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This week’s episode includes some reader questions and a review of The Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act). The SECURE Act has passed the House of Representatives, and a similar bill is working in the Senate. The Senate version is called something else, but, most likely, when this bill is passed, it will be called the SECURE Act.
There are a lot of things in this Act, but we’re going to talk about the things that have to do with you planning your Big Picture Retirement.
But first, let’s go to some voice recorded questions. (Don’t forget, if you go to BigPictureRetirement.com, right up at the top, there’s a button that says “Talk to Us!” And you can record your question right on your computer.)
What Do You Think About Robo Advisors?
Rick called to ask if Devin and John have any opinion on robo advisors. John points out that the caller sounds like a pretty sophisticated investor. He has a basic knowledge of the fundamentals. With this level of knowledge, you can DIY a lot of your own stuff, with maybe just a little bit of assistance. That can be a great way to control costs.
Compare that with a person who really doesn’t have that sophisticated knowledge level. A robo advisoris probably not the right choice for them. They need someone who can break it down, and guide them, and they should expect to pay for that service.
Devin thinks that for the service you are receiving, robo advisors provide a good value. But you have to remember, most financial planners should be offering more than investment advising. If your guy or gal is just doing your investments, that’s probably not a good deal. What they are supposed to be providing you is a step-by-step journey that will guide you into retirement. A robo advisor isn’t going to help you make rational decisions when your emotions are running strong.
Social Security for Lower-Earning Spouses
Phil called with a question about Social Security for spouses. Can the lower earnings spouse collect their benefit early, and then when the higher earning spouse files for their own benefit, can the lower earning spouse switch to the spousal benefit?
Here’s the way that works: The lower earning spouse’s benefit is made up of two different parts. If they file at 62 for their own benefit, then that benefit will be reduced based on the filing age. And then when they file for their spousal benefit, the spousal benefit is a top-up on top of their own benefit. It’s actually two benefits, and each benefit is reduced (or not reduced) based on the age at which the benefit is started.
Devin did a YouTube video that makes it a little easier to see how this works.
A Change To Required Minimum Distributions
But one of the big parts of all the proposals is increasing the age at which you have to start taking required minimum distributions (RMDs.) Various proposals have different ages, mostly between 72 and 75. It’s common for people to not want their RMDs. If the SECURE Act passes, you may be able to start a little later, which will provide some flexibility.
Increasing the Maximum Age for Contributions to Traditional Individual Retirement Accounts
The other thing that could have some impact is the repeal of the maximum age for contributions to traditional Individual Retirement Arrangements (IRA). Right now, you can’t put money into traditional IRA once you reach the age for RMDs. It is
Certain Additional Penalty-Free Withdrawal Options
The bill will likely add birth or adoption to the list of reasons why you can take a penalty-free distribution from your retirement account. They are talking about possibly $5,000 or $10,000. It will still be taxable income, if it came from a pre-tax account, but there will not be an early withdrawal penalty.
Changes to the Stretch Provisions for Inherited IRAs
Under current rules, when an IRA is left to a non-spouse, they have the option to roll that account into an inherited IRA, and stretch out the taxes for the beneficiaries’ life expectancy. In the past, these rules have presented tremendous opportunities for families to grow tremendous wealth
It looks like they are either going to completely get rid of the stretch for non-spouse beneficiaries, or they will limit the term to somewhere between 5 and 10 years. This will mean that a lot of people need to change their long-term planning, and that anyone
Depending on what the final product looks like, there may be some exceptions to this rule. For example, if you have a disabled person as a beneficiary. We’ll have to see how the final bill looks.
Please note that these changes will not apply to those who already are receiving funds from an inherited IRA.
Changes to 529 Plans
529 Plans are changing. It looks like the bill will expand 529 plans to cover more costs, including technical training, home schooling, and private schools. This means not just higher education, but also grades K-12, and it may include qualified student loan repayments.
One of the big provisions of this legislation is changes to annuities. The intent of these changes appears to be bringing more annuity providers into the 401k business. This will give owners of retirement accounts the ability to convert that money into a stream of guaranteed payments.
Of course, we don’t know yet what specific provisions will be in this bill, but it is clear that there are going to be massive changes. Be sure to follow up when the bill is passed and see how the final form will impact your Big Picture Retirement.
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