the “death of the stretch IRA,” which is going to apply to a lot of our listeners, a lot of clients, a lot of folks out there, and they really do need to take action, because this is going to impact their overall plan. If you think about it prior to this act, the way it used to work was that beneficiaries were required to take minimum distributions out of an inherited IRA and in a given way. Let me walk you through a simple example. There is $1 million IRA that’s owned by dad, and dad passes those assets to the primary beneficiary, who is mom. So those assets then go to mom, and mom can roll it into her own IRA and it’s treated as if it’s her own. She’s going to live maybe another 5-10 years and then afterward, it’s going to go to her primary beneficiary. Let’s just say they had one child and it goes to their son and so maybe it’s a million-dollar IRA. Their son is 40-something years old. His life expectancy is say 40 years at that point. From a required minimum distribution perspective, he’s going to take 1/40th of that as a distribution on an annual basis and that’ll be ordinary income to him, but he gets a stretch it out over his lifetime, so it’s still growing tax deferred and that’s the way it used to work. Now there’s a challenge. With the SECURE Act, the tax man wants to get their hands on this money a whole lot sooner, so now in that same example, dad passes away, and the million dollars goes to mom. Mom gives it to jr., well, jr. can no longer stretch that out over his lifetime. In fact, there’s a 10-year period of time in which he needs to then drain that account. So on $1 million, assuming no growth. Let’s just say that’s $100,000 a year. Well, if jr. is in his 40s and potentially successful, he has earned income. Another $100,000 of ordinary income could kick him into a higher income tax bracket from a federal, state or local tax perspective. There are a lot of different things to consider here, and again, he has a 10-year period to do so. What used to be an incredible wealth transfer vehicle, this stretch IRA provision, no longer exists. The government’s going to get its hands on the tax revenue a whole lot sooner – it really inhibits the ability to use this stretch IRA provision as we once could as a wealth transfer vehicle. So it’s a challenge at this point. I and others have referred to this SECURE Act and what they’ve done with the stretch IRA as death of the stretch. I would say it’s not necessarily dead. I mean, there are exceptions to the rule. We’ll say that it’s wounded, but there are exceptions. For example, surviving spouses can treat the inherited IRA as if it is their own. They can roll it to their own IRA. Another exception is children who are minors. You obviously wouldn’t go to a six-year old and say your 10 year clock starts today. Effectively they have 10 years after they reach age of majority, which is either 18 or 21, depending upon the state, chronically ill individuals or individuals who are disabled. They are exempt from this as well. And finally, individuals who are no more than 10 years younger than the IRA owner. So that could be, maybe it’s a sibling of the IRA owner or something of that nature. Those are the exceptions. This is where the stretch IRA is still very much alive.

Scott: Really, it seemed like to me, it’s the federal government saying, okay, we see what you’re doing with IRAs, we created these things in the 1970s so you would save and then live off it in retirement. And now we’re going to take away that estate planning aspect of it and get that tax revenue that we’ve let you have  for however many years.

Brian: Exactly. And I think one of the issues is that, as advisors, good planning, we would say if you needed to have a trust as the beneficiary of your IRA, you can set this up in a way to meet certain rules and criteria that you can make this a conduit IRA, which would enable you to have a trust as the beneficiary or the ultimate beneficiary of the IRA. The challenges when these were written for most documents anyway, everyone’s going to have their own specific situation. Is that the trust document essentially says that, the RMD, required minimum distribution, is going to be taken out on an annual basis and that would satisfy the rules to become this conduit IRA. The challenge of course is now when the trustee is making these distributions and reads, literally the words RMDs must be made. There are no RMDs anymore. It’s just a 10-year period of time. What ends up happening is there is no distribution that’s made, but they know the account has to be drained within 10 years. So the trustee ultimately says in year 10, I have to take all this money out. Within that situation, they take out $1 million in pay, a huge tax hit all in one year. So for those individuals who have leveraged a strategy like that, they absolutely need to speak to their advisor, work with a qualified estate planning attorney to make sure that they can adjust the language such that they can truly take advantage of this and try and understand if they even want that trust as a beneficiary anymore. I mean, most of the time, you know, people set this up because they want control and the benefit of the tax aspect of it. Well now the tax aspect, a lot of that’s been mitigated. It still provides control, but there are issues that people need to consider at this point.

Scott: Yes, I think it’s trust documents in general. If an IRA is part of the equation of someone’s estate, generally they’re drafted relatively specifically to address that. I honestly think there’s probably not something that comes along in a estate planning where there’s, you know, flashing lights, red flags like, Hey, you actually need to like address this today. This is one of those. It seems like there are a lot of people who could potentially get kind of caught up in this. Not even really knowing what the ramifications are.

Brian: We talk about planning and it’s an evolution, right? And things change. The market changes, laws change. I like to say I think all these tax laws are written in pencil because at some point they are going to change. But we all have to be mindful of it because I mean this is a great example of how you thought you might have this opportunity transfer wealth in a vehicle such as this. And the reality is, and that comes along like this and completely changes that. And the truth of the matter is many people don’t know much about this act at all.

Scott: No. I think within the wealth planning or retirement planning, estate planning communities, this was for sure the elephant in the room that people were talking about for months and months and months. But I think you look just within society and it’s just not known or not understood or combination of both. Which is unfortunate. You work hard to put things together and have things planned out and it’s like one small legislative change can have a massive detrimental impact.

Brian: I was talking to somebody this week asking them about their estate plan and if things are up to date and they said everything’s up to date because they met with their attorney about 11 months ago or about a year ago. And I start talking about this Act, they said, that’s ridiculous – I just put this in place.

Scott: One thing I wanted to touch on there, it’s obviously not great – the Act, this portion of it is not cool, I would say. There are some interesting things though, and there are some strategies that we’ve crafted and I think the industry is kind of coming around to that are going to be helpful. Do you want to touch on a couple of those?

Brian: I’m happy to – One of course is the ability to look at your IRA a little bit differently and think through what are referred to as Roth conversions or converting those assets, those IRAs to Roth IRAs, which the Roth IRA – there’s a lot of misinformation that’s out there, but with the Roth IRA, anybody can convert to a Roth IRA. Maybe not everybody can contribute to a Roth IRA because their adjusted gross income is too high, but you can convert. You don’t have to do it all in one year. There are different things that you want to think about. You know, what’s my tax rate this year? What’s my tax rate over the next few years? Maybe I’m going to retire and before I start taking distributions out, I’m going to go through this phase where I have lower income and maybe I think about converting over a period of years at that point because again, it’s going to be ordinary income to them. And so once they go through that process though, whatever those assets were, I mean make it up – if it’s $1 million, depending upon their tax bracket, let’s say that they end up with $700,000, that $700,000 is income tax free to beneficiaries. There are no RMDs on that. As it relates to while that person is living, their children will have to take, or whoever inherits the IRA, that non-spouse beneficiary will take RMDs but there won’t be tax associated with those distributions. So we love the Roth IRA, everybody’s situation’s a little bit different but those are things to think about. If there are listeners who are currently working, and they’re thinking about their contribution to a 401(k), you know, should they be contributing to a Roth 401k? A traditional 401k? These are great conversations to be having now with your advisor, especially in light of the SECURE Act.

Scott: Without question. Very much the Roth conversion is a huge tool in the toolkit basically that I think often goes overlooked. It’s a short-term pain, long-term gain type of a thing. But, very helpful nonetheless. One thing I wanted to make sure we talked about too was strategies that use a charity as part of your estate plan. I mean charities are essentially able to take taxable dollars and there’s really no ramification to them. So you know, having an IRA left to a charity or some sort of charitable vehicle can be a really good option.

Brian: One of the great things about leaving retirement assets to charities is that they get the full deduction, that fair market value. So if you give $1 million in an IRA to charity, there’s a deduction for $1 million, even though the reality is your basis in that maybe $200,000, so they’re great assets to leave to charity, you can split those so you don’t have to give the entire million dollars. But that is absolutely something to think about. The charity then sells that and because it’s a 501c3 they don’t have to pay tax on that. And so really everybody wins of course, except for the government. From that perspective. You know, another thing to think about is, and this is pretty technical, so you want to make sure you’re working with a competent advisor as well as a tax advisor. But it’s on the beneficiaries themselves. So I’ll walk you through this. Let’s say you have mom and dad, and in our example prior, we would say it’s a $1 million IRA. You know what? Let’s make it even simpler. Let’s say it’s a $2 million IRA, dad passes, and generally he might leave the $2 million to his wife. And then what’ll happen is ultimately, again, assuming no growth, the $2 million will go to junior, and junior will take $200,000 out over the next 10 years. Another way to think about that though, again, the dynamics have to be right, but simply from a tax perspective, there’s a lot more that goes into planning than just taxes. But here’s an idea or thought process. If mom doesn’t need the $2 million outright? Maybe dad leaves mom $1 million and that splits the IRA. He gives the other million dollars, and he makes junior the primary beneficiary on the account on half of those assets. So when dad dies, $1 million goes to mom, and she’s going to live for say another 10 years. The other $1 million goes to junior, and junior begins to take $100,000 out for 10 years. Let’s say mom lives another 10 years. Well then, he’s going to take again, dad’s distribution out for the first 10 years at $100,000, and then the following 10 years, he’s going to take $100,000 out, which was what was given to mom, for 10 years. So he’s effectively stretched out these distributions for 20 years as opposed to $200,000 a year, which would crush him from a tax perspective over a 10-year period of time. So every situation’s a little bit different. But that might be an interesting way to work that out. Again, dynamics are important. Goals are important. Different things to be thinking about from that perspective. And you know, there’s a host of other strategies that we can talk about, but if we can encourage folks to speak to their wealth advisor, the tax advisor about these strategies, what might be right for them. Because like we said earlier, everyone’s situation’s a little different.

Scott: Oh, for sure. We were talking even before we came in briefly and essentially came to the conclusion that we’re in this stuff all day long, every day. There are still elements of it that make my head spin. So for the average Joe or Jane walking on the street, it’s very easy to step in quicksand relatively quickly. I think seeking out a professional, having an advisor on your side is something that’s huge.

Brian: It’s overwhelming, and we understand that. Scott, I know we talked about a handful of different strategies, a lot of the changes. What are a couple of the quick takeaways for our listeners?

Scott: Very simply and just a few just general questions or suggestions I have to pose to an advisor or someone maybe you’re working with is – Number 1: How are these changes going to affect my individual financial plan? Everyone’s a slightly different, there’s no cookie cutter type approach, so that’s a huge one. Number 2:  How are these going to affect my estate plan? They’re intertwined, but that’s a huge one. This is potentially very far reaching implications from this. Number 3: Is there’s the Roth IRA conversion appropriate for me and then just in general – what are some tax strategies I should be looking at from the SECURE Act and the fallout from it I need to be mindful of or making changes to my plan.

Brian: Scott, that’s terrific. I think folks are going to get a lot out of this, and I think this is the first step, right? Getting educated, understanding where they are, and then thinking through what it is that they need to do. Scott, really appreciate you being here. Before we let you go, we like to ask all of our guests, what is the worst financial decision you’ve ever made? And being that you have a master’s degree, a law degree, a CFP, I’m sure it doesn’t happen often?

Scott: You would be surprised. Candidly, you know, I generally like to think I don’t make that many, but I, I’ll even go with two…Number one is I think I have this constant anxiety of the mistakes I’m making that I don’t know I’m making. Number two, I’ll say of financial mistakes. 401(k) loans are sometimes seemingly a good idea at the time when you need the money, but it is a pain paying that off. And that’s one thing I would maybe for those just listening or, or considering it, that’s one thing to certainly kind of think about.

Brian: Without a doubt. A lot of pitfalls with that strategy. Appreciate you sharing. Thanks for coming on the show.

Scott: Thanks Brian.

Brian: And to our listeners, thank you very much for listening. Again, if you guys have questions, suggestions, any type of feedback, please feel free to email us at [email protected]. Thanks again.

The views expressed are for commentary purposes only and do not take into account any individual personal, financial, or tax considerations. It is not intended to be personal legal or investment advice or a solicitation to buy or sell any security or engage in a particular investment strategy.

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