The_SECURE_Act
00:00:00.000 | Hello, everybody, it's Sam from Financial Samurai, and happy 2020.
00:00:04.320 | Happy New Year.
00:00:05.320 | Can you believe that the decade is over and a new one has begun?
00:00:09.840 | I'm pretty pumped.
00:00:10.840 | I'm actually really, really pumped.
00:00:12.980 | It's kind of like season two of your favorite Netflix show where I'm going to go on this
00:00:18.940 | new journey, and I hope you guys go on a great new journey as well and accomplish a ton of
00:00:23.440 | stuff.
00:00:24.640 | So there's been a lot of stuff going on since the last podcast, and I just want to do a
00:00:28.240 | little recap and also talk about what I plan to do over the next three years.
00:00:34.360 | So while we were relaxing and enjoying each other's company and the holidays, the SECURE
00:00:39.160 | Act passed.
00:00:40.160 | And I think it's somewhat interesting.
00:00:41.840 | It's a net positive for most Americans and their retirement planning strategy at the
00:00:46.320 | margin.
00:00:47.320 | There are several things you should be aware of.
00:00:49.080 | The first thing is the required minimum distribution starts at age 72 from 70 and a half.
00:00:55.480 | So that means there's another one and a half years of tax advantageous compounding of your
00:01:00.600 | accounts before you have to start withdrawing and therefore before you have to start paying
00:01:05.280 | taxes.
00:01:06.640 | So that's pretty good.
00:01:08.080 | Given that our population as a whole is living longer, extending the RMD from 70 and a half
00:01:13.000 | to 72 makes sense.
00:01:15.080 | We should be allowed to have our investments compound tax free for a longer period to pay
00:01:19.520 | for our longer lives.
00:01:21.720 | So your goal is to amass a large enough taxable retirement portfolio so that you can wait
00:01:26.400 | until 72 to withdraw from your retirement funds.
00:01:30.160 | And of course, your goal should be to try to live as long past 72 as possible.
00:01:35.080 | The second change due to the SECURE Act is pre-tax contributions can be made to your
00:01:40.040 | traditional IRA after age 70 and a half.
00:01:43.600 | So that's pretty good as well.
00:01:45.240 | But it's kind of like a two-sided coin here.
00:01:48.360 | One, if you're fortunate enough to still have the energy, ability, and desire to still have
00:01:52.440 | a W-2 income after age 70 and a half, that's good.
00:01:56.400 | Just contribute to your traditional IRA.
00:01:59.160 | But if you still have to contribute money to your IRA when you're 70 and a half plus,
00:02:05.680 | I think that kind of sucks unless you really, really like your job.
00:02:09.140 | So the maximum IRA contribution for 2020 is $6,000, which is the same as in 2019.
00:02:15.240 | I don't know why the government didn't raise that contribution limit as it raised the 401(k)
00:02:20.880 | contribution maximum limit to $19,500.
00:02:24.200 | The IRA catch-up contribution limit will remain $1,000 for those age 50 and older for a maximum
00:02:29.600 | possible IRA contribution of $7,000 in 2020.
00:02:33.560 | The thing that bums me out most about the IRA is that the government still doesn't allow
00:02:38.480 | all Americans to contribute to a traditional IRA with pre-tax income.
00:02:43.920 | For some reason, it believes that once a single individual makes over $139,000 a year in 2020
00:02:49.800 | for a Roth IRA or more than $70,000 for a traditional IRA, they no longer want or need
00:02:56.880 | to save for retirement because the government says they're not allowed.
00:03:00.800 | Well, for a traditional IRA, you can, but it's just not going to be with pre-tax money.
00:03:06.080 | And for the Roth IRA, you cannot.
00:03:08.600 | And so I just want everybody to realize the weird standards the government is giving to
00:03:15.440 | all Americans.
00:03:16.440 | I mean, it's as if they believe all Americans face the same living expenses.
00:03:21.040 | Obviously, living in New York City is going to be more expensive than living in Des Moines,
00:03:25.320 | Iowa.
00:03:26.320 | And what also befuddles me is simple math.
00:03:29.840 | If you're a single person and you make over $75,000 a year, you cannot contribute pre-tax
00:03:35.760 | money to a traditional IRA.
00:03:38.520 | Now if you are married, the limit for contributing to an IRA, the income limit, is $124,000.
00:03:48.120 | So once you make, combine more than $124,000, you cannot contribute to a traditional IRA.
00:03:54.400 | But the funny thing is $75,000 plus $75,000 is what?
00:04:00.160 | $150,000?
00:04:01.380 | Not $124,000.
00:04:03.980 | So the government also believes that 1 plus 1 does not equal 2.
00:04:08.200 | And it just doesn't make sense.
00:04:10.960 | What happened to the equality between man and woman or man and man and woman and woman?
00:04:15.460 | Both people deserve to make their money, have their careers.
00:04:19.400 | So the government is always kind of determining the winners and losers.
00:04:22.820 | So you just want to be aware of that.
00:04:24.760 | A third item the SECURE Act changes is no more stretch IRAs.
00:04:31.460 | So what is a stretch IRA?
00:04:33.440 | Well it's an estate planning strategy that basically richer people use that extended
00:04:38.340 | the tax deferred status of an inherited IRA when it is passed to a non-spouse beneficiary.
00:04:46.160 | Theoretically an IRA could be passed on from generation to generation while beneficiaries
00:04:50.560 | enjoyed tax deferred and/or tax free growth.
00:04:54.020 | But now that's gone.
00:04:55.020 | Under the new law, most beneficiaries will have to withdraw all the distributions from
00:04:59.600 | their inherited account and pay taxes on it within 10 years.
00:05:03.640 | Exceptions are made for spouses and the chronically ill or disabled.
00:05:07.240 | Now there seems to be some kind of uproar about the elimination of stretch IRA.
00:05:11.680 | But I say come on, give me a break.
00:05:14.440 | If you are lucky enough to inherit an IRA and not need to use it, you know, after 10
00:05:22.040 | years, you're clearly doing very, very well.
00:05:24.840 | So you're basically getting a gift when you don't really need the gift.
00:05:28.720 | So I say hey, you know what, if the government wants the money after 10 years, then so be
00:05:33.520 | it.
00:05:34.520 | It's fine.
00:05:35.520 | You should be talking to an estate planning lawyer and he or she will tell you things
00:05:38.960 | that you probably have never considered before like the GRAT.
00:05:43.120 | And you should also set up a revocable living trust if you have children.
00:05:46.520 | At the very least, everyone should have a clearly written will and an area where you
00:05:51.280 | have all your passwords and usernames because estate planning really is an act of kindness
00:05:55.920 | for your beneficiaries who will go crazy if they can't figure things out and will have
00:06:00.800 | to pay a lot of lawyer fees to figure out your estate.
00:06:04.040 | The fourth item the SECURE Act introduces are annuity options in your 401k.
00:06:10.720 | So annuities like whole life insurance is a very profitable product for financial companies,
00:06:15.400 | which is why I think financial companies were more lobbying hard for the SECURE Act to pass.
00:06:21.600 | Annuities if you don't know, are insurance products that turn a lump sum investment into
00:06:25.400 | a lifetime of guaranteed income.
00:06:28.080 | So besides the hidden cost of owning an annuity, one of the concerns companies had for offering
00:06:33.160 | them in a 401k was the viability of the annuity provider.
00:06:37.480 | So for example, what if your insurance company went bust or the annuity provider went bust?
00:06:42.960 | You may not get what is promised to you.
00:06:45.920 | Think about money.
00:06:46.920 | It's just a promise that it's worth something.
00:06:49.480 | We think it's worth something, so therefore it's worth something.
00:06:51.840 | But one day we might think it's worth crap and money might not be worth anything.
00:06:57.680 | And this is why I personally like to buy real assets such as real estate because if everything
00:07:03.400 | goes to crap, at least I can go to a property I own and take a crap.
00:07:08.160 | You know, there's a utility there.
00:07:09.600 | There's utility and it's just not going to disappear like poof, like many, many paper
00:07:13.880 | assets and things did during the 2008 to 2009 financial crisis.
00:07:19.220 | So I would say that's fine if there are annuity options, but I wouldn't go about selecting
00:07:25.800 | an annuity option.
00:07:27.360 | It's just, I don't think it's a good idea.
00:07:29.320 | You lose your liquidity.
00:07:30.480 | You lose your flexibility.
00:07:31.760 | You don't know what it costs.
00:07:33.080 | It's kind of murky.
00:07:34.080 | I would just pass.
00:07:36.560 | And if you're an employer, I would say you'd be foolish to offer an annuity option in your
00:07:40.600 | 401k plan despite the increased legal protection because no employee is going to join an employer
00:07:47.560 | or stay at an employer because of its great annuity options in the 401k.
00:07:53.560 | Really more so just do a better match or do some more profit sharing instead.
00:07:58.520 | All right, what else?
00:08:00.520 | Five, 401k accounts may become more prevalent for part-time workers or employees of small
00:08:05.980 | businesses.
00:08:06.980 | And this is something I'm most excited about because I believe there is a change in the
00:08:11.920 | way we work.
00:08:12.920 | If you think about it, I don't know, going on a 30 minute to an hour commute to an office
00:08:18.120 | where you don't really need to be in the office because of technology doesn't make much sense.
00:08:22.880 | It's much more efficient to wake up, go to the bathroom, put on your underwear.
00:08:26.840 | Hopefully you already have your underwear on and then get to work on your laptop and
00:08:31.240 | you can do teleconferencing and all that.
00:08:33.360 | So if more 401k plans are going to be provided to small businesses, that's great for employees
00:08:39.560 | of small businesses and I think freelance workers.
00:08:43.480 | The SECURE Act now requires employees who offer 401ks to expand its access to part-time
00:08:49.120 | workers who work at least 500 hours a year for three consecutive years or 1000 hours
00:08:55.220 | for one year.
00:08:57.300 | To put these hours into perspective, a full-time worker who works 40 hours a week will work
00:09:01.300 | 2080 hours a year.
00:09:03.760 | Therefore working 1000 hours for one year is a walk in the park.
00:09:08.520 | We're talking only an average of 20 hour work weeks.
00:09:11.840 | So I think that's really, really easy.
00:09:14.240 | So at the margin, the offering of more 401k plans to part-time workers will probably further
00:09:18.420 | increase the rise of part-time and remote workers.
00:09:22.160 | As a result, I foresee a continued demographic shift towards lower cost areas, which is why
00:09:27.840 | I'm diversifying my real estate holdings into the heartland of America.
00:09:33.120 | Your mission, if you choose to accept, is to find part-time and remote work opportunities
00:09:38.640 | with employers who offer a 401k plan with a match.
00:09:42.560 | Because there is so much dead weight working a full-time job with one employer.
00:09:47.040 | Think about all the meetings you have to go to, especially the ones that are meetings
00:09:51.360 | about meetings.
00:09:52.420 | Think about the commute.
00:09:53.480 | Think about all the distractions.
00:09:56.160 | It's much more efficient, I think, to be a freelancer and get multiple clients.
00:10:00.760 | Because if you are reasonably efficient, you can make a lot more money.
00:10:05.560 | Sixth thing to note about the SECURE Act, 529 plans get more flexible.
00:10:10.520 | After the tax cuts and jobs act passed in 2017, owners of a 529 plan could not only
00:10:16.120 | use these funds from the plan to pay for qualified college expenses, owners of the plan could
00:10:21.840 | also use up to 10,000 of the funds annually for K-12 expenses.
00:10:26.840 | And I thought this was really great, especially for folks living in big cities or coastal
00:10:32.000 | cities, maybe where the public school system isn't that well-funded or ranked.
00:10:37.360 | So 10,000 a year, that's pretty good.
00:10:39.360 | So now with the SECURE Act, a 529 plan can also be used for apprenticeship programs,
00:10:44.680 | which is really, really popular in Europe, not so popular in the United States for some
00:10:49.280 | reason, and qualified expenses including fees, books, supplies, and equipment.
00:10:54.520 | Further, 529 plan funds can be used to pay for principal and interest of qualified education
00:10:59.120 | loans in the amount of $10,000.
00:11:03.440 | So the details, I mean everything sounds good, but you gotta look at the fine print before
00:11:08.440 | you do anything, as always.
00:11:10.740 | But your goal is to have a 529 plan for each kid, if you have kids.
00:11:17.040 | Yes, we all know that a college degree is getting devalued each year, but it's still
00:11:22.080 | worth opening up a 529 plan if you have children.
00:11:25.160 | You want a little bit of that flexibility, your contributions will grow tax-free, and
00:11:29.200 | if you don't end up using all the funds, you can change the beneficiary over to someone
00:11:32.960 | else.
00:11:33.960 | It can be another sibling, or it can be a grandchild, know the details, but it's not
00:11:39.160 | like you're stuck and uh-oh.
00:11:41.360 | You want to be efficient in terms of saving for retirement and saving for your children's
00:11:46.280 | future as possible.
00:11:47.720 | Finally, there's something good for folks who just had a baby or just adopted.
00:11:52.920 | Bless you folks who have adopted children, I think that's awesome, and you guys are
00:11:56.920 | my favorite type of people.
00:11:58.880 | The SECURE Act allows Americans to withdraw up to $5,000 per parent from their retirement
00:12:04.360 | accounts, including a 401k or IRA, without a 10% penalty.
00:12:08.560 | So in other words, a couple can withdraw up to $10,000 penalty-free per child.
00:12:12.320 | Now this is good if you really, really, really need the money, but normally I would just
00:12:16.360 | recommend keeping things separate.
00:12:19.280 | Don't touch the money that is compounding in your retirement plans for retirement.
00:12:24.440 | You want to save money set aside for your children's expenses.
00:12:29.720 | Don't commingle because it'll make things a little bit messy and you're probably going
00:12:33.520 | to do a little bit of cheating and you're not going to be as disciplined in saving and
00:12:36.360 | investing your money.
00:12:38.100 | So overall, I think the SECURE Act is a net positive for millions of Americans.
00:12:43.880 | It's really rare that the government does something specifically positive for Americans
00:12:48.080 | because it always seems like it's mismanaging funds, like the Social Security pension fund
00:12:53.520 | is 33% underfunded and stuff like that.
00:12:56.360 | So this is pretty good, and what I do like is that the government recognizes there is
00:13:00.600 | this shift in the way Americans work from, again, going to the office to being able to
00:13:05.680 | work more remotely and giving Americans and freelancers and small business workers more
00:13:11.780 | freedom to live in lower cost areas of the country to take advantage of the arbitrage
00:13:17.200 | opportunities of being able to work from anywhere thanks to technology.
00:13:21.400 | So I am encouraged that the government is taking right steps, positive steps to change
00:13:26.800 | along with the change in the way we earn and the way we save and live.
00:13:31.280 | So I know I was going to talk about my future plans for 2020 and beyond, but I'm going to
00:13:36.000 | do that in another episode.
00:13:37.720 | So talk to you guys later, folks.