Power Up Wealth podcast – Keeping Up With Change – Episode 36 transcript:
James Derrick 0:00
In the final days of 2022, the US government passed the SECURE Act 2.0. There have been a lot of mixed reviews, but overall there is an incredible amount of flexibility that comes to all of us because of this new law. I’m James Derrick, and today we’re going to talk about SECURE 2.0. I have Sharla Jessop, President of Smedley Financial Services here with me to discuss it.
Sharla Jessop 0:36
Welcome to the SFS Power Up Wealth podcast, where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
James Derrick 0:59
Thank you for joining me today, Sharla.
Sharla Jessop 1:01
Thanks, James. I’m glad to be here.
James Derrick 1:02
Sharla is President of Smedley Financial Services. She has is a Certified Financial Planner and has a Behavioral Financial Advisors designation as well. Sharla, tell us about SECURE Act 2.0. Why are you so excited about it?
Sharla Jessop 1:16
Well, when you look at what’s happening in the retirement landscape, it’s it’s been a little bit frightening. So many people are ill prepared for retirement, and they need a reason, maybe some help, some incentives to save and become better prepared for what’s coming.
James Derrick 1:32
And is that essentially what they were trying to accomplish when they passed this? An incentive for all generations?
Sharla Jessop 1:39
I think it really impacts those who are closer to retirement. Fidelity did a study in their research, they created what they call the Retirement Readiness Measurement. And they determined through this study, that people who were baby boomers, you know, from 1964 and earlier. Only 48% of them felt like they were prepared or could cover their expenses. They rated themselves as poor or fair in the area of being able to cover their basic expenses. The tail end of the baby boomers will be turning 59 this year.
James Derrick 2:13
- Yeah, that is what we call crunch time.
Sharla Jessop 2:16
It is! They’ve got a lot of preparing to do. They’re nervous, and they’re not ready. And they don’t feel like they have what they need. And many of them are already in retirement. When you think of that the majority of the baby boomers are already in retirement.
James Derrick 2:29
Now out of curiosity, do the other generations respond in similar ways? I mean, how is Gen X doing? How are the others doing? Are they more keen to prepare for retirement? Or is it similar?
Sharla Jessop 2:40
Well, let’s talk about Gen X, because they’re the next generation right after baby boomers. They’re going to be ages 46 to 58 this year. And they rate themselves rather than 48%, they only rate 58%. So 58% of them feel like they are poor, when it comes to planning or fair. They’re not ready. They’re not prepared. They don’t think that they can cover their basic expenses. That’s, that’s a little bit scary for them. They’re really in their peak spending years right now. And earning years at the same time when you think about it. Peak earning because this is the time in their careers when they’re probably going to be making the majority of their money. But they’re also in their peak spending years because they’ve got their kids now ready to go to college or entering colleges. And they’re part of the sandwich generation. They’re taking care of these kids and their family and raising them. But they’ve also got parents that they’re also trying to help in many regards. So they’re really pressed.
I certainly understand the concept of peak spending years, I’m feeling it. As I imagine everyone listening to this, you know, knows what that is like. It is difficult, and there’s a lot less flexibility. So how does SECURE Act 2.0 help?
Well, it helps them eke out some more money. There’s more incentives for saving. So it allows them to put more money aside in Roth. Before Roth was only available in 401(k)s if it was a retirement plan. Now it’s going to be available in many different types of retirement plans. So it gives them opportunity to save now while maybe their taxes are low, in those peak spending years, they’ve got mortgages still, they got deductions, and you know that they’re claiming, so their income tax marginal bracket is fairly low for most of them. That gives them the ability to put money into Roth, where their money has been taxed already, and it’s gonna grow tax-free. That’s an incentive for the future and putting money aside.
Okay, I’m gonna throw you a curveball here, Roth versus Traditional. How do you know which one is best? And a lot of employers are beginning to offer Roth 401k. Are we going to see more of that in the future?
I think they’re really leaning into Roth, because they’re offering more and more. Some people have been worried that if I have my money taxed now and put it in Roth, does that mean in the future they’re going to take it away or not allow me to do it. Well, they’re really keen on Roth. Think about it, the government’s going to get their revenue now versus in the future from a required distribution.
James Derrick 5:04
Sounds like something they would like.
Sharla Jessop 5:06
Yeah, so it does benefit them. The reality is, if the tax rate is the exact same now, and in the future, there’s not a difference or a benefit tax-wise. The benefit comes in that in the future, you’re not going to be forced to take your money out of retirement account and pay tax on it. If you don’t want to. In a Roth, it can stay invested, and there is no required distribution. But for most people, they do it because they believe that they’re going to be in a higher tax bracket in retirement than they are while they’re working.
James Derrick 5:36
Fewer, fewer deductions in the future. So take advantage of Roth now.
Sharla Jessop 5:41
Right.
James Derrick 5:43
Okay. Also, the possibility that the government could raise taxes in the future would also be a benefit to Roth now. So those.
Sharla Jessop 5:49
Right.
James Derrick 5:51
And then you mentioned no required minimum distributions. That would be the third reason why you might consider one.
Sharla Jessop 5:58
Right, you aren’t going to be required to take the money out. If you don’t use it during your retirement years, it goes to your beneficiaries tax-free. A Traditional IRA goes to a beneficiary taxable at their tax rate.
James Derrick 6:09
Okay. Thank you for clarifying on that. Now, we mentioned required minimum distributions. They had some pretty major changes there with SECURE Act 2.0. Can you dive into that?
Sharla Jessop 6:20
They did! And this is one of the things that I really love, because when it comes to planning and flexibility and opportunities, they’ve created some great benefits that many people have overlooked. Let’s say that you someone retires early. Let’s say John and Mary, for instance, are 65 years old, and they’ve decided that they’re going to retire and their income drops to $100,000. Well, they have this period of time as to when they’re going to have to take a required distribution. So if they’re 65 now, they’re required distribution date will be when they are going to be 73. So they have a planning window between 65 and 73 where their income will be lower. And they can determine when and how much to convert from Traditional IRA to Roth IRA. Because at a $100,000, a married couple filing jointly is in the 22% marginal tax bracket. And that goes up to $190,750, I believe. They can marginalize or take money out of their traditional tax deferred account, whether it’s 401(k) IRA, and convert it to a Roth IRA, up to $190,000, stay in the 22% marginal tax bracket. And then they’re not forced to take distributions from that in the future. One of the concerns with pushing the RMD out is that people would not take any distributions and that they’ve just pushed distributions and create this growing nest egg tax bomb in the future. But planning, tax planning, and preparing gives us the opportunity to help people determine every year, how much should you convert? Should you convert at all? And if so how much? And how can we marginalize that tax bracket. Maximize what’s available without putting you into the next tax bracket?
James Derrick 8:02
Well, I can see how pushing back the age for the required minimum distribution doesn’t force anyone to do anything. All it does is just increase your flexibility for planning.
Sharla Jessop 8:14
Right! That’s right. And it allows people also who who want to continue to save money if they’re working to do so without taking money out of retirement accounts. You know, some people are working longer in many regards so if they want to, and they don’t have a retirement plan, they can continue to contribute to IRAs during those periods of time and not have to take money out. And the law changed. Actually a 73, if you were born in 1959 or prior are already taking distributions if you’re already taking required distributions you’re not impacted at all. It’s just the people who were going to be turning 72 this year, their RMDs and younger are pushed out till 73. But if you were born in 1960 and later, then you don’t have to take a required distribution until you’re 75. So that creates an even a greater window of opportunity.
James Derrick 9:03
Yeah, that’s incredible. They just keep pushing it back. Because we’re living longer and longer. I think it makes a lot of sense.
Sharla Jessop 9:09
And you know, I think that people don’t realize taxes are one of the biggest challenges people face when they retire. Is taking their tax deferred money out that they’ve set aside for all these years. And now they have this big tax crunch that they’re going to be faced with in the future. But some, there’s some planning that people can do to help take advantage of opportunities and convert and keep their tax brackets down. Make sure that when they convert, they’re not taking too much so they don’t run into a problem with paying IIRMA, or increased premiums for Medicare Part B and Part D. If you take out too much and your incomes over a certain limit, $190,000, then you end up paying higher premiums. So there’s a lot of things that come together in planning that people need to understand.
James Derrick 9:54
Wow, it sounds like a good reason to come in and see a financial advisor who understands all this.
Sharla Jessop 10:00
Great reason! I think a financial planner not only can look at the whole picture, understand somebody’s values, their goals, what they’re trying to accomplish. But they can take all of this person’s situation, all of their investments, their fixed income, and then they can take all their resources and knowledge that they have and put together a plan that will help each client maximize all the opportunities available to them.
James Derrick 10:20
Before we finish up, is there anything else you want to let people know about SECURE Act 2.0. I know it’s it’s massive, and we can’t cover it all. Jordan Hadfield from SFS is also going to be talking about it in the podcast.
Sharla Jessop 10:34
Some of the things that are included in SECURE Act 2.0 that Jordan will be covering later are, first of all, we have increased contribution limits this year, that is not part of SECURE Act, it’s just that was phased in that it would increase and an increased catch-up. So if you’re over 50, and you’re contributing to an IRA or a Simple IRA, or some type of an employer sponsored plan, like a 401(k), you can have an increased catch-up. And then they’ve also instituted a special catch-up provision for those who will be 60 to 63, which increases their catch-up amount considerably, but it doesn’t go into effect until 2025. But still something to consider that it’s still just a way to help people better prepare.
James Derrick 11:19
Well thank you, Sharla for coming in and participating and filling us in on all the information from SECURE Act 2.0. We look forward to learning more about it as time goes on.
Sharla Jessop 11:30
Thank you, James.
Shane Thomas 11:30
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn. The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Securities America. Inc., Member FlNRA/SIPC. Roger M. Smedley, Sharla J. Jessop, James R. Derrick, Shane P. Thomas, Mikal B. Aune, Jordan R. Hadfield, Registered Representatives. Investment Advisor Representatives of Smedley Financial Services, Inc.®. Advisory services offered through Smedley Financial Services, Inc.® Smedley Financial Services, Inc.®, and Securities America, Inc. are separate entities.
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