Retirements are Changing and What You Can Do Now to Prepare

For people that are younger, you are likely 20-40 years away from retirement so a lot will change by the time you are ready to retire.

For people closer to retirement, there are significant changes in the SECURE 2.0 Act that you should be aware of.

Almost more important than asset allocation is asset location. The location of your assets would be what type of accounts you hold them in. These can be Roth IRAs, Traditional IRAs, Roth or Traditional 401(k)s or 403(b)s, taxable brokerage accounts, trusts, etc.

Each has there own benefits and downsides.

For example in traditional (pre-tax) retirement accounts, you are required to withdraw a certain amount of money based on your account balance and age each year once you reach 72 (now 75). So if you have a $500,000 traditional IRA and you are 78 years old this would be your example:

To calculate your RMD (required minimum distribution), you would need to use the IRS's life expectancy tables or a qualified retirement plan calculator.

1. Find your life expectancy factor in the table. For a 78-year-old, the life expectancy factor is 22.9.
2. Divide your account balance by your life expectancy factor. In this example, your RMD would be $500,000 / 22.9 = $21,792.
3. Round down to the nearest dollar. In this example, your RMD would be $21,792.

Note that this is just an example and your actual RMD may be different depending on your specific circumstances.

Now if you didn’t take that you would be subject to a 50% penalty on what you didn’t withdraw. So if your tax rate is in the highest bracket of 37%, it’s still better than the penalty of 50%.

That is also poised to change from 50% to something lower (25% if not corrected, and 10% if corrected timely)

But RMDs are not something that people who hold a Roth retirement account have to take because contributions are made post-tax, meaning you get taxed on what you put in. The government makes sure they get their cut.

But people who inherit IRAs (both traditional and roth), if they inherited it after January 1st of 2020, have to fully distribute that account in 10 years. You can do it all in year one or do it all in year 10, or spread it out over 10 years.

The main thing is you want to watch out for tax bills, if you inherit a $500,000 traditional IRA (this doesn’t apply to roth’s) and distribute it all in year one, you would be looking at paying more in taxes than if you smoothed it out over the 10 years. A key thing to keep in mind though is your current tax bracket, if you already earn a lot you may have to pay a lot anyways.

So for young people, this is important. You are the ones making more contributions. You likely need a plan for how to allocate assets between accounts. You probably don’t want to be stuck with only a $4,000,000 pre-tax account. Again each has its own benefits and downsides, but that is certainly one of them.

This is really what makes having a financial advisor a great idea, especially when you are younger. And it also doesn’t hurt to have a financial plan. If you are interested in creating a free one click here.

So what major things changed in the SECURE 2.0 Act?

1. The age at which you have to start taking RMDs is now going to be 75 versus 72, unless you were born in 1959, which I won’t go into (talk to your financial advisor)
2. An RMD exemption, this one won’t apply to that many people but it is nice to see. If your combined total traditional retirement account balance is less than $100,000 you will be exempt from taking RMDs.
3. RMD penalties are poised to change from 50% to 25% or even as low as a 10% penalty. That means for some it could make sense to not take your RMD and just pay the 25% or 10% penalty “tax”, because otherwise you may be required to pay a 37% tax, if that is your tax bracket.
4. Employer contribution matches may be directed into the roth portion of your employer-sponsored account whereas before they all went to the traditional portion of your plan. This means that you won’t be getting “matched” as much, it’s still the same nominal amount it’s just taxed as it goes in.
5. All employees will be auto-enrolled in an employer-sponsored plan and their contributions will automatically rise by 1% every year until they hit 10%. You can, of course, opt out of this and if you are already contributing more than 10% nothing will change for you.

Those are some of the highlights of the major changes that came with this new bill. The total thing came in at 4,100 pages, so there is much more than what I have covered here, and if you have specific circumstances some of these points may not apply to you. That is why I can’t stress this enough you need to talk to your financial advisor before you make any changes.

And of course, that is what I do, so if you have any questions I would be happy to help you answer them.