Power Up Wealth podcast – SECURE Act 2.0 Part 1 – Episode 38 transcript:
Sharla Jessop 0:00
How will you take advantage of SECURE Act 2.0? I’m Sharla Jessop, President of Smedley Financial. Today we’re going to talk about the latest tax law changes. And what they mean to you with my friend and colleague, Jordan Hadfield.
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.
Jordan, I’m glad to have you with us today.
Jordan Hadfield 0:49
Yeah, I’m very glad to be here.
Sharla Jessop 0:50
Jordan is a wealth management advisor with Smedley Financial. And he holds both a Certified Financial Planning and Behavioral Financial Advisor designation. Jordan the tax law changes were that were implemented at the end of last year were wide sweeping and impact almost everyone. How does anyone make sense of all of these changes and the different implementation dates?
Jordan Hadfield 1:12
Yeah, that’s a good question. The SECURE Act 1.0, which passed a couple of years ago, brought with it some very big changes that impacted a lot of people in a lot of big ways. But there wasn’t a lot to that act. It was very large in its effect, not very large in its scope. The SECURE Act 2.0 doesn’t have any major changes like the SECURE Act 1.0, the CARES Act, but it has a lot of little changes that are important to understand. So this act is very large. What I would say to most people listening to this podcast is you don’t need to know everything that’s in the act. That’s our job as Private Wealth consultants. So I want to give you a very high-level overview of some of the things that I think are most important for you to just be aware of. But as far as the planning aspect of this act, and the opportunities that it creates, and the fine details and the laws that needed to be adhered to, we’ll take care of all that, you know, this act is huge. It passed in an over 4000-page piece of legislation. Right. And the SECURE Act 2.0 is a portion of that, but we studied the act in detail. You do not need to. We’ll take that off your hands for you.
Sharla Jessop 2:35
Thank goodness!
Jordan Hadfield 2:35
Right.
Sharla Jessop 2:36
A lot of information.
Jordan Hadfield 2:37
Exactly.
Sharla Jessop 2:38
You know, for people who are turning 72 this year, they got a little bit of a present from the SECURE Act 2.0. Tell us about that.
Jordan Hadfield 2:45
Yeah, they did. RMDs have been have been adjusted for a number of people. And in 2023, no one will be required to take a first-time RMD. In other words, if you were taking an RMD, and excuse me, I want to point out that RMD is a required minimum distribution from a retirement account. No one needs to start taking a required minimum distribution this year. If you’ve already been taking an RMD, you’ll continue to take it. If you were turning 72 this year 2023, meaning that this was the year you would start with your required minimum distributions, it has been pushed back to next year, 2024. Just to point out when you qualify going forward, if you were born before 1950, there are no changes to your RMD. Continue as usual, the SECURE Act 2.0 will not affect your RMD. However, if you were born between 1951 and 1959, your RMD age has changed to 73. And if you were born 1960 or later, your new RMD age is 75. So this is pretty cool. Yeah, it’s a significant change for sure.
Sharla Jessop 3:58
I’ve heard a lot of people, this isn’t my opinion. I think this is a wonderful planning opportunity. But a lot of people feel like it’s creating this tax nightmare by pushing out when people are required to take money out of their tax-deferred accounts. They’re just building up for a larger distribution each year in the future. Talk to us about that.
Jordan Hadfield 4:19
Yeah, it’s funny how political pundits will spin these things, right? I’ve had a number of people come to me and say this is terrible news. The RMD age is being pushed back. And this is going to create, you know, a tax problem. This is bad. And I completely disagree. I think what this does is it gives more freedom and flexibility to investors and it creates planning opportunities. So what I’m hearing most about is what is being called the tax crunch. Basically what it means is if you are not taking distributions from a retirement account, your account is typically growing. Okay, and the more it grows, the higher your RMD will be theoretically when you need to take an RMD. So if you push an RMD age back, your accounts are growing, and you also have less time to remove the money. And so what I’m hearing is this is creating a tax crunch. Investors who start taking RMDs at a later RMD age with larger retirement accounts are going to be forced to take larger RMDs in order to liquidate the account. And that’s going to affect a multitude of things from a tax perspective, such as Medicare, which is subject to income. Maybe tax deductions that you qualify for you are phased out of because your income is higher, because your RMDs are greater. For those individuals who do no tax planning, who do no retirement planning, no distribution planning, and do not have a financial professional in their corner to help them. Yes, it can create a tax crunch, and it can be a problem. But for those who are working with an advisor, who were actively planning. Just because the RMD age has been pushed back, doesn’t mean that distributions necessarily need to be pushed back. It’s just the required minimum distribution that’s being pushed back. So let me give you one example of a great planning opportunity. If you retire, let’s say you retire at age 65-67. And your RMD has just been pushed back to age 73, or 75, you now have a greater time of lower income, particularly if you’re delaying Social Security at age 70. Maybe you’re living off other savings, taxable accounts, you’ve got a period of time now where your income is much lower, which is a great opportunity to do Roth conversions from traditional tax-deferred retirement accounts. So if your RMD age was just pushed back to 75, you’ve had now two more years to take advantage of this opportunity. So we’re very excited to see this change. We’re very excited of the the planning opportunities that it presents. And we will be actively working with our clients to make sure that they’re taking advantage of every opportunity available to them. We’re excited about this.
Sharla Jessop 7:09
I think what I’m hearing you say is that this is a great year to make sure you’re meeting with your advisor and implementing some of the strategies that could save you money.
Jordan Hadfield 7:18
Yes, absolutely. You know, I heard a story from an accountant one time who said he was asked the question, you know, they’re gonna simplify taxes, you know, the tax form, are you concerned that, that this will affect your job. And he said, they’ve been talking about simplifying taxes forever, and they’re not going to do it. I kind of feel the same thing in our industry, as legislation passes, things are only becoming more complex and more difficult. And the need for an advisor for an advisor, who knows you, knows your goals, knows your situation, a need for an advisor, to do some active financial planning is just becoming more and more important.
Sharla Jessop 7:58
I couldn’t have said it better. I think that as we talk about planning, you know, it’s not a secret that so many people are so ill-prepared for retirement. Fidelity recently did a study talking about a retirement preparedness measure. And in their study, they found that 55% of baby boomers felt like they were not prepared for retirement scary, somewhere between 48 and 55%, which is a huge number. And that also included a previous generation. I think that as people get closer, they really focus in on retirement. And there were some changes for people who are over 50 and some special changes as far as putting more money in retirement accounts. Talk to us about that.
Jordan Hadfield 8:41
Yeah, so I think the government is concerned about what you just pointed out. I think they’re concerned that Americans aren’t saving enough. And what happens is, there becomes a huge reliant on the system, and that begin becomes very expensive for the government and for taxpayers. And so they’re really motivated to help Americans save for retirement. I don’t think they stress it enough. I would like to see them, you know, put out more education and more opportunities for younger people to save. But the SECURE Act 2.0 brought some opportunities there. One thing that we see often is people you know, young people come out of college they get into their careers. They’ve got debts, student loan debts, and they’re focused on that. They’re focused on getting their debts paid off. They’re focused on you know, purchasing a home and building a family and progressing in their careers. And they’re not thinking about retirement because they’re young, and they’re never gonna grow old. Right. We’ve all we’ve all felt that way. And the government’s aware of this, and as people grow older, their focus shifts towards retirement. Also, their incomes typically increase as they’re growing older and so many, many years ago, the government instituted what they call a catch-up contribution. In other words, when an investor hits the age of 50 they can contribute an additional amount into their, into their retirement accounts, which is fantastic. You know, the employee has taken advantage of this for many, many years. They’ve just added to that in the SECURE Act 2.0. They’ve added what I’m calling is a super catch-up. So if you are age 60, 61, 62, or 63, you will have the ability to take advantage of this super catch-up and get even more money into retirement. So I think this is fantastic. What I think is not fantastic, Sharla, is for people who are turning 60, 61 this year, it’s not going to apply. This does not go into effect until 2025. So great news, starting in 2025, you’re feeling really left out if you’re 60 through 63, in 2023 or 2024.
Sharla Jessop 10:51
Yeah, as I’ve mentioned, I’m right in that cusp at that area. And I’ve felt like boy, why didn’t they just start that sooner to give those people a little bit of advantage?
Jordan Hadfield 11:00
I know I wish they were I wish they would have. But for those that do qualify, it is a great opportunity to get more into your retirement accounts, and better secure your retirement. There’s tax planning for current year for these people, because some of these assets are tax-deferred. They’re at later end of their careers. They’ve probably got higher incomes. So there’s some real benefits both in the working years and in the retirement years for a change like this, again, very happy to see it.
Sharla Jessop 11:26
Does the super catch-up apply to IRAs, traditional IRAs or Roth IRAs?
Jordan Hadfield 11:32
Yeah, so what applies to a 401(k) type plan. So mainly in employer-sponsored plans. However, there are some changes to IRAs. IRA catch-up contributions will start to be indexed for inflation. Basically, what this means is, you know, with inflation, the ability to contribute more to your IRAs is just going to increase. Not the same way in employer-sponsored plans, but it is an increase there as well. And then the simple IRA catch-up contributions will have the 60s through 63, provision included, so they’ll have access to the super catch-up for the simple IRA. And then the contributions there will also be indexed for inflation. So again, we’re seeing pretty much across the board, a greater ability to contribute to retirement plans going forward. But the super catch-up applies to 401(k) plans, 457 plans, 403b plans, any employer-sponsored plan, and then the simple IRA.
Even without the tax law changes, there was an increase in contribution levels this year for traditional plans. Is that right?
Yes, across the board, there was a significant increase. You know, for example, 401(k) employee contributions jumped from $20,500 to $22,500. So $2,000, which is a big jump. Normally, we see those increased increments of $1000. But across the board, those limits have gone up, HSAs have gone up. So if you’re contributing to any retirement plan, particularly if you’ve got a systematic contribution going into that plan. In other words, you’ve kind of set it and you’ve forgotten about it, you may want to double back on that. And make sure that you’re you contributing the maximum that you can, and you’re going to want to double back on that every year going forward, because of these provisions indexed to inflation, these contribution limits should go up every single year going forward. So again, if you’ve got a systematic contribution, you’ve set your contribution amount monthly, you may need to adjust that to make sure that you’re totally taking advantage of your contribution limit.
Sharla Jessop 13:40
Great. Jordan, as we talked about this, there’s so much information, and we’re only going to touch on the things that we think are really important. But that doesn’t mean the other things that we’re not going to touch on aren’t important. They should still talk to their financial advisor who can help them understand is that correct?
Jordan Hadfield 13:56
Absolutely! It’s important for financial advisors everywhere to understand this in great detail. And I feel like you know, my colleagues here at Smedley Financial, we’ve really dived deep into this act and we have a very, very good understanding. The general public, you know, most of this, they don’t need to know it in that in that depth. But we definitely want to highlight the things that they should be aware of.
Sharla Jessop 14:18
Jordan, what will we be covering in part two?
Jordan Hadfield 14:21
Yeah, a lot of changes to Roth accounts across the board. So we’re going to talk about that in a little bit more detail. And then also, there’s been some, some cool changes to the 529 plan, which I think it’s important to understand. So we’ll hit on both of those next time and I look forward to it.
Sharla Jessop 14:38
Great. Thanks for joining me, Jordan.
Jordan Hadfield 14:40
Yes, thank you, Sharla.
Shane Thomas 14:46
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.
