The Secure Act 2.0 – Changes In Retirement Planning


Mark Elliot: Glad you’re with us today for The Retirement Income Show with Troy Sharpe, the CEO and Founder of Oak Harvest Financial. Troy is also a certified financial planner professional. I’m Mark Elliott. Glad you’re with us. You can always search Troy Sharpe at Oak Harvest on YouTube. There’s over 200 videos out there. Troy has got a lot. Jessica is going to have some videos on the YouTube channel as well.

Chris Perras does the podcast on the website. He also has one that is really saying, “Is this news or noise?” Chris, of course, is the Chief Investment Officer at Oak Harvest. He graduated summa cum laude from Georgia Tech. He’s got his MBA from Harvard, but there’s a lot of information out there. If you have concerns about anything in retirement or financial world, there’s probably a YouTube video that Troy and the team put together for you, and there’s no cost to the YouTube channel.

Just search Troy Sharpe and Oak Harvest, and you subscribe, so you get all the new ones, and give us a little bell, but there’s no cost. We’re talking about the new SECURE Act. Remember, the 2020 SECURE Act change required minimum distribution age. It went from 70.5 to 72. It did away with the stretch IRA. You now have a 10-year window. If you leave behind an IRA for your kids, to take it out, they’ve got to do it all and pay the taxes within a 10-year period.

Now there is the new SECURE Act. It was talked about a lot probably in 2021, and then it never passed. Well, now it has passed the House. It’s now in the Senate, and Troy is talking about some of the changes there. Certainly, one of those was the RMDs going from 72 to 73. By 2030, that age would be 74. By 2033, that age would be 75 for the RMDs. We’re going to continue on in this vein, I think.

Troy Sharpe: Yes, I just want to go through some of the remaining recommendations, I should say, because it’s not yet passed legislation. The House has their version. That’s what we’re talking about today. The Senate has their version. Those two will be reconciled and, almost certainly, will pass sometime in the next few weeks.

For those who did not catch the last segment, there is a change to required minimum distributions upcoming. The original SECURE Act changed them from 70.5 to 72. Now, this is going to change most likely from 72, your beginning date, to age 73, as long as you reach age 72 after December 31st of this year 2022. Then in 2030, the RMD age is going to go to 74, and then 2033, it’s proposed it will increase to age 75.

Now, the acronym here for the SECURE Act is setting every community up for retirement success. Actually, I guess there’s no S at the end of SECURE Act, but that’s what they say it stands for. Now, I was a big voice against the SECURE Act because I don’t truly believe that it’s designed– Well, you know how it is in Washington. They pass these pieces of legislation. They give them some phony name, and then that’s their marketing.
That’s how they essentially sell it to the public. What I did not like about the first SECURE Act is, first and foremost, increasing the RMD age from 70.5 to 72, it does have some benefits. You have more time to do Roth conversions. Essentially, that’s the big one for me. You have more time to do Roth conversions before you’re forced to distribute.

What it did is when you passed away, your kids were forced to distribute that retirement account over the next 10 years of their lives. Imagine you have, let’s say, a million-dollar retirement account. You pass away, your kids are working. They don’t really need that money right now. Hopefully, your kids aren’t going to go and take big distributions and buy Lamborghinis and Ferraris and waste the money, but some of them may. There are ways to protect against that, though, through estate planning, and that’s part of our process as well.

The reason I didn’t like it is because it makes your retirement account even more of a ticking tax time bomb. If you pass away, or when you pass away, and the kids get the money inside the retirement account, they have 10 years to take it all out. Well, if they’re both working, and you have a million, it’s going to stay invested. It hopefully will grow over that time. Now, all of a sudden, they have to take this huge distribution of taxable income.
That income goes on top of their other income from their wages from working, and now, all of a sudden, your IRA in the future is being taxed at the top marginal tax rate. Maybe that’s 30%. Maybe that’s 50%. If you live in a state– We’re recording this on YouTube, so not everyone listening here is in Texas. If you live in a state, where you have income tax, you could easily add another 5%, 7%, 10%, 12%, 13% on top of that federal tax liability.

I saw it more of a way to force distributions from retirement accounts with the intention of, down the road, the government raising taxes to get a much larger piece of that retirement pot. This is one of the reasons why we’re huge proponents of doing tax planning in retirement. If you only have an investment plan 60, 40 stocks bonds, pulling out 4%, somewhere along that lines, you don’t have a retirement strategy. That is just an investment. That’s step one of a retirement plan.

Step two then goes into a specific income plan, not just how much to pull out but how much to pull out from where. Typically, we’ll be doing combined distributions, maybe from the IRA, in the non-IRA accounts. We’re trying to manage that tax bracket, but we have to do so within the context of having vision into the future.

Meaning, what are these decisions that we’re making today? How do they impact our account balances in the future? How do they impact our taxes in the future? How do they impact our requirement on distributions? How do they impact the legacy component? Excuse me. If you pass away with a bunch of money in what we call a non-qualified brokerage account, under current law, all those taxes go away. You get what’s called a stepped-up cost basis.

If you had $600,000 in gains, under current law, you pass that on, it gets stepped up, there are no capital gains taxes due. In a retirement account because of the SECURE Act, you pass all that money on, the kids have to take it out within 10 years and then pay income taxes on every single dollar, which goes on top of their earnings from their wages at their job. All of a sudden, your retirement account went from a 401(k) to a 201(k), and you’re not passing on nearly as much as you should.

This is all part of retirement planning. Little tangent there, but it is important to understand the context of, in my opinion, why they’re passing these pieces of legislation. They put that pretty acronym around it to make it sound like it’s actually in your favor, but I truly believe it’s really subterfuge, in a way, to get those retirement accounts distributed as soon as possible down the road and do so inside a higher income tax environment.
We’re talking trillions of dollars in taxes that will go to the government because of this legislation because prior to the legislation, the retirement account was able to be stretched out over the course of your children’s lives. If you had split beneficiaries, one of your children’s maybe 35, the other’s 32, the other’s 40, they were able to take those distributions out over the course of their life expectancy. Again, it’s a tangent, but it’s important to understand context with what Washington is doing and how it pertains to your retirement.

Other aspects of this SECURE Act 2.0. There is one that I actually like because we have a massive student loan problem in this country. It’s unbelievable how much colleges charge kids for tuition, especially in a low-interest-rate environment. Then, of course, how much a lot of these tenured professors are making and not really teaching the kids things maybe that historically weren’t a high focus in a college education, but I digress.

Matching contributions for student loan payments. This is pretty cool. If you are making student loan payments, and you can’t contribute to your retirement account because you’re, for the most part, strapped there, then your employer can still provide a match into your 401(k) because of that student loan payment that you made.

This is for your kids, maybe your grandkids. If they have student loans, pretty cool. If they have a job, where the employer provides a 401(k) matching, when they make that student loan payment, the employer will put money inside their 401(k). Now, this is not going to be a huge amount of money, but what I see happening is it sparks that light that, “Hey, okay, you know what? This is pretty cool. I have money inside the 401(k). I’m getting it for making my student loan payments.”

Maybe they pay more towards the student loans, or maybe it just gets them focused on retirement a little bit, and they decide to start saving a little bit in that account. That is pretty cool. How else can this legislation impact you? They are going to change, if you’re in between the ages of 62 to 64, it’s proposed right now, the catch-up contribution for your 401(k) is going to increase up to $10,000. Right now, I believe, it’s $6,500, on top of the $19,500 standard contribution for a maximum contribution of $27,000. Pretty cool there.

If you’re 62 to 64, they’re going to increase that to $10,000 as the catch-up contribution, but in 2023 next year, what they’re going to require, and I do like this as well, unless some of you are in the very high-income tax brackets above, let’s say, the 24% bracket and the 32, the 35, the 37, they’re going to force all of the catch-up contributions to go inside the Roth IRA or the Roth part of your 401(k). That’s pretty cool because we’re huge proponents of the Roth IRA here.

That catch-up contribution, if you’re putting the rest of your money inside the traditional part, where you get a tax deduction today, it comes out subject to income tax in the future, that catch-up contribution, it’s proposed that in 2023 and moving forward, all of those catch-ups are going to go into the Roth to help you build up some tax-free part of your retirement nest egg.

As many of you know, if you’ve listened to me for years, we’re huge on tax diversification. That means you want multiple buckets, not just of– Most people think of the bucket strategy, they’re thinking, “I’m going to pull maybe some from here, pull some from this bucket, or invest them differently.” No, we also need tax buckets. We need tax diversification, some IRA, some non-IRA, some Roth.

The more diversified we are with our tax structure, the more choices and flexibility we have later in life when it comes to making withdrawals, which allows you to manage what your income taxes are in retirement. One I don’t know, I haven’t really thought about this one too much, but I never like when the government forces you to do something. This probably will end up being good for people in the long run. So many people do not save for retirement.
One thing I know from being a financial planner is that if you save first, you pay yourself first, you get acclimated to not having that income, and you live your life without knowing that it was even missing. They’re going to have an auto-enrolment feature, where new employees get a 3% payroll deduction automatically that goes into their 401(k). That’s going to increase 1% a year up to in between 10% to 15% of the paycheck being reduced to take those deductions to put into the 401(k).
This is The Retirement Income Show. If you have more questions, if you want to talk about it, give us a call at 1-800-822-6434. Let’s get a retirement plan in place for you and your family. Visit the YouTube channel, search Oak Harvest Financial Group, search Troy Sharpe, get educated. Learn about retirement planning, tax planning strategies. You can do that on the YouTube channel. Just search Oak Harvest.

Mark: We’re going to talk more about this Proposed New SECURE Act to the House, Senate looking at it now. How does it affect Social Security? We’re going to get into that aspect a little bit as well in the final two segments. Stay with us. This is the Retirement Income Show with Troy Sharpe, the CEO, and Founder of Oak Harvest Financial Group.

Speaker: Oak Harvest Investment Services is a registered investment advisory firm. Troy Sharpe is an investment adviser representative and insurance professional. Investing involves risk, including the potential loss of principal.