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We continue our conversation about the SECURE Act. Another big piece to this new law is the removal of the stretch IRA. Nick walks us through the things we need to know about this big change.Helpful Information:PFG Website: https://www.pfgprivatewealth.com/Contact: 813-286-7776Email: info@pfgprivatewealth.comTranscript of Today's Show:----more----Mark: Hey, everybody. Welcome into another edition of Retirement Planning Redefined. Thanks for tuning into our podcast about investing, finance and retirement with the guys from PFG Private Wealth. On this episode, just Nick joining me again. That's all right. I like talking to Nick. How are you buddy? Nick: Pretty good. Pretty good. Mark: Hanging in there. Hope you had a good week since the last time we talked. Nick: Yeah, absolutely. This is kind of my favorite time of the year from the standpoint of climate in Florida. Most people are in a pretty good mood overall, including myself. Mark: Well, I'll tell you what, you guys have in the weird weather we are? It's in the 70s in North Carolina. Nick: It's definitely warmer than I prefer, but I know that it's going to kind of cool back down. It's still at least not 90 for four months in a row. I'll take it. Mark: Well, the bad part about the warmer winters is it doesn't get a chance to kill the bugs. I'm showing my old man age there by that, but it's really true. Every year I get older, it's like, man, we do kind of need a cold snap during the winter to kind of kill off some of the stuff that is going to haunt us come spring in summer, right? We don't get rid of some of those bugs. It just makes it that much worse. Hopefully another cold snaps on the way. Nick: You must live near the woods. Mark: Woods or water, man. Woods or water. Nick: There you go. There you go. Mark: You'll get it with that. All right. Well, let's get into our show this week. As I mentioned the last time, we talked about the SECURE Act on our previous podcast. If you haven't subscribed to the show, please do so on Apple, Google or Spotify or whatever platform of choice you'd like. We're all over the place with those. We talked about the increase to the RMD age limit and also the contributions for IRAs with the new SECURE Act. The SECURE Act, as I mentioned before, for those of you who'd just be catching this, that is the most significant piece of legislation the government has passed for our listening audience since really the Pension Protection Act of '06. The SECURE Act is setting every community up for Retirement Enhancement Act. Mark: This was $1.4 trillion budget piece that they kind of snuck it into at the end of December there last year in 2019. This week we're going to talk about a really big component, Nick, and that is the elimination or the altering of what was termed the stretch IRA. Really a lot of people they're saying this is the big negative to this piece of its great for the government because is basically a tax generating... This is the way to create more tax income for the government, but not so great for folks who planned on using this as a generational tool, which is primarily what it was done for to leave wealth to their heirs. Nick: Yeah, absolutely. It's going to have a pretty significant ripple effect from the standpoint of people that were planning to leave their IRAs or maybe had adjusted the way that they were taking from their investments throughout retirement and trying to preserve the IRA to pass. That's going to have a pretty significant impact on that. Plus it's also going to probably cost some people some money in legal fees as they adapt and adjust their estate plans and legal documents to take these sorts of things into account. Mark: Yeah, absolutely. What was the stretch or kind of give us a quick overview and then what they've done to alter it? Nick: Yeah. One of the things I always kind of tell people is from the standpoint of a stretch IRA is that it's really kind of a nickname and it's a concept. A joke that I would kind of make is if somebody passed away and you had inherited funds that were in an IRA and you walk into the bank and you tell the bank teller that you want a stretch IRA, they may look at you cross-eyed. It's not an actual legal name for an account type. The real kind of legal name for the account type is an IRA BDA or a beneficiary designated IRA. Essentially what happens is if you inherit IRA funds or you're listed as a beneficiary on an IRA, there are kind of two classifications for how they look at or at least that's kind of been the rule up to now where it's either spouse or non spouse. Nick: The way that it would work is that if you were to inherit an IRA from a spouse, you could either put those funds into your own IRA, or you could put it into the beneficiary designated IRA. The rules for withdrawals would kind of dovetail from there. For a non spouse, you would also open it as a beneficiary designated IRA. But then the required minimum distributions that would have to be taken from that account would be based upon multiple factors, including your age, the year at which the person passed whether or not they had started taking distributions already, et cetera, et cetera. There are some different rules that went on with that, but in theory you could really stretch that over your entire lifetime by taking the minimum out, and you could also list a beneficiary yourself on the account. Mark: The reason for doing that was to if it was a larger account for tax purposes, right? Nick: Absolutely. Let the account continue to compound, avoid taking out in a lump sum and having to pay taxes on the entire lump sum amount. Because just as a reminder for people, when you inherited a traditional IRA or traditional IRA funds, the full account balance has... Taxes are due, federal taxes. If you live in a state where you pay state income taxes, income taxes are due on that full amount. That could be a pretty significant kind of tax bomb dependent upon what happened, especially if you made a mistake in how you had to take it out. Really this new provision essentially applies to people that are going to inherit these funds starting on January 1st of 2020 moving forward. It is not a retroactive rule. Essentially what it does is it says that you must deplete that account within 10 years. Nick: From what I've seen so far, correct me if I'm wrong, the rules on how you need to take out distributions within those 10 years are not as strict as they used to be. However, that account needs to be depleted within the 10 years. Mark: Right. Yeah. You can do it over like annually obviously, but at the end of 10 years, whatever's left, you got to pull it out and pay the taxes. Nick: But you can defer within those 10 years as well. Mark: Yes. Nick: Again, that could create a pretty big tax bond dependent upon the size of the account. There's a little bit of a flexibility and a little less accounting or paperwork on trying to track those required minimum distributions that would have to come out and the amount on are you doing it correctly, are you calculating it correctly, or some people most likely, and we haven't gotten into it yet with any clients with it being so early in the year, but my assumption is dependent upon the overall situation, people are going to probably take it out equally over the 10 years or try to defer and be a little bit strategic with how they take it out dependent upon maybe there's an impending retirement. Maybe a husband and wife are 60 years old and they both plan on retiring at 65. Nick: Wife's father passes away, leaves them money in the inherited IRA. Our goal is going to be that we're going to take it out post retirement where the income has come down, try to minimize the taxation, and maybe even let that fill in the income hole that they have between 65 and 70 or even 65 and 72 now that the RMD age for their own accounts has bumped up to 72, and they can let their own account kind of accumulate and grow and defer accordingly. It will definitely add another level of strategy and just kind of thinking outside the box a little bit so that we don't have to deal with that, but it's going to be interesting to kind of adjust and adapt to the new rules. Mark: Oh yeah, for sure. Now, for some of those folks listening who are thinking about this now, I do know there are definitely some exceptions I guess if you will, if you want to call them that. There are definitely some pieces to ponder when it comes to some exceptions I guess if you will. Obviously if you're a spouse, that kind of stays the same. This is really kind of targeting the heirs, so like basically if you were leaving this to your kids, but there are also a couple of exceptions there like chronic illness I think is one. There's a couple of others as well. Nick: Yeah, chronic illness is definitely one. If there's a disability, that changes and adds a different set of rules. Those sorts of kind of deeper details are the things or the aspects of the new legislation that everybody's kind of digging through. The attorneys are kind of reading through all the paperwork to make that everybody has a really good grasp and understanding of what those exceptions are and how those funds can be used. Attorneys typically do a good job of interpreting the new rules and laws and coming up with new strategies that allow us to work around them a little bit. Mark: Yeah, no, that's a great point. That's why it's really important to talk with your advisor about how this may affect you if you are planning on leaving. A lot of people do that. Some people are saying, Nick, with the way this whole SECURE Act is working together with the increase to the RMD limit at 72, age of 72, and then with this, a lot of folks, they're kind of looking at it saying it's a tax grab for the government, which of course, I mean, it's always something, but it's one of those deals where if you're living longer and you're putting more money and you don't have to take it out and you choose to leave it to your heirs, like these IRAs or whatever, then that's kind of where this is coming from. Mark: That's kind of how the two pieces of the puzzle in some people's minds are working together in order to generate more tax revenue for the government. It's certainly a piece where you want to talk with your advisor about how you can now be planning more efficiently. Nick: Yeah. As an example with that, just kind of a thinking outside the box and how people may adjust and those sorts of things, if there are substantial funds in the IRA and it's important to you to try to leave money to your beneficiaries, this change in the law may kind of push people to look a little bit more at using a tool like a permanent life insurance policy where they're going to use their own distributions that they're taking from their IRA in retirement, apply some of those distributions towards a life insurance policy that is going to pay out tax free after they pass on and avoid that potential tax bomb that the IRA would leave. Mark: Got you. Nick: There's different things. The fun part, and we can put that in quotes as far as the fun part, but the part that we enjoy the most as far as financial planning and retirement planning, et cetera, is that people are different. There are enough rules, laws, product strategies, et cetera, that there's usually something for everybody. It's just important for us to kind of get to know them, figure out what's most important to them, and adapt and adjust the strategies that we recommend so that it fits within their life and what they're trying to do. This is just another change that we take it into account. We adapt. We adjust. One of the things that we always preface, and this is a really good example of why is... Nick: In these classes that we teach, one of the most common questions that people will ask us is, should I contribute money to a traditional IRA or a traditional 401k or Roth IRA or Roth 401k? They start to understand by the end of the class together that we say it depends for a reason, things change. The only thing that we know for certain is that things will change. This is a great example. We always emphasize building in the ability to be flexible and adapt to whatever changes we do have happen to us so that we aren't all in on one certain strategy that we have no control over whether or not it changes. This is just a perfect example, and it emphasizes even more that it's important to have multiple sources of income in retirement, multiple account types. Nick: That goes for the funds that you're going to use in retirement, as well as the funds that you want to leave in retirement. Mark: Got you. Got you. Okay. That's why we kind of preached that on the show that anytime you hear anything, whether it's our podcast, somebody else's, a different show, a radio show, a television show, you may be hearing some information that kind of peaks up your ears there and kind of gets you to thinking about something. But before you take any action, you should always check out what's going to affect your specific situation by talking with a qualified professional financial advisor like the team at PFG Private Wealth, John and Nick here on the podcast. As always, we're going to sign off this week. Really good information here on the show. Mark: If you've got questions about how the stretch IRA, the removal of that or the changes to that are going to affect you or how the SECURE Act in general is going to affect you, make sure you talk with your advisor or reach out to John and Nick at (813) 286-7776 here in the Tampa Bay area, (813)-286-7776. You can also find this online and subscribe to the podcast via the website pfgprivatewealth.com. That's pfgprivatewealth.com. You can subscribe on Apple, Google, Spotify, iHeart, Stitcher, whatever platform it is that you choose. Nick, my friend, thanks so much for your time this week. I appreciate you. We'll talk more I'm sure about the other components of the SECURE Act and how it's going to affect things in the weeks to come. Nick: Thanks, Mark. Have a good day. Mark: You do the same, and we'll see you next time right here on Retirement Planning Redefined.