Power Up Wealth podcast – SECURE Act 2.0 Part 2 – Episode 39 transcript:
Sharla Jessop 0:00
How will you take advantage of the SECURE Act 2.0? I’m Sharla Jessop, and Jordan Hadfield will spend time today talking about the SECURE Act and its impact to you in part two of SECURE Act 2.0.
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, thank you for joining me today.
Jordan Hadfield 0:49
Thank you for having me.
Sharla Jessop 0:50
Jordan is on the wealth management team at Smedley Financial Services as a private wealth manager. He also holds a Certified Financial Planning designation and a Behavioral Financial Advisor designation. Jordan, in part one, we talked about many things that impacted RMDs and catch-up provisions and things from the SECURE Act. But there’s so much more. What are we going to cover today?
Jordan Hadfield 1:13
Yeah, so there’s been some pretty significant changes to Roth accounts. And I think that’s important for people to just have a general idea, a general understanding of. I’d like to talk about that in some detail.
Sharla Jessop 1:23
Roths are pretty broad. They impact so many different types of accounts. What do you think is most important about the changes in Roth?
Jordan Hadfield 1:29
That’s a great question. There’s a couple of things here that I think are important. If I had to highlight just one for you, it would be a change to RMDs and Roth 401(k)s. So traditionally, there has been a required minimum distribution from Roth 401(k)s. In other words, the government has forced people to take money out of their Roth 401(k)s when they hit RMD age, depending on what that age is, depending on when you were born, that’s all covered in part one. But IRAs, Roth IRAs has never had a mandatory distribution. And one of the biggest advantages of Roth as they grow tax-free. So the idea is to leave money in your Roth accounts as long as possible to take advantage of that tax-free growth. So forcing an RMD out of a Roth 401(k) has greatly reduced the benefit of the Roth 401(k). Now the way we’ve handled this in the past is when someone has hit retirement age, or they’ve separated from service, we’ve just rolled their Roth 401(k) into a Roth IRA. And there’s pros and cons to that. And we can talk about that in detail. Keeping money in a Roth 401(k) will not be subject to the RMD rules anymore. And that is great. We’re very excited about that. But there is still some opportunities that are created in a in a Roth IRA rollover. Again, we can talk about that in detail with clients on an individual basis. But that is a good change, I’m glad to see that it went into effect. A couple other things that we’ve seen that I think are important. They’ve added a Roth option for SIMPLE IRAs and for SEP IRAs. Before there has been no Roth account available in the SIMPLE and the SEP IRA. Now, this is effective January 1, 2023. In other words, it is legal now, but it’s not available. Now, these big custodians have to take time to process this change, to create the account paperwork. So there’s going to be a delay as to when this actually can be implemented. But legally, it went into effect at the first of this year. That’s great, it’s just more option for Roth. Another point that I think is really cool personally, and I think a lot of listeners will think is cool, is an employer will now have the option to contribute their matching contribution into Roth. The way this has worked in the past, when an employee makes a Roth 401(k) contribution, the employer match has always gone traditional, you know. Starting 2023, if an employer wants to make a matching Roth contribution, they can. It will be taxable to the employee in the year that it was made, and the employee must be fully vested. These are important, but the fact that that option is there, and we can get more money into Roth for those that that for whom it makes sense to contribute to Roth, and it doesn’t make sense to everybody, or it’s advantageous to contribute to Roth. It’s a great addition.
Sharla Jessop 4:24
Will that be effective on every plan out there that the employer can do that or will have to do that? Is it mandatory for the employers are optional?
Jordan Hadfield 4:32
No, it is optional for the employers. So not everyone will see that change. But I’m sure there’s a handful of employers out there that are excited about this and will offer it to their employees, not everybody.
Sharla Jessop 4:35
Sounds like a great opportunity, especially there will not be any FICA tax or employment taxes, just state and federal taxes, which seems like a great opportunity to get money into a Roth.
Jordan Hadfield 4:55
Absolutely. And employers will still be able to deduct it just like they have before but again will be taxable to the employee in the year that the contribution was made.
Sharla Jessop 5:04
You know another thing that I thought was pretty interesting I’d heard you mention earlier is a mandatory change that’s coming down the line for catch-up provisions.
Jordan Hadfield 5:14
Yeah, this is big and it needs to be highlighted. We talked again, in episode one about catch-up contributions. There’s a pretty significant change here for catch-up contributions for individuals over the age of 50 who are making catch-up contributions into their retirement accounts. Effective 2024, those catch-up contributions will be mandatory Roth, if anyone in the plan makes wages over $145,000. It will have to go into Roth 401(k). Traditional tax-deferred 401k catch-up contributions will not be optional.
Sharla Jessop 5:53
It seems to me like there’s going to be a lot of amendments of plans going on in the next couple of years.
Jordan Hadfield 6:00
Yeah, so it is surprising, but we still come across 401(k) plans that don’t offer a Roth. The question is, what’s going to happen to these individuals? If someone in the plan makes over $145,000, and there is no Roth option, catch-up contributions will not be allowed? That seems pretty big, right? If I’m in a plan, and I can’t make a catch-up contribution, because someone else in the plan is making too much money, and a Roth option isn’t available, I’m not going to be too super happy. I imagine that those who have kind of lagged in making Roth adjustments to their plan will now make those adjustments. I can’t imagine there’s very many plans after this goes into effect that do not offer Roth options. So I don’t think it’ll be a big issue. But it could be we’ll just have to wait and see.
Sharla Jessop 6:46
I agree with you. I think there’s going to be a lot of changes, because generally, the company owners who put together the plan or agree to do the plan are at the higher compensation levels. I think just for self benefit, those plans will be adjusted.
Jordan Hadfield 6:58
Yeah, I think you’re absolutely right, I think we’ll see them change.
Sharla Jessop 7:01
Jordan, another thing that’s a big change is 529 planning. There’s been a lot of change in some of the opportunities in planning 529 savings accounts, and the beneficiaries. Talk to us about that.
Jordan Hadfield 7:14
Yeah, so there’s been some significant changes to the 529 plan. For anyone who not familiar, the 529 plan is an Education Savings Plan. So it gives an individual the ability to save tax-free, tax-advantaged, I should say, to accounts that will later fund education. Typically, we see parents open these for young children, or grandparents, open them for young grandchildren. Very, very cool accounts. It’s not the only option out there. But it is a really good way to save for education for qualified education, I need to hit on the fact that it has to be qualified education. This account does have a couple drawbacks. And that is if it’s not used for qualified education, then there is tax on the money that’s withdrawn from the account, as well as a 10% penalty. And so there was a bit of a problem when a parent or grandparent would fund a 529 account. And then the assets in that 529 account would not be used or not all the assets would be used, maybe the child didn’t go to a qualified university. Maybe they received scholarships, right? And so they didn’t need the money. So now what does the custodian of this account? What is the parent or the grandparent? What do they do? They can take a distribution, pay the penalty and pay the tax, or they can change the beneficiary. In other words, they have to give those assets to somebody else to use for qualified education. There hasn’t been a lot of options. And because of that, some people have decided to save for education in other ways other than the 529. Thanks to the SECURE Act 2.0 this is changing. They’re adding another option. This option allows assets in a 529 plan to roll into a Roth IRA in the name of the beneficiary of the account. So if a parent funds a 529 for a child, the child uses those assets for college but he but they don’t use all the assets. Now the parent has the ability to roll them into an Roth IRA for that same child. Really cool change. Excited to see it. It just makes this plan more attractive. It creates some really cool planning opportunities. I look forward to diving into this more with my clients who are interested in saving for future education purposes.
Sharla Jessop 9:37
I can see how that’s a great benefit. Everybody likes a tax-free withdrawal or tax, or the ability to take advantage of tax-free savings. And there are a lot of plans that go untapped. Because like you mentioned the child doesn’t go to qualified education providers or maybe they have scholarships and it’s a great way to keep that money going tax-free for that same beneficiary or for another beneficiary if they want to.
Jordan Hadfield 10:07
Yeah, and there’s some rules that apply to the 529 and that rollover and how that works. They’re quite dry. I won’t bore you with the details of that. You can let you can let us as your advisor, the advisor that you’re working with worry about that. But it is a cool option. We’re very glad to see that it’s in place.
Sharla Jessop 10:22
Going back to the Roth plan. You know the government is well known for making changes, implementing something and changing it in the future. And a lot of people are really worried that Roth IRAs are going to go away. What do you think about that?
Jordan Hadfield 10:34
Yeah, I get this question often, actually, It surprises me how many people say there’s some real benefits to the Roth IRA, but they’re contingent on those benefits remaining in place for 20 – 30 years? How do I know the government isn’t going to make a change to the Roth? And then all of this money that I thought was tax-free now becomes taxed? How is this going to work? It is possible that the government can make a change. They have that power, right. However, I do think it’s highly unlikely. And there’s a couple of reasons why I think it’s unlikely there’ll be a tax change to Roth accounts. Typically speaking, when the government makes a change of the size they grandfather people in, right? So if you’ve got money in a Roth, and a change happens, and I think that’s a big and most likely, no one knows for sure, but most likely, people who have contributed to Roth will be grandfathered in, right. But I don’t think a change will be made. And I don’t think a change will be made because the government loves Roth IRAs, because they get to collect the tax now. And the people also love Roth IRAs or Roth accounts because they grow tax-free. Point to one other area that the government is happy, because they tax you now, and the people are happy because they’re taxed now. Right?
Sharla Jessop 11:52
It’s hard to find one.
Jordan Hadfield 11:53
It’s a win win. The government is stoked they’re getting money now. And the people are stoked. They’re paying tax now, but they’re getting tax-free growth later. So I don’t think a change will ever come. Both sides love Roth accounts. And this is proven in the in the SECURE Act 2.0. They’re expanding the Roth accounts. They’re not shrinking it. They’re adding it to the SIMPLE IRAs, the SEP IRAs, to the 401(k)s, adding, you know, benefits there to 401(k) accounts. So I think the government is taking a stronger stance on these accounts. And I don’t think they’re going to be, you know, taking those away later.
Sharla Jessop 12:26
I think it just leads to more planning. People need to plan. It’s not something straight across the board, where it’s easy to determine how much or if you should contribute or convert to Roth, it really is an individualized situation based on someone’s financial situation, their income, their tax rate, so many things go into that calculation.
Jordan Hadfield 12:46
Yeah. And we’re often not blindsided by changes. I mean, with the SECURE Act 2.0, we’ve heard rumors of things that were coming and things that weren’t coming for a long, long time. Again, let us as your financial professionals worry about that. You can only make decisions based on the hard facts of the here and now. And as things change, as we hear rumors of things changing, we’ll advise you along the way to make sure that you’re not miss stepping in anywhere, that you’re not missing any opportunities. You know that that is one of the benefits of having a financial advisor in your corner, is they’re watching out for you and making sure that, that you’re doing what you need to do to succeed in retirement, and to achieve the goals that you want to achieve financially, and live the life you want to live. That’s why we’re here. That’s what we’re trying to do.
Sharla Jessop 13:29
Jordan, we’ve talked a lot about all the changes with the SECURE Act 2.0. And it’s big, and we didn’t haven’t even touched on everything. But what are some of the things that didn’t change that are important for people to know?
Jordan Hadfield 13:41
Yeah, a lot changed. One rumor that we’ve been hearing for months and months this has been swirling for a long time, is that the backdoor Roth and the mega backdoor Roth would be going away. This was something that we were disappointed, and that we were not looking forward to this going away because it is a cool tool for those people who qualify for it. And we’re very excited to see that it wasn’t included in the act. In other words, the backdoor off and the mega backdoor Roth are still strategies that are that are available to us. And for high income earners that cannot contribute directly to Roth accounts. There may be a planning opportunity here. You know, these strategies are complex. And so if you’re heard about these strategies, you think you qualify for these strategies. And you’re thinking about maybe implementing these strategies in your own financial life, reach out to a professional. Reach out to us, let us help you with it. Not everyone applies there. Like I said, they’re complex there are some real things to consider here. But we’re very excited to see that they’re still in place for those who do utilize the strategy and looking forward to implementing that strategy with others as we go forward.
Sharla Jessop 14:52
Great. Thanks, Jordan, for sharing all this information with us.
Jordan Hadfield 14:56
Yeah, and if you have any questions about the SECURE Act 2.0 and how it affects you personally, please reach out to us. There’s a lot here. We want to help. Thank you.
Shane Thomas 15:10
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.
