Secure Act and Your Retirement:
Mark Elliott: Welcome back to The Retirement Income Show. I’m Mark Elliott, alongside the CEO and founder of Oak Harvest Financial Group. Again, you can always go to the website to learn more. It’s a phenomenal website, oakharvestfinancialgroup.com. A lot of great information about the team, but a lot of great information for you as somebody that might retire someday. Wouldn’t that be nice?
A lot of great information on the website and of course, you can always go, I think it’s a great place to really educate yourself about some of the challenges and things you need to know about retirement is go to the YouTube channel, just search Troy Sharpe and Oak Harvest. Over 300 videos. Anything financially you can think about, there’s probably a video on it.
Anything retirement-wise, there are probably several videos on it, but it’s really a great place for you to learn about some of the challenges and things you need to be aware of heading into retirement. Just search Troy Sharpe and Oak Harvest on YouTube. You can subscribe, there’s no cost for that. That way all the new ones that are coming out all the time. There are over 300 videos on the YouTube channel.
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All right, we’re going to talk about, in front of Congress right now is the Secure Act 2.0. The House has passed their version. The Senate is now trying to figure out theirs, but it’s bipartisan support for this. We’re going to talk about some of the different areas of Secure Act 2.0, but Troy, maybe go back to the 2019 Secure Act, which went into play in 2020. There were some big things that happened in that one, and then we’ll talk about what’s happening in the new one. What do you think of the big things that happened in the Secure Act itself back in 2020?
Troy Sharpe: Honestly, it’s not really led to much, but it’s the-
Mark: The stretch IRA going away is a big deal, though, for you retirement planners, I would think.
Troy: Well, as far as the original intention of the bill, so the Secure Act was ultimately designed to get more people to participate in retirement plans, to– I’ll tell you one cool thing. Our COO, Mike DiCenso, he is– When the Secure Act came out, they created the opportunity for what is called these PEPs. They’re pooled employer plans. One of the main purposes of the Secure Act was to create an opportunity for small businesses to join together and participate in a 401(k) plan so costs are reduced, access is improved and they were to do this through what’s called a PEP, or what came to be known as PEP, a pooled employer plan.
Our COO, Mike DiCenso, actually created the very first PEP in the entire country, then went on to create the very– I think there’s only 23 out there, and I think he created all 23. That, I guess, you could say, is one benefit, but they are just so underutilized and it’s so much of what Congress does. To a certain extent or to a large extent, you can’t legislate behavior.
Now, you can use policy to influence certain decisions and certain thoughts that we have, but for the most part, people are going to move at their own pace. Now, we all want everyone to have much more money for retirement, but the truth is, it is a personal discipline to save money for retirement. I don’t care what laws we pass in Congress, Secure Act 2.0 is trying to address this through some forced participation, which we’ll cover in a second, but saving for retirement, it’s a personal choice, it’s as simple as that. Do you want to have the $1000 iPhone, or do you want to save $800 for your retirement and have the $200 phone? The iPhone 2, or iPhone 4?
We all make decisions. I’ve said this for years, once you get to retirement, how much money you have saved is, for the wide majority of people out there, is nothing more than the sum of all the financial decisions you’ve ever made in your entire life. Do I buy the $400 pair of shoes or the $37 pair of shoes? Do I go on this vacation or do I go here? Do I travel first class or do I take the bus?
Every financial decision we make, and this is so much like retirement in the sense that, it’s just magnified in retirement, but every financial decision you make in the accumulation years, how much you spend, how much you save, all of that, what type of college education you receive, what job you pursue, all of these decisions, they sum up to some financial number, and that is how much money you have for retirement when the paychecks stop.
Now, once you do get to retirement and those paychecks stop and that light bulb moment comes on and you’re like, “This is all I ever have, how do I take money out? Do I have enough? Can I retire? Will my family be okay if something happens to me? How do I pay less tax?” In retirement, it’s the first time you get to decide, what goes on your tax return based on where you distribute money from.
Do you take it from the 401(k) or your retirement account? Do you take it from savings from the non-qualified or what we call taxable accounts? When do you take social security? That all impact what goes on your tax return, which impacts how much tax you pay. Our job is to help organize that and create a plan so you pay less tax over the course of retirement.
Now, I know you were leading me down the Secure Act there, Mark, but I guess, I’m not happy with how the Secure Act, not how it was passed necessarily, but just a disappointment that, once again, the intended outcome is not what actually played out. Now, some of the good things with the Secure Act, RMDs did increase from 70 to 72. That gives us much more time, or at least a couple of years to do tax planning. It allows us a few other flexible options from a planning standpoint as well.
Taking the stretch IRA away, who does that benefit? Does that benefit the government? Because of our children– Now this is step five of our retirement success process, the legacy planning. It’s so much more than making sure you have beneficiaries. Your accounts, if you’re going to leave them to your child, what if your child is married and then gets divorced? If you haven’t planned for that, your child’s spouse is going to get half of your money. Did you think about that?
The Secure Act, it forces you or your children to distribute that money over a 10-year period. If they’re working and they have an income, all of your retirement account distributions will go on top of their income, potentially pushing them up into the 25, 30, 35, 40. What if tax rates are at 45%, 50%, and 60% in the future? What if they’re in a different state with a state income tax as well? So much to do on that legacy planning side of things.
The Secure Act taking away the stretch IRA, in my opinion, is awful. It benefits no one except the government. All they have to do in the future now is raise taxes, raise income taxes because you’re already forced to distribute trillions and trillions of dollars of retirement accounts in this country, that’s been put into place. Now all they have to do is increase income taxes.
Mark: If that was your plan, to leave your kids this IRA, well, now, because if you did it in 2018 and they were 40, they had 45 years basically to take that money out, pay taxes, and they went. Now they have the 10-year window that Troy was talking about. This would be a great time to sit down with a team at Oak Harvest and figure out maybe a different strategy. Maybe you can’t do something different. Boy, if you can, that might be a great thing for your heirs. 800-822-6434 is the number. No cost to chat with the team. They’re here to help if they can. 800-822-6434.
All right, Troy, Secure Act 2.0. House has already passed its version, Senate has its own version, so we don’t know for sure how it’s all going to play out, but we’re pretty confident it’s going to be passed, at least a lot of these. Here are a few of the key things. They’re going to mandate automatic enrollment in 401(k) plans at a rate of at least 3%, and then automatically increase it each year until the workers contribute 10% of their pay. Workers can opt-out and there are some exceptions. Right now, what is the IRA? 6,000 a year, and then if you’re over 57,000, is that kind of ballpark?
Mark: Well, they’re going to increase those limits on the catchup contributions if you’re in your 60s to $10,000 a year, raise the required minimum distribution age from 72 to 73, a few years later to 74, and then by the time 10 years go by, the required minimum distribution age will then be 75. What about those three? Then we’ll talk more in the final segment.
Troy: First of, I’m never a fan of the government mandating much of anything. Now, there are certain things obviously that are required for a civilized society to function. When we start talking about mandating where your money goes, look, it’s your choice if you want to save for retirement or not. You will pay the consequence if you don’t. Mandating it I think is a bit aggressive, but the government feels I guess they have to mandate this because people won’t take it upon themself. I guess we’re losing the freedom, essentially, to decide if we’re going to save for retirement, even though it is in our best interest. I’m just not a fan of the mandate clause within this.
When you get a new job, your employer will– You’ll have to sign up, and then you’re going to have to contribute. Now, you can opt-out, but the goal is to get people to start increasing their contributions to their retirement plan over time. As you said, it’s supposed to start at 3% and then increase annually until it gets up to 10% of your pay going into your retirement account. Now-
Mark: Now, if they would’ve had that when I started working, it would probably have been a good thing for me because maybe I would be retired at 62 instead of still working. It’s a good idea, but I get your point, that it’s making you do it.
Troy: Well, the issue is that the 401(k) marketplace is– My mom always said, “If you don’t have something nice to say, Troy, you should probably keep your mouth shut.” The 401(k) marketplace, it’s disjointed, it’s conflict-ridden. It’s not setup for the consumer or the employee who participates in the plan, or even what we call the plan sponsor, the company owner that creates the 401(k) for you. It’s not set up, in my opinion, to really benefit the consumer. It’s just not.
Now, they’re there, but when I talk about the conflicts. When we review these 401(k) plans, even though the regulatory environment has become much of higher scrutiny, it’s become much more frowned upon to do some of the things that they’ve been accustomed to doing for decades in this country, such as hidden fees inside mutual funds, layered fees inside these 401(k)s, conflicts of interest between providers and then the funds, and the products that they offer inside these plans, limitations, the inability to invest in funds outside of that. Let’s say insurance companies line up or mutual fund companies line up. We simply need more freedom and more flexibility, and more choices inside the 401(k) marketplace.
Here’s how it should function in a nutshell is you as the consumer, when you go to work for your employer, there should be an educational process.
This goes all the way back to financial planning with great school kids. I saw Governor DeSantis in Florida just started this, and I’ve been talking about it for 20 years. We need financial literacy classes as part of the core curriculum starting in pre-school, if needed. It might be a little too young, but kindergarten, first grade, I don’t care what concepts we’re getting across.
Good money habits come from practice. It comes from habits, or I should say, good money decision comes from creating good habits at a young age.
If we teach first graders how to save, they’re going to transfer those skills over to their financial decision-making, a large number of them, because ever since they were little, they will have understood the importance of saving. We’re going to talk about the Secure Act when we come back because there are a couple of other things we really need to get into, but I want to end it here.
The most important thing that we can do is create powerful habits, and we create powerful habits by making the right decisions at young ages. Someone has to teach us. When it comes to this 401(k) marketplace, there should be very clear training and education available and not just– like our 401(k) here, well, again, I could go on about this forever and complain, but there isn’t a proactive approach to helping people understand how to properly select the mutual funds, to invest, what to save, how to save.
It is really a mess and the Secure Act is trying to save it but again, the best intentions sometimes don’t quite work out as what was originally intended, but that’s why we’re here.
Whatever you do save once you get to retirement, give us a call. 1-800-822-6434. The goal is, is to help you make good decisions from this point forward. The sooner you reach out to us, the sooner we get this retirement success process going, the more likely you are to have more income and pay less tax in retirement. The website is oakharvestfinancialgroup.com. Check out the YouTube channel. Just Google Oak Harvest on YouTube and give us a call. 1-800-822-6434.
Mark: We’re talking Secure Act 2.0. Passed the House. Senate has it in front of them right now. We think it’s going to go through. The final, I guess, Secure Act 2.0, we’re not sure exactly, but we know a lot of the key things that are in it. That’s what we’re talking about. We’ll talk more about it right after this. This is The Retirement Income Show with Troy Sharpe, the CEO, and founder of Oak Harvest Financial Group.
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