Transcript
Paul Winkler: And welcome to The Investor Coaching Show. Paul Winkler here. All right. Big changes may be coming to 401(k), IRA, and other retirement plans. Big changes may be coming to these retirement plans. According to Rob Berger, personal finance writer for Forbes, a bipartisan bill has been introduced in the house and we’ll see where it goes.
Big Changes Could Be Coming to Retirement Plans
You typically see those a lot IRAs and other retirement plans from increasing the required minimum distribution. You know, so you put money in, you take the tax deduction later on, you grow without tax. Your retirement plan grows. You don’t have to pay taxes on it. Someday. You gotta pay the Piper, which is where you’re pulling the money out and you pay taxes on it. And the back end, that’s the required minimum distribution and catch-up contributions.
You can do a catch-up because they look at it and go, you need to catch up, man. You haven’t been putting enough money away for retirement. You got to catch up. So they let you put a little bit more in these plans. If you’re over the age of 52, expanding automatic enrollment, which has been one of the better ideas in recent years, where you go to work for a company and you basically are enrolled automatically in the 401(k) plan. And you have to actually take action to disenroll from the 401(k) plan. And since people are generally lazy, they won’t disenroll. People think, I know I should save for retirement. I just take the money out, go ahead and take it out of sight, out of mind, out of sight, out of mind.
So it’s not a bad idea. We know from studies on the human brain, that it’s a really good idea just to make people just do stuff. Legislation is poised to expand retirement savings options for millions of individuals and housewives and means committee. Basically, they’re saying that they’re introducing this, securing a strong retirement act of 2020, and trying to work on this and see what’s going to happen now. What are the provisions expanded? Automatic enrollment expanded.
Evan: So they’re going to have to contribute before you start working here.
Paul Winkler: No, that’s probably not what they mean by regulations; they permitted employers to automatically enroll employees since 1998. I didn’t realize that stuff. Wow. Quite that long. I didn’t realize it had been around that long, automatic enrollment, which they can opt out of. But as I said, they don’t typically do that. Now secure act two would require 401(k) simple plans to automatically enroll employees once they’re eligible. So it would become a requirement from what I’m reading here. It would. Now it would just not necessarily be an optional program. I think that’s kind of cool. I think that’s not opt out.
Yeah, well, no, no, no, no. It’s not that you have to enroll them. They can still opt out, but you don’t have the option of not having an automatic enrollment feature. So if you’re an employer, it’s going to be part of your 401(k). It’s not, you know, it’s not something you elect to do. It’s going to be automatically, that’s going to be the way it is. And I kind of dig that. I think that’s yeah, I think that’s not a bad idea. The initial enrollment amount must be at least 3%, but no more than 10%. And yeah, typically you’re going to find that, you know, they’re not going to go and do that. They may, you’ll see, you’ll see, some of these are pretty fancy. They’ll start at three next year. They go to four the next year, you know, they inch their way up because they want to get people used to the idea.
Would you like personal help with your financial plan? Schedule a call with us to explore what this can look like for you here.
Or schedule a more in-depth, virtual or in-person meeting here.
The Changes Explained
Increase in the saver’s credit. So I think that’s a good idea. I think just automatically in increasing getting people involved. I think that that would be a good thing. If they did that increase in the saver’s credit. Evan, you can probably talk to this a little bit, but cause I’d be curious how often you see people actually use this now basically the way it works is this saver’s credit. You may not even be aware that this exists. If you’re a lower income person, you know? So it’s like, what is that? $50,000, $60,000, something like that. If you’re married, filing jointly, it’s actually that high, that would be considered lower income, but you know, reality, that’s not really that low of income, but the well for joint taxpayers, things are out about there.
Yeah. For jointly, it would be, but it phases out. So in essence, what happens is there’s a credit, it’s like a thousand dollars for low and middle income people. They give you credit and the new legislation. So what they’re doing is they’re helping you. A tax credit is where they say, “what’s your tax bill X, Oh, we’ll give you a credit of 500 bucks.” That means your tax bill is reduced by $500. It’s not a $500 deduction from your income, which would reduce your taxes maybe by 50 bucks, depending on what your tax bracket is. It’s kind of a percentage of your contribution. Yeah. So in essence, they’re saying the new legislation would simplify the rate structure by implementing a single rate of 50%.
Evan Barnard: Well, just right now, it’s a sliding scale. And so like if you make, I mean, these numbers are somewhat arbitrary, but just as an example, if you make $20,000, you get 80% of the credit to make $ 24,000. Okay. You get 72% credit. I mean, it’s just, it’s just a sliding scale. That’s a little bit harder to calculate them. Software does most of that, but it’d be nice to be able to plan with people and just say, Hey, you’re going to get a 50% credit if you make under $50,000. Yeah. That does make a lot of sense because you know, you don’t necessarily know where the income is going to land. Right. If you had a set number, it would be a whole lot easier to do the planning. And let me, let me expand on that a second.
Because one of our family members falls into this category, okay. This is a credit that very often is used by our military personnel. And so for, for a host of regions, you know, particularly in enlisted ranks, it’s, it’s some lower pay. A lot of times it may be single income, but they’ve got them in house. They don’t need that much high and done well, but housing C doesn’t show up on their W2. Right? Exactly. So they’ve, you know, their lifestyle is X, but if they’re contributing to the TSP, for example, that, you know, millet, thrift savings plan, military version, they can absolutely take advantage of the saver’s credit and it’s a great deal for them.
And so that, you know, that’d be a, that’d be a win-win if they could get more people to do that, that’s a, that’s a big group that can take advantage of that. Yeah. So that’s a good increase in the savers. Credit is, is a, a possibility, and it looks like it’s part of this bill. Anyway, if it goes through required minimum distribution, RMD age, they just increased it to 72. Right. So you heard it with 70 and a half to 72. Now they’re toying around with 75. Never going to get to quit.
Paul Winkler: Never be able to retire. There’s never going to be forced to pull out your money in this, you know, and support all the great things that our government does. Right.
All right. So you’re a research geek. Extraordinary. How many people do you think that really impacts? Like how many people do you think just while guests don’t, aren’t aren’t taking money out of their IRAs to live. I mean, you talked about, everybody’s not the majority of people aren’t on track to retire and maintain their life and research.
Just a wild guess though, how many, what percentage of people do you think aren’t like, I know, like I look at my 20 years in the business, I don’t know too many people percentage wise that aren’t using distributions to supplement their social security or the pensions or whatever. Yeah. So I’m just wondering if your thoughts on that. I have no clue.
Evan Barnard: Throwing out 10% as a number. Of people take out required minimum distributions because they’re late. You say it’s the it’s maybe, you know, it might be the parade or principal might be 20. It could be, it could be, this is good, but it is more believable if we say 9.7. No. Oh. Instead of 10.
Paul Winkler: We’re not making up stuff. Yeah. That’s the other show catch up limit would rise. So, the IRA catch up limit was, which has always, it’s been a thousand dollars forever, you know? So the IRA contribution is a different thing. It’s $6,000. And then if you’re over the age of 50, you get to put another thousand dollars, which is, it brings up to $7,000. They would increase that. It doesn’t say what it’s going to increase to though. It always looks like it’s just an additional thousand dollars, a hundred bucks. So it might be $2,000. Catch-up provision. Good. I’ll take that.
Any, any discussion of raising the income threshold on being able to fund a Roth to be able to other than inflation? I mean, did they nothing, nothing other than inflation? No. Not nothing that I’ve seen there. No, no. That you still have to do the trickery of the backdoor Roth IRA conversion, which almost nobody can do. I can get your dog on. Yeah. You got to aggregate the other in English. What that means is most of you can’t do this. And you’re really fancy because, well, it’s, you know, sometimes if you’re really high income, what you can do is you can convert actually your IRAs to, you know, your IRAs to Roth IRAs. So, you know, there’s a provision where you can go and contribute to a non-deductible IRA.
Cause it doesn’t matter what your income is. So you can have a gazillion dollars of income contribute to a non-deductible IRA and then convert it over to a Roth IRA right away. Because it’s non-deductible. And if you don’t have any gains on your IRA, you’re paying a pittance in taxes to go and do this. And it’s a sneaky way to get into a Roth IRA. If your income level is too high. So that’s asking you about sneaky, but illegal, you know, but the problem is what they have. What happens if you have an IRA, they go and aggregate the doggone nondeductible IRA with everything else and it messes you up. So you gotta be, and you can, then you don’t get any, you don’t get any really.
You want to work with a very high qualified coach that has a lot of financial education to walk you through this, Paul. Yeah. You know what? The IRS gets the gold mine. We get the shaft.
An Interesting Provision
Anyway, a student loan payment would qualify for matching contributions. You heard me, right? I thought this was a very interesting provision. Isn’t that interesting. I bet the bank stuck that in there. So employer retirement plans offer matching, and this is bipartisan by the way, folks, many retirement plans offer matching contributions. So the rules can vary from plan to plan. And you know, you might have one plan that says we’ll match a hundred percent up to the first three and 50% of the next two, or somebody might have a hundred percent up to four. You might have, you know, there are different matching plans with 401(k)s and you’ll have all different types of formulas that companies will use.
But in essence, they come up with a 401(k) and that incentivizes people to put money away for retirement because you get a match on your contribution. Well, the problem is you’ve got somebody, who’s got a bunch of student loan debt and they’re sitting there going, I can’t afford to put money in my 401(k). I’ve got this student loan. I gotta pay. Well, what if they took the match and stuck that into paying on your student loans? How cool is that? Who’s funding that not the employer? Well, it would be the employer because you would’ve, you would’ve made a contribution to the 401(k), the employers indifferent because they would have given you money pocket, right pocket. Yeah. Yeah.
Well, the employer would have been glad, if you, if you had funded your 401(k), right. They would have put money in and matched.
Evan: I agree. Can I throw a wrinkle into this argument?
Paul Winkler: Wrinkle away, my friend,
Evan: What if I’m on a five-year investing schedule and I quit after year two and my employers put all that money in my account.
Paul Winkler: It’s only a safe Harbor plan here. That’s all they’re talking about. And there is no vesting on a safe Harbor plan. Okay… I’m guessing. I’m making it up. I’m covering myself.
Evan: No, seriously. Well, I could see your job application. Yes. Do you have any student loans next, right? I mean, no. You know, there’s always going to be fallout from that kind of stuff. There could be in a safe Harbor plan for those of you that don’t have a clue.
Paul Winkler: What I just said is a type of 401(k) plan, where there is a matching contribution that the employer does. And a lot of 401(k) is our safe Harbor plan. So that what happens is when you make a contribution, the employer makes a match. You are immediately invested on that match. And in that case, the employer would be indifferent. But if you have, let’s say a 401(k) where there is an investing schedule, right? You could have a situation where you leave and then they’ve gone and paid off part of your student loan for you. Right. And you know, you’re just out and out in the rain, but I don’t know. It does not. It does not sound like an interesting idea. I thought they were going to let you pay your student loan.
And they were going to put, say 3% into the 401(k). Oh, that’s at least that could still be vested. I just misunderstood what they were doing. Just the opposite. Yeah. Let’s see if it, if it actually, you know, I was not, let me see if it’s in there, granted it’s not law yet. So we probably don’t need to fret this out too much. Yeah, yeah, yeah, yeah. It’s, it’s a little confusing. I’m not positive where the money’s going to actually go. Interesting. So we’re going to Congress by, you know, so yeah. It may be that they stick the money in the 401(k) for you possibly could be that. Yeah. That would make more sense because if it is an investing schedule that they could at least take the money back if you left early.
Yeah. Yeah. That’d be enough. All right. Listening to the investor coaching show where we just I’m just postulating on what might happen in the future. And yeah, I, that was, I think that’s, that’s interesting, you know, it was some of these changes, I think from a standpoint of what could happen. That could be, it could be interesting. It could be really cool things. And I just like that there are some creative ideas coming out of Washington because it beats the heck out of them not doing anything.
You’re listening to The Investor Coaching Show. And I’m your host, Paul Winkler. We’ll see you next time.
Want to talk with us directly?
Schedule a call here.
Ready to meet with us virtually or in person? Schedule a meeting here.
*Advisory services offered through Paul Winkler, Inc. (‘PWI’), a Registered Investment Advisor. PWI does not provide tax or legal advice: please consult your tax or legal advisor regarding your particular situation. This information is provided for informational purposes only and should not be construed to be a solicitation for the purchase or sale of any securities. Information we provide on our website, and in our publications and social media, does not constitute a solicitation or offer to sell securities or investment advisory services, or a solicitation to buy or an offer to sell a security to any person in any jurisdiction where such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction.
