Ep. 200 – How Secure Act 2.0 Could Affect Your Retirement
In this Episode of the Secure Your Retirement Podcast, Radon and Murs have Denise Appleby to discuss how the Secure Act 2.0 can affect your retirement plan. Denise is the CEO of Appleby Retirement Consulting Inc., a firm that provides IRA tools and resources for financial and tax professionals.
She explains the good provisions of the Secure Act 2.0 that benefit domestically abused spouses, terminally ill patients, the 529 beneficiaries, and so much more. Listen in to learn why you should talk to a financial advisor to help you do IRA transfers instead of jumping into a rollover without any guidance.
In this episode, find out:
- The confusion the age change of taking Required Minimum Distributions (RMDs) is creating.
- Understanding the meaning of a rollover as part of RMDs and how it works.
- Denise explains the good provisions of the Secure Act 2.0.
- The 529 plan and the stipulations they put in place to govern it’s rolling over into a Roth IRA.
- How to avoid making an IRA rollover mistake by talking to an experienced financial advisor.
- Understanding an IRA rollover and why you have to be careful how you move your money.
- Why you should do a trustee-to-trustee IRA transfer instead of a rollover.
- Denise’s retirement dictionary, where she breaks down retirement language into simple English.
- “Don’t believe everything you read online; talk to a financial advisor and interview them just as you would your physician.”– Denise Appleby
- “You really want to do a trustee-to-trustee IRA transfer and never a rollover.”– Denise Appleby
Get in Touch with Denise:
If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!
To access the course, simply visit POMWealth.net/podcast.
Here’s the full transcript:
|Radon Stancil:||Welcome everyone to Secure Your Retirement podcast. Murs and I are very happy to have a very special guest with us today, Denise Applebee. Before I even go further, I’m just going to say thank you so much, Denise, for coming on and talking with us today, and I’m going to give everybody a little bit of understanding of why it’s so special to have you. But thank you so much for coming on.|
|Denise Appleby:||Thank you, most welcome.|
|Radon Stancil:||So I just want to give a little bit of background. We’ve had Denise on another episode, but Denise is our consultant that we utilize when it comes to IRA, 401K type planning. And that can go in a lot of different areas. I just say it that way because it’s the way people most of the time understand it. But the rules are always changing. We’re going to talk about some of the new rules that we have had to deal with, but these things get complicated. There’s no way that Murs and I can do everything and be a specialist at everything. And so we’ve tapped into Denise’s specialty to make sure that we know exactly what to do. So Denise, you have been invaluable when it comes to what we do with our clients to making sure we do things correctly.|
|Denise Appleby:||Thank you. I appreciate that. I love what I do. That saying, find something you love and you never work a day in your life, it’s actually true.|
|Radon Stancil:||Very good. Well, from time to time we get these things that come up that are things that we just don’t deal with every day. So we have to reach out to you. One of those things that has occurred, and we’re going to talk about a few different things a day, but is this idea around the Secure Act. So Murs, can you kind of set this up a little bit and we’ll kind of transition over to some questions?|
|Murs Tariq:||Yeah. So the Secure Act 2.0 now was just passed at the end of December last year, which is just, it’s so perfect that something gets passed as the calendar year is about to turn. And now all institutions, advisors, everyone that works with IRA money is scrambling to figure out what the rules are and what changes happen and who do we need to tell and how do we communicate this to our clients. And as with any legislation, it’s thousands and thousands of pages. So luckily we have Denise that can help us sort through that. And what we want to do today in today’s episode is kind of walk you through a little bit of a history on, well, what is the Secure Act? Because there was a 1.0 as well that was released a couple years ago and then now there’s 2.0 released at the end of the year last year, and what changes have been made.|
|I’m sure some of you have heard about RMDs changing. We’re going to get into that. And there’s a lot of other things in there that are specific to retirees that we want to walk through and at least get some information out there because it is so fresh and new. And we were talking before we started the recording of the episode and Denise said, “Yeah, I’m still combing through it.” And I think I’ve heard that from a lot of people that work in that world, CPAs and consultants, they’re still combing through all the legislation on what all actually changed. So again, thanks for being here. And I think Denise, if you want to walk us through what was the first Secure Act and then we can start talking about what has changed with 2.0.|
|Denise Appleby:||Yeah. But first of all, what is their obsession with passing these laws the last week of the year?|
|Denise Appleby:||Saying some of the provisions become effective the next year. That is so challenging because not only do you as advisors have to communicate these changes with your clients and be prepared to transfer them, but IRA custodians and plan administrators have to make changes to their system to make sure they comply. So I’m going to jump ahead a little bit to Secure Act 2.0 to give you an example. That was signed into law in December 29th, 2022, and some of the provisions became effective 2023. For example, the required minimum distribution rules. Now Secure Act 1.0 increased the starting age for required minimum distributions from 70 1/2 to 72. Nice little break. So now all IRA owners are thinking, “I don’t have to start my RMDs until age 72 as long as I reach age 70 1/2 after 2019. And that is how the custodian systems are designed.|
|Then Secure Act 2.0 says let’s extend the ages a little further. Now we have a calendar to deal with. So when a client walks into your office and say, “When do I need to start my RMD?” Then you got to give them a little table and say, “It depends on when you were born. If you reach age 72 before 2023, then you start at age 72.” So if you reach age 72 last year, you should have already started your first RMD is due last year can be taken by a required beginning date, which is April 1 of this year. But if you reach age 72 after 2022, then your RMD starts when you reach age 73.|
|Another nice break, but here is the problem. IRA custodians are sending out letters to people who reach age 72 in 2023 telling them that they have to take RMDs for the year. The problem with that is the IRA custodians didn’t have enough time to make changes to their system to stop those letters from going out. So now I have clients who are calling me saying, “You told me that there’s no RMDs for these people this year because they reach age 72 after 2022. What should they do with these letters?” And I’m telling them, “Chuck them in the garbage. They’re not really any good.” But the problem is some people have gone ahead and taken those distributions thinking that they have to.|
|Good news is those amounts are not really RMDs, which means you can roll it over because typically you cannot roll over an RMD, right? But because this is not an RMD, it can be rolled over. So remember anyone who reached age 72 this year, they don’t have to take an RMD. And if they mistakenly did because of that letter, then they can roll it over. Another challenge is-|
|Radon Stancil:||Well, I’m sorry, I don’t mean to interrupt you there, I just did that but it’s just for everybody’s purpose ’cause I think that that gets confusing. Could you just explain, just so we’re clear on that rule, when you say the word rollover, could you explain what that really means and what the rule is around that rollover?|
|Radon Stancil:||Because we actually just had that happen with a client where he took the RMD, he called us and he said, Hey guys, you didn’t tell me about this. And we’re like, “Well, hold on. This is all brand new to everybody. We’re figuring it out too.” And you took your RMD what we thought was going to be an RMD at the beginning of the year, and so we were able to help him roll it back over. So could you just walk us through how that works?|
|Denise Appleby:||Absolutely. So usually when you take a required minimum distribution from your traditional SEP or simple IRA, you got to include it in income and any amount you got to pay income taxes on it unless an exception applies. And one of those exceptions is a rollover. A rollover means you’ll put it back into your IRA and usually in order to put it back or roll it over, you have to do that within 60 days after you receive those funds. Once you put it back, it wipes it out for tax purposes. But there are several rules to think about when it comes to a rollover. If you take money out of an IRA and you roll it back, you can only do that once during a 12 month period. So now we got to ask the client, “Well, you can put it back within 60 days, but hang on a second have you taken a distribution from it?” Traditional, roll it back to a traditional. A Roth, roll it back to a Roth within the proceeding 12 months because if you did, then you can’t roll this over.|
|There’s another issue what if when they come to see you, it’s well past the sixty day deadline? Well, the IRS says it’s not your fault. So there’s this procedure called a self-certification that allows you to put it back after the sixty day, the deadline right now what if they’re breaking the one per year rollover rule? Then you can put that money in a 401K or in a Roth as a conversion because those transactions are not subject to the one per year IRA rollover rule. Lot of movement, lot of parts moving there.|
|Radon Stancil:||All right, thank you. Thank you for letting me butt in there and ask that question.|
|Denise Appleby:||You’re welcome. So that that’s one part of a required minimum distributions so that they need to check with you as the advisor and confirm whether or not they’re supposed to take an RMD because if they’re supposed to and they missed the deadline, then they’re subject to an excise tax. Now here’s something good that came out of Secure Act 2.0. Before Secure Act 2.0, the excise tax was 50% of your RMD failure. So if you were supposed to take an RMD of $10,000 and you didn’t, then you owe the IRS $5,000 in excise taxes.|
|But Secure 2.0 reduce that to 25%, they also reduce it further to 10% if it’s corrected during a correction period. So now we got to ask, what’s the correction period? And that’s defined in Secure Act 2.0. Someone misses their deadline, they come to see you, we can help them to make sure it’s corrected within the correction period, so it reduces to 10%.|
|Now I see a lot of people talking about that, but they’re not talking about the fact that the modification to the Internal Revenue code as made by a Secure Act 2.0 did not repeal the provision that says if you missed a deadline due to reasonable cause, you can ask the IRS for a waiver. 10% is still a lot. 10% of any amount depending on who you are, it’s all relative. So if we can get that waived, we still should get it waived. So that that’s part of the change.|
|Here’s another of good change that was made for required minimum distributions on the Secure Act 2.0. Typically, if you have an annuity that has been annuitized and a regular IRA, you cannot aggregate your RMDs for that account. What do I mean by abrogation? You calculate the RMD say for IRA A, you calculate the RMD for IRA B, and you can take the total from any one of those IRAs, but the existing provision says you can’t do that if the annuity has been annuitized.|
|Secure Act 2.0 changed that rule, another welcome change. You can aggregate your annuity and your regular IRA now. And for a lot of people what has been happening is the annuity payments have been much more than they needed to take, and so they still find themselves having to take that RMD from the traditional IRA. So here they have another break. I love Secure Act 2.0. There’s very rarely anything in there that I don’t like so far, right as I’m going through it.|
|So staying on RMDs, one of the complaints that we have gotten about designated Roth accounts, which is like wrought 401ks, Roth 43Bs, governmental Roth 457b plans is why do I have to take RMDs from that, right? Because I don’t have to take RMDs from my Roth IRA unless I’m a beneficiary. If I’m the owner, I’m not subject to RMDs. So now they have equalized the rules for designated Roth accounts. If you have a Roth 401K account, you don’t have to take RMDs. I think that takes effect in 2024, but we should double check those dates. I don’t remember the dates off the top of my head, but some of the dates are staggered, right?|
|We’re clear on the RMD rules as far as what the different dates are. I can give those to you in a slide and you can put it on your website so people know that some of these things that sounds really good don’t become immediately effective. For instance, there’s a provision that says if you experienced spousal abuse, whether by a spouse or a domestic partner, you are eligible for a up to $10,000 penalty free distribution from your retirement account. That doesn’t become effective until 2024. And I’m thinking, and why do they have to wait?|
|You get abused now, let’s take care of that right now and the distribution has to be made within one year of when the abuse occur. So I don’t like the fact that they’re making these people wait. But another good provision is if you’re terminally ill, if a doctor has certified that you have an illness that could result in death within eight to four months, then you can take distributions from your retirement accounts and it’s not subject to the 10% early distribution penalty. So yeah, I know you’re checking off all the stuff that I’m talking about right now. It’s really great, a lot of great things.|
|No, part of what you guys asked me about earlier is, well, what about this provision where you can roll over your 529 to your Roth IRA, right? That’s the one that has gotten everyone excited because this provision says, listen, we are funding 529 plans for a lot of kids and they’re either getting scholarships or maybe college is much cheaper than they thought it would be.|
|So at the end of college they find that they still have this pot of money in their 529 plan. Not a bad problem to have, but problem is that if you take distributions of those amounts and it’s not used to cover eligible expenses, then any amounts that attributed to the earnings will be subject to income tax and the 10% early distribution penalty. So I know they have a provision where you can move up to $35,000, that’s a lifetime limit from your 529 plan to your Roth IRA. Some sort of conversion. It’s technically not because it’s not included in income and usually conversions are included in income.|
|But there are several stipulation. It’s capital a lifetime limit at 35,000. The amount that you move each year cannot be more than your regular IRA contribution limit. So it’s going to take a while to build up to that 35,000 and if you made a contribution to your traditional or Roth IRA, then you got to add that up to the amount that you’re moving to figure out how much you move each year.|
|Because when you add the movement from the 529 plan to your Roth IRA, when you add that to your traditional Roth contribution, it should not exceed the regular IRA contribution for the year. And the funds must be moved as a direct transfer. So you can’t go to the 529 company and say, “Give me my $6,000, I’m going to move it to my Roth, and then you put it in your checking and move it there.” No, you have to go to the financial institution that holds your Roth and ask them to request it because it has to be done as a trustee, the trustee transfer or you’re going to mess up the transaction.|
|Here’s another stipulation they put in. You can’t fill up your 529 plan in the last five years to get that 35,000 in there because another provision says the amount that you move has to have been in a 529 plan for at least five years because they know people are going to gain assisted. Right? Because you’ve been saving in these 529 plans probably when the kid was born and now during the last five years you see this as an opportunity to just stack the money in there and they have gotten ahead of us with that one, so can’t do it,|
|Murs Tariq:||Right? Yeah, and so for anyone listening the 59, it’s, I know a lot about them because I’ve got a little almost three year old and I opened a 529 for him, but it’s a college savings account where someone can fund into not just yourself but also grandparents can fund into, and the adult is typically the account owner and then the beneficiary is typically the child that’s going to use those funds for college education. It’s a really nice tool provided that they are going to use them for education.|
|But what Denise is talking about here is that the worry has been is that what if I overfund this and for whatever reason the kid doesn’t go to college or I have too many dollars in there and the cost was a lot less than expected. So now there’s a way out which is into with this new provision to move money from a 529 into a Roth. My question though, Denise, whose Roth does it go into into the beneficiaries? So the child’s Roth or would it go into, would it be able to go back into mine?|
|Denise Appleby:||Definitely the beneficiaries because once you have given up those assets, it’s not yours anymore. The 529 plan. Well, and education savings account too does have a provision where if you’re not going to use the funds, you can transfer it to another eligible beneficiary, someone who’s a qualified family member. But the only way could get into yours is if you are going to an eligible financial institution and you move it to your 529 plan.|
|Denise Appleby:||But yeah, it has to be the 529 plan of the beneficiary. Now beneficiary in this case means something different from what we are used to because typically we’re talking about IRAs. A beneficiary is a person who received the assets upon the death of the account owner, but in this case, the beneficiary is the beneficial owner.|
|Radon Stancil:||Great. So I got a question for you, and this is not specific to the Secure Act because we could probably talk about that forever right now because of the questions, but I know that we utilize your services throughout the year. I was telling you before we actually hit record, it’s not every single day that we need to call and say what’s the answer here? But those few times a year that we have to get answers, they’re big. They can be very costly mistakes if we don’t check ourselves. What would you say are some of the biggest questions that are out there that you get from advisors or maybe some of the biggest mistakes you see people in general doing when it comes to their IRA type planning? Is there anything in particular that sticks out?|
|Denise Appleby:||Yes. Moving assets, and this usually does not happen with individuals who work with someone like you because even if you don’t know the answer right off, the light bulb goes off. But I get a lot of calls from advisors who say, “This client called me because they’re frantic. They did 10 rollovers from their traditional IRA to another traditional IRA because they’re trying to do some deal. They want to take money out investing in a house and put it back when they sell their first home,” and that never happens. That’s how life work most of the times.|
|And the problem is when they come to me, it’s usually too late because they have broken the one per year overrule that we talk about, and I always say to consumers, “Don’t believe everything that you read online. I don’t care how good it sounds,” to a financial advisor and interview them just like you with your physician, how much do you know about this stuff?|
|Because yeah, you’re pretty smart and you can make me a lot of money, but can you protect my IRA from that type of mistake? One of the provisions that was included in Secure Act 2.0 is where they now have a statute of limitation for the 6% excise tax and the RMD excise tax. They have a statute of limitations on that. They always had, but the statute of limitations started when you filed Form 5329. How many people knew that unless they’re working with someone like you, there is a particular case where this man right now owes the IRS eight and a half million dollars because he didn’t know that he should file form 5329 to stop this statute of limitations.|
|Now, Secure Act 2.0 acknowledges that it’s a weird rule. Not everybody knows it. So now let’s start the statute of limitations when the tax return is filed. So whether it’s six years or three years depending on the penalty, now we have a stop date when the IRs stop accumulating penalties. This is not a stuff that you can know as a consumer unless you read about this full-time. You got to work with an advisor like you who know these rules or at least know enough to say, “I need to check further into this to get the right information.”|
|Murs Tariq:||Yeah, I think that’s a great point. And I wanted to clarify, so you said a rollover are, you’re talking about a 60 day rollover where it’s made out to the person and then they can do whatever as long as they get it to an IRA within 60 days. So there’s a limit of one of those per year.|
|Denise Appleby:||Yes, and one of the question I get a lot, I’m so glad you asked that question, is, “Well, does this one per year limitation apply to my 401k?” No, it doesn’t. It only applies if you take money from an IRA and move it back to an IRA. And there are two types of IRAs, Roth and IRAs that are not Roth, which would be traditional second symbols. Now about 2014 this brilliant, an attorney wrote publication 590, published by the IRS, which led him to believe that if you have 10 IRAs, you can do 10 IRA rollovers. And so he tried that, he did two. And someone at the IRS noticed that he did more than one because you get separate IRS statements, 1099R and 5498, and so they disqualified one of the rollovers, which means he couldn’t put it back, right?|
|Now, if the money’s coming from your 401K or to your 401k, 43B, 457, then that does not apply. If it’s going from a traditional to a Roth, that does not apply. Usually what happens is a client is unhappy for whatever reason with one financial institution, wants to go to another, and when they’re upset, they’re like, “Give me my money now.” They don’t want to do the right thing of going to the new custodian and say, “Please go get my money,” which would be a transfer. Non-reportable, non-taxable. You can do that as often as you want to.|
|So because they’re upset, “Give me my check now,” they get a distribution, they walk across the street, put it in their new account. That’s a rollover. You can do that only once per year. Sometimes they do it because they want to invest the funds or lend it to a family member or whatever the reason and try to put it back. So you got to be careful how you move those assets.|
|Radon Stancil:||Yeah, I was just going to say just for, because we’re using this term rollover, and I think a lot of times people think in their minds, oh, a rollover is moving from one IRA to the other. And what we’re talking about here on the 60 day rule is it applies only if I take possession of the money into my name. If I do what you said, and I go trustee to trustee, meaning I go from Schwab to Fidelity or from one IRA to the other and it never loops through my name, I can do as many of those as I want a year. It’s only that one where I get the check made out to me.|
|Denise Appleby:||And loops through your name is a very important distinction because a case that I’m working on right now is where the IRA owner went to the old custodian and tell them to send a check to the new custodian, and they’re thinking it’s going from custodian to custodian and it should be fine. The problem with that is that they filled out distribution paperwork, and when you fill out distribution paperwork, the IRS is notified of the transaction. So now the IRS is a 1099R, they have a 5498 on the other side. For them, they don’t care how it happened. They just know that you have more than one of those.|
|If you do that more than once, and for them, that’s a problem. So you really want to do a trustee to trustee transfer. You never want to do a rollover. There are going to be instances where you really need to use the funds, and if your IRA is your only source of savings, then you have no choice but to take it out. But you have to deal with the reality that you might not be able to put it back within 60 days if you’re going to break the one per year roll over rule.|
|Now, what I like to say to people too is we’re talking about the 60 day deadline here, and that also applies if you take money from your 401k, have it paid to you and you want to put it back. But sometimes life happens and the IRS recognizes that they provide solutions where if you miss that deadline for reasons like a family member was ill, there’s a natural disaster, you were incarcerated, then they allow you to get an automatic extension of a 60 day deadline when that reason that prevented you from completing the rollover within 60 days no longer applies. So I always say to the consumer, “Yes, you might think that you have a problem dealing with right now, but you got to talk to your advisor to know if there is a solution before you just give up.’`|
|Murs Tariq:||Very good. Well, I know the beginning of this, we talked a lot about the Secure Act and just a quick summary there. I think the biggest thing for retirees that if you want to take something away from this episode on the Secure Act 2.0, there are some changes that are coming our ways. Some have already been put into place, the biggest one being the RMD, changing from age 72 to age 73 and also expanding to age 75 at some point in the future. And then there’s other changes as well from a retirement plan contribution perspective or the Roth RMDs that Denise was talking about that are going away from a 401k.|
|So a lot of good changes, but there’s a nitty gritty on you really have to do these things, right? You got to understand them and everything like that. So it comes down to either doing the research yourself or working with someone that understands all these new different rules. So Denise, I thank you very much for coming on and hanging out with us for a little bit here to talk about what most people would consider not the most exciting subject, but it’s what we do and it’s good that everyone knows as much as they can about them.|
|Denise Appleby:||It’s my pleasure. Thank you very much.|
|Radon Stancil:||By the way, you mentioned that you had written a dictionary. Could you tell us about that dictionary and what that is about and how people might be able to get it?|
|Denise Appleby:||Absolutely. I wrote the retirement dictionary retirement at retirementdictionary.com. And what I attempt to do is to break down or translate regulations like this into plain English for the consumer. Occasionally I read an article that’s directed at the advisor, but the bottom line is if you want to know what’s going on with Secure Act right now, you can go to that website. I have any area especially designated where I’m breaking each section down and explaining it so everyone can understand it.|
|Radon Stancil:||Fantastic. Well, we’ll make sure that that link is in the information so people can go get that. Again, I’ll reiterate what Murs said, thank you so much for taking time out of your day to come and spend some time with us and our listeners.|
|Denise Appleby:||An absolute pleasure. Thank you.|