401k, Interest Rates, IRA, Retirement, Roth, Taxes
January 02, 2020
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On this podcast, we go to Suze School for an education on how the new SECURE Act will affect retirement accounts and what you need to know to make the right adjustments for your financial future.
It's 2020 and welcome everybody to the Women and Money podcast, as well as the men smart enough to listen. You know, the goal of this podcast is to make sure that you are strong, smart and secure. And in order to be able to do that, you have to know how money works. And I get very well that over these past few podcasts, KT and I've been playing with you, didn't you all have a good time listening to her? I've created a crazy woman here. Every day she says to me, now can we do another podcast? Can we do another podcast? I'll tell you a secret between the two of us, just the two of us. I loved doing that podcast with her, we've done three now. I loved it because, you know, it can get pretty lonely sitting here and just talking into a microphone and being by yourself. And so I loved having somebody to talk to, especially because it was KT. And we all know how much I love KT, but I'm not going to get off on the KT thing now because I am talking about money. And to be strong, smart and secure, you really have to know how money works and the laws that affect you, especially in retirement. And so today I want to do a podcast on exactly that.We're going to go to Suze School because I need to teach you today how the laws have changed since December 20, 2019, because that was a big deal. You probably don't even know that something changed, but it did. Because on December 20, 2019, President Trump signed into law something called the SECURE Act, now secure, S-E-C-U-R-E stands for Setting Every Community Up for Retirement Enhancement, and this is a major change to the laws for retirement accounts, and what you can do with money in retirement accounts, and when you have to start taking money out of retirement accounts, and the types of investments that can now be offered in retirement accounts, and what your employer has to show you if you have a retirement account as well as eventually here, part-time workers are going to have to be able to be part of a retirement account.Now, why are these things happening before I even tell you about them? In my opinion, it's because the government is worried. The government is worried that you are not going to have enough money to be able to retire, and therefore they don't have enough money to support you if you don't have enough money to support yourself. So they are trying to pass laws to make it so that you have more money or at least you know more about the money that you have when you get ready to retire. They're also in this law talking about 529 plans and what you can do with the money that's in a 529 plan that you couldn't do before. So get out your pen, get out your paper and listen up because I'm going to talk to really just today about the things that affect individuals. There are many things in this plan that affects businesses and tax credits and all these things, but if you really care about all that, just Google the SECURE Act and you can read everything that was passed. But today I just want to give you the highlights of what affects you.Let's start with your retirement accounts. A lot of the people that listen to the Women and Money podcast happened to be older, and I want to tell you, I love that. I love that I have people who are 60, 70. And yes, I can say 60 and older when I'm 68. And really, when people who are 60, 70, 80 years of age are listening and they're writing in, they are taking time to write in and ask about their money. And a lot of them are saying to me, Suze, this first time I've ever had the courage to ask about my money. I've always been afraid for all these years, but I feel safe asking you. And so I'm so honored that you're doing that. So, let's talk about something called required minimum distributions. You know, for all of you who have ever contributed money to a traditional retirement account and when I say traditional that word traditional, always refers to a pre-taxed retirement account. A retirement account where you put money in and you get a tax write off, so to speak, for having done so. It's with pretax money and that money comes off of your income so you don't have to pay taxes on it. And that money is allowed to grow and grow and grow tax-deferred until you're of a certain age when you then get to draw it out without penalty, which is usually 59 and a half. And the only downside is you have to pay ordinary income tax on that money and its growth at whatever your tax bracket is at that time.Now a lot of people get older, 59 a half, 60, 65, and they don't need the money in their retirement accounts. And the government says, well, you might not need it, but we need the tax money that you owe on that money. Got that everybody? So they created something called required minimum distributions, and the name is just like it says, you are required to take out distributions from your retirement account that you will pay taxes on, but there is a minimum that you have to take out. You can't just take out any amount of money you want, you can take out as much as you want, but you cannot take out less than the minimum required of you once you attain a certain age. And until December 20, of last year, 2019, it was you had to start taking required minimum distributions by April 1st after the year that you turned 70 and a half, and no matter what, you had to do it. And if you didn't take out the amount of money that was set by law, you would owe a 50% penalty tax on the amount of money that you should have taken out but you didn't take out. So they're serious about this.Well, on December 20, 2019, the age that is required for you to start withdrawing those minimum distributions changed. So listen closely. If you are turning or you turned 70 and a half after December 31, 2019, you no longer have to take required minimum distributions when you are retired from a traditional retirement account until you are 72 years of age. To be exact, April 1st after the year that you turn 72. If, however, you already turned 70 and a half prior to December 31st or by December 31, 2019, you still are governed by the 70 and a half age requirement. But for the majority of you, you will now not have to take required minimum distributions until April 1st after the year that you turn 72.Next, I now want to talk about 401k plans, employer-sponsored retirement plans. Now, when you hear me say 401k, please know that I am referring to all qualified employer-sponsored retirement plans, a 403b, TSP, whatever it may be, just know that. But it's just simpler for me to say 401k and you know that it applies to all of them, OK? It used to be and, actually, still is that if you work for a corporation, you did not retire and you were working for a corporation that had a 401k plan, then you could postpone taking required minimum distributions until you actually retired. So, if you were working and you were 71, 72, whatever it is, you didn't have to take required minimum distributions until you actually retired. That has always been true. However, you were able to contribute to the 401k as well. It used to also be true that if you were working even though you're contributing possibly to your 401k, you were not allowed to make contributions to your IRA once you were passed the age of required minimum distributions, which used to be 70 and a half. OK, everybody? That law has changed.You, now, if you are working, you can also make contributions to your IRA account so you can be 73, 74, and still be making contributions to your IRA. That is new under the SECURE Act. However, even though in a 401k plan at the place that you are currently working, you do not have to take required minimum distributions in an IRA while you are working even though you can contribute to it. You have got to take required minimum distributions once you reach 72 years of age. That is important for you to understand. So at the same time, now that the government is going to allow you to be putting money into an IRA, still contributing to it while you are working, when you're 73, 74, whatever it may be, you have to start also making required minimum distributions once you reach the age of 72 to be exact by April 1st, after the year that you turn 72. You also have to start taking required minimum distributions from any ex-employers 401k plan. The only place that you do not have to take required minimum distributions from when you are working is from a 401k plan at your current employer's place, no matter what age you are, because that's an important thing for you to understand.Now again, why are they allowing all of this? They're allowing it because they know again, and I said this earlier, you're going to need this money. Do you know for all these years how I've been saying to you, you've got to work until you're 70? Don't start social security until you're 70. You've got to save, you've got to save, you've got to save, and it's because you are living longer. Health expenses are going through the roof. You do know that if you were to retire around the age of 65 and lived a normal life span, you could spend $500,000 on healthcare costs over those years? So you have got to save money, and the government is doing everything they can to help you and entice you to do so. When you have a retirement account and you leave it to your spouse, your spouse has the right to take over that retirement account as if it was his or her own. She is not regulated by the same rules that apply to other beneficiaries. So for this segment here, when I am talking about beneficiaries, I am not talking about your spouse. I am talking about your children or people other than your spouse. OK?Next, here you are, and you have a retirement account, a traditional retirement account that you've never paid taxes on, and you die and you leave it to your beneficiary. And maybe your beneficiary is your child. They were able to do what was called a stretch IRA that allowed your beneficiaries to stretch the amount of time that they could withdraw money from it so that they didn't have to pay a lot of taxes on it because only a little was coming out at a time. Well, if you inherit an IRA after December 31, 2019, and it's other than your spouse, then what happens is you have a maximum of 10 years. Your beneficiaries can now no longer do a stretch IRA, they have a maximum of 10 years to withdraw the money that's in the IRA that they just inherited. And you'll read about this in my new book that comes out March of this year, which is called The Ultimate Retirement Guide for 50+ (Winning Strategies to Make Your Money Last a Lifetime). It is in this book that probably for the first time, I'm really telling you why I want you to have a guaranteed source of income where you know your money is going to come from, because then you base all of your investment decisions on that figure and what you need above that. So, because interest rates are so low and because there are very few places to get a good guaranteed income anymore, now the government signed into law on December 20, 2019, that employers via a 401k plan are going to be offering guaranteed annuities, guaranteed income annuities to you so that you can see how much money you could get if you took your money that's in the 401k, and you converted it right there because 401ks with employers get better group rates than if you did it on your own through an IRA rollover. So now they're going to allow you to do that. And it's just something that I think all of you should absolutely look into.So a few other things, just a few other things that the new law provides. Ready for this one? Do you know that if you have a qualified plan like a 401k or 403b traditional pretax, whatever it is, and an IRA, do you know that you can take out $5000 penalty-free? Now, when I say penalty-free, that means you're not 59 and a half years of age yet, so if you take money out of a retirement account prior to that age, you will pay a 10% penalty tax on it. You can take out $5000 penalty-free to do what? For the birth of a child or if you're going to adopt a child. Of course, you have to pay taxes on that $5000, but do you know how many people write to me and they say, Suze, I got pregnant. I'm going to have a baby, I don't have any money. I have some money in my retirement account, I'm just going to take it out, I have to. And then they have to pay taxes on it and the 10% penalty and possibly a state penalty tax as well, depending on which state they live in. Now they're going to be able to take out up to $5000 penalty-free due to the birth or adoption of a child. I don't know, I think that's pretty great.Again, quick summary, if you were not 70 and a half by the end of last year, December 31, 2019, your new age for required minimum distributions will be 72. If you are working and you worked past the age of 72, as long as you're working, you can continue to make contributions not only to your 401k where you're currently employed but to an IRA as well. So just remember, in an IRA, once you reach 72 even though you can still make IRA contributions, if you're working, you still have to at the same time take required minimum distributions from that IRA. And don't forget, you have to take required minimum distributions from any old employer's 401k plan, even if you are still working. It is only your current employer's 401k plan, if you are still working after the age of 72, that you do not have to take the required minimum distributions. Got that?Inherited IRAs. If a person dies after December 31, 2019, and their beneficiaries inherit an IRA after that, they have a 10-year maximum to withdraw the money that is in the retirement account unless they are a spouse or certain other circumstances. But mainly, it's now a 10-year maximum they can no longer do a stretch IRA. You can withdraw $5000 from a retirement account without any penalty tax for the birth or the adoption of a child. Those are the main things that you really need to know that have changed.Let's talk briefly about 529 plans. The main change for a 529 plan now is that you can use the money tax-free from a 529 plan to pay up to $10,000 per beneficiary of a student loan. So, if you happen to have a kid or a grandkid, you can take out up to $10,000 to pay off part of their student loans or maybe all of their student loans. And you can give that $10,000 to their siblings so you could do it for quite a few people. But $10,000 max per beneficiary. Also, 529 plans can be used not just for college and things like that, it can also be used to pay for apprenticeship programs. Now, obviously, these programs have to be registered and certified with the Secretary of Labor under section one and blah, blah, blah. But you can look and go to the Department of Labor, where they have this search tool to find out if particular apprenticeship programs are qualified. Now, this is something that's important because maybe your kid doesn't want to go to college, maybe they don't want to be that, and you know a lot of you write to me and you say to me, but Suze, I'm not sure my kid wants to go to college. He wants to do this, he wants to do that. Now just possibly, a 529 plan could really help with this program because many of these apprenticeships are used in many industries, such as construction, manufacturing, health care, all kinds of things. So, it's just something that you might want to look into. Also the kiddie tax, you know, when you put money into your kid's name, the SECURE Act also changes the kiddie tax and it lowers that tax, which is the tax that's imposed on your child's passive income from dividends, capital gains, taxable interest, all those kinds of things.Now, I know that this was a whole lot. I get it, I get that your head is probably going, what did she say? But here's what's so great about a podcast. Play it over and over and over again. Got that? So, Suze Orman, what is your take on all of this, really? Overall, I think there are some great things in this SECURE Act. I think it's great that your employers are going to have to really disclose certain things about your retirement accounts to you that will show what kind of income all of your money will do over your lifetime. All of that, I think, is great. But, here's what is important, bottom line. If you don't have money in a retirement account, none of this is going to help you.So now is the time, I don't care what age you are that you start putting money away, assuming that you're totally out of debt. I'm not talking about mortgage debt or car loan debt, but you're totally out of credit card debt. And the type of retirement account that I want you to choose, now more than ever, especially now that stretch IRAs are no longer eligible; you have to take money out, your beneficiaries, on an inherited IRA in 10 years. A Roth IRA, a Roth 401k, a Roth retirement account is the way to go. If you didn't understand something, write to me. You can always write to me at AskSuzePodcast@gmail.com, that's S-U-Z-E, and you never know, I might just answer you. That was the very first podcast for the year 2020 and we went to Suze School. In providing answers neither Suze Orman Media nor Suze Orman is acting as a Certified Financial Planner, advisor, a Certified Financial Analyst, an economist, CPA, accountant, or lawyer. Neither Suze Orman Media nor Suze Orman make any recommendations as to any specific securities or investments. All content is for informational and general purposes only, and does not constitute financial, accounting or legal advice. You should consult your own tax, legal and financial advisors regarding your particular situation. Neither Suze Orman Media nor Suze Orman accepts any responsibility for any loss, which may arise from accessing or reliance on the information in this podcast and to the fullest extent permitted by law, we exclude all liability for loss or damages, direct or indirect, arising from use of the information. To find the right Credit Union for you, visit https://www.mycreditunion.gov/.
Credit & Debt, Saving, Investing, Retirement