The Setting Every Community Up for Retirement Enhancement (SECURE) Act brought about significant changes to retirement planning in December 2019, and the retirement planning landscape has once again been updated with the passage of the SECURE Act 2.0. In this episode, Michael, Tommy, and John are joined by Ben Raikes, CFP, to discuss how this could impact your financial future. They examine the updated rules around Roth IRAs, the expanded access to distributions from TSP, and more.
Listen in to learn about the new required minimum distributions (and the impact of missing them), as well as the challenges of legacy planning in the current tax landscape. You will hear the common myths and misconceptions about the SECURE Act 2.0 and how to use this knowledge to make informed decisions about your financial future.
Listen to the full episode here:
What you will learn:
- The importance of staying up to date with tax laws. (4:30)
- How to ensure your clients remain up to date with what they need to do. (9:00)
- Why having a financial team (not just a planner) is key. (11:00)
- The new required minimum distributions. (12:00)
- What happens if you miss your RMD. (16:45)
- The rules around Roth IRAs now that they’ve been updated. (22:00)
- Why legacy planning is getting so much more difficult. (27:00)
- The impact of the SECURE Act on the VCP for the Civil Service Retirement System (CSRS). (35:30)
Ideas worth sharing:
“Financial planning is tax planning.” - Mason & Associates, LLC
“Let’s be proactive with our tax planning, not just reactive.” - Mason & Associates, LLC
“Legacy planning is getting a lot harder.” - Mason & Associates, LLC
Resources from this episode:
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Read the Transcript Below:
Congratulations for taking ownership of your financial plan by tuning into the Federal Employee Financial Planning Podcast, hosted by Mason & Associates, financial advisors with over three decades of experience serving you.
Michael Mason: Welcome to the Federal Employee Financial Planning Podcast, hosted by Michael Mason, Certified Financial Planner; John Mason, Certified Financial Planner; Tommy Blackburn, Certified Financial Planner and Certified Public Accountant; and Ben Raikes, Certified Financial Planner and IRS enrolled agent.
Talk about some qualified financial planners. This is Mason & Associates, we have over three decades experience helping federal employees with their financial plans.
This episode's going to be SECURE Act 2.0. We may reach back and grab some of SECURE Act 1.0, but it's going to be the latest passed law, SECURE Act 2.0.
John Mason: Yeah, welcome back. If this is your first time joining us on the Federal Employee Financial Planning Podcast, four financial planners here with you on this episode. Primarily, first, we are financial planners that specialize in serving federal employees. Generally, clients are 55 or older, and we manage about 700,000 or more for those families.
So, if you're looking to become a client or you're looking for a financial advisor who specializes with you, we are accepting clients and you can get that process started at masonllc.net.
So, we're a financial planners first, we're a podcast hosts second, and we are retired from our live radio show that we did for over 15 years. So, welcome, welcome back. Thank you for being with us.
One other call to action as we get kicked off on this episode is, if you like the content, please leave us a five-star rating. But importantly, we also want to hear from you and we want to make sure that you're following, that way as we release new content, you're notified of those content episodes as they're released.
So, leave us a five-star rating. Send us an email to masonfp@masonllc.net. That's masonfp (like financial planning) @masonllc.net. What keeps you up at night? What are your concerns? What are your questions? We'd love to hear from you and we'll address it on a future episode.
So, guys, let's dive right in. SECURE Act 2.0. We know SECURE 1.0 was monumental legislation changes. And I think maybe it makes sense to put this in context of how big tax law changes are, the ripple effect and then how long it takes to actually get clarity on some of this.
And I think that's where I would just like to point out that we still don't really fully understand everything about SECURE Act 1.0 and we're just now, getting guidance back in 2022 on things, Tommy, that were passed three years ago. And I think there's more guidance to follow.
And if I'm not mistaken, for, I think tax law changes in 1987, it took like a decade or more to receive guidance on some of these things. So, it's the Wild Wild West out there.
Tommy Blackburn: That's right. So, for SECURE 1.0, we got some proposed regulations, I think towards the middle or end of 2022. And they're just that, they're proposed. So, gives us an idea of what the IRS is thinking, but it's not the finality of it.
So, we're still waiting on final regulations from the first act of SECURE, and now, we got the son of SECURE, SECURE 2.0. So, this is our best understanding. I suspect that we will be revisiting this as things become more clear.
And just for our audience, it is January of 2023 when we're recording this. We think this will be released before tax season. So, the tax season is upon us and new year, new goals and new laws. And we've got SECURE 2.0 to digest.
And, John, to your point, (and Mike, you could certainly speak to this having been in the profession longer) I think we've seen more tax changes in the past 10 years than in the past 30 or 40. I mean, it just seems like they're coming in quick and fast these days.
Michael Mason: Yeah, there's no doubt about it. And as I think about this, when I came in the business you could do an IRA and put $2,000 into it (and maybe my memory is flawed) a 401(k), 10% of your pay. This year, I'm going to put $30,000 pre-tax into my 401(k). So, whole lot of changes in the 35 years I've been doing this.
Tommy Blackburn: And we're going to talk about one of the changes on that catch-up, that's coming in a few years for you as well. And maybe how that overlaps with your plan. I haven't done the math completely.
John Mason: Well, before we dive into SECURE 2.0, maybe we can just talk a little bit about how did SECURE Act 1.0 change the landscape?
And then from like a practitioner standpoint, I would also just like to highlight for our audience, guys, that like for example, one of the changes was the way inherited IRAs worked and how long you could keep that inherited IRA. Whether you could keep it over your life expectancy or you had to close it in 10 years.
And what a rotten position the government put us in. Because the original thought was that there were no required minimum distributions on those, you just had to close it within 10 years.
And then all of a sudden two years later, we find out there is an RMD. And then when we find that out, we weren't sure did we have to go back in time and fix what we had done before or had missed before.
So, as a practitioner, I just want to highlight to our audience, we're going to do … some of it is like our best guess because we may be waiting for official regulations and notices and action items for years.
Tommy Blackburn: Well, that's what we have to do. Is we have to take the position of what do we think the IRS and Congress, the law intended and kind of what's the most conservative position?
And then hopefully, if history's any guide, the IRS would be more generous, which they were. So, were we supposed to be taking required distributions these past two years based upon their proposed regulations? Yes, we were supposed to be, but that was never communicated. So, they also said, “Hey, in our grace, we'll give you a waiver because we realized it wasn't clear.”
So, I think one of the biggest things of SECURE 1.0 was the death of what's called the stretch IRA, being the ability to inherit it and stretch it over your lifetime.
Now, we have what sounded like it would be so simple, Ben, was the 10-year rule. But what we found out is not simple at all. And it's more like the now, and 10-year rule.
Ben Raikes: The 10-year rule, which, Tommy, exactly, hey, this is really simple. All you have to do is distribute this entire account within 10 years and that's it.
Well, initially, that was taken as, “Do I need to take 10% per year to completely distribute something each and every single year? Do I need to have the entire account distributed at the end of that 10-year period?”
Then we got SECURE Act 1.0, SECURE Act 2.0. We're working with different rules between, well, did you die before the initial SECURE Act and then your beneficiaries inherited it after?
There are all these different iterations. And I'm going to tell a joke here, these iterations are keeping us employed right now, because there's just a lot to learn and a lot to consistently go over.
John Mason: IRAs are not getting easier to deal with, they're getting harder. Especially as we begin to see like this in the biz, Mike, they talk about the transfer of wealth or the shift of wealth from like the baby boomers to Gen X and Gen Y.
Well, this is now, going to be really the first time in history where we're seeing inherited, inherited, inherited IRAs, now all of a sudden being passed down from all these generations.
And oh, by the way, depending on when you were born and when you died and when the original owner of the IRA passed away, the rules are going to be different across the board and custodians and all of these folks aren't tracking it the same way.
So, it's again, the Wild Wild West out there. RMD changes happened in SECURE 1.0-
Tommy Blackburn: Which were, we went from 70 ½ to 72. And we in the biz, as you say, the profession, we lived and breathed this all the time, so it's easier for us to keep up with this. But guys, we all, I think encounter clients that these things aren't front of mind for them.
So, how often do you come across a client that still thinks when they sell their house, they have to reinvest the proceeds within X amount of days? That hasn't been the law for 20 or 30 years.
So, that's, I think a purpose of a do you have an advisor helping you keep on track with this? Because these changes are coming fast and furious.
Michael Mason: And that's a extremely good point. And Ben, I would say it's not a joke, it's reality. And if you don't have — we're going to do an episode on consult your tax advisor. Yeah. Congress passes these bills that they've never been able to read. This thing was passed in the darken night and they shoved 2.0 inside there along with a trillion-dollar omnibus bill.
Tommy Blackburn: Over 4,000 pages in that bill and this SECURE Act was in there.
Michael Mason: So, they don't know what it looks like. Inside of that is a military survivor benefit open season. I have military gentleman retired that didn't take it, that's dying. And I can't even find out right now, how to get his foot in the door because they passed and they don't know.
So, the point is, you probably just have a person that manages your money. They're probably not willing to give you tax advice. They haven't rolled up their sleeves to understand this. You're listening to this and if that sounds like what you have, then you need to search for a real financial planner.
We're not going to be able to go through everything in this podcast on SECURE Act 1.0 and 2.0, but let me tell you, there's no better team than the ones sitting around this room right now, that will digest it over time.
Keep listening to the podcast and remember, Mason & Associates still adds clients to the book of business.
John Mason: Well, maybe just recapping that a little bit more, Mike, is that financial planning is tax planning. And we hope that the audience listening to this podcast is one, getting that federal knowledge, but two, we're kind of breaking the mold.
It's like, “No, my financial planner does not just manage my money. My financial planning team helps me with my estate plan, absolutely gives tax advice, knows my federal benefits, and sure, helps me execute some trades from time to time in my investments too. And maybe has some good ideas there.” It's so much more.
And if there is a big call to action from this episode, not just the five stars and connecting with us, et cetera, it's really pushing back on the norm and the status quo and saying, no, you can't have financial planning without tax planning.
So, 2.0, Tommy, where should we start with some of these big changes that we saw recently released?
Tommy Blackburn: Yeah. So, there was a lot of stuff in this bill. We're going to try to hit the highlights for you, the things we think are most applicable. And so, SECURE 1.0, that moved our required minimum distribution age and when we have to start taking distributions from IRAs, moved it from 70 ½ to 72.
Now, Ben, SECURE 2.0, what has it done to those dates?
Ben Raikes: We have gone from 70 ½ to 72 to now, we're at 73 and potentially, 75. And I think I've got some notes here that say this could be a really, really good thing or it could be a really bad thing.
If you've listened to our podcast before or heard us on the radio in the past or have just worked with us, you always hear us talk about your tax planning window, the ability to do Roth conversions, the ability to smooth out those tax brackets over time.
The great news is if you're about to turn 75 and you've been listening to us into making Roth conversions, you can smooth out those tax brackets and you can have a really nice tax situation.
If you haven't been listening to us, if you haven't done Roth conversions, now, that time bracket is compressed and you potentially have a tax bomb coming your way.
Tommy Blackburn: Right. So, if you haven't been proactive, maybe you just got a gift, you just got that window expanded a little bit. But if you do nothing, what's happened is the percentage that has to come out at these later ages is the same as before they changed the law.
So, let's just say it is 4%. So, you get to wait extra years before 4% has to come out, but you haven't taken anything out if you don't do anything.
So, let's be proactive, let's look at that tax window and let's just because we're not forced to take it out, we have more of a window if we wait. It's now being compounded, we've got a bigger crunch. That tax bomb that we talk about just got worse.
So, for the proactive, we see this as a benefit. For the reactive, this is a trip wire, so to speak.
John Mason: I really just fundamentally kind of disagree with the extending of the RMD. And I guess I don't really know why. One, I don't believe people should just arbitrarily wait until an age to begin taking distributions.
And I think specifically for federal employees, if you tell them they don't have to start taking money out of their TSP or IRA until 75, that's probably what they're going to do.
So, for most of America, I think it sets them up for … let me rephrase, Mike. For federal employees, it sets them up for a tax bomb. For most of America, it's an arbitrary change because they needed their IRA and 401(k)s to live on earlier anyhow. And delaying the RMD age until 75 is probably irrelevant because most folks are probably taking more than what they can financially support early on.
Michael Mason: They're probably helping people delay their fun until 75 when they can't enjoy it as much. I mean, as federal employees, we see that they make more than enough money between their CSRS annuity or FERS and Social Security, that they don't need to take money out.
But when they do, when they were forced to at 70 ½, they did something, they did something special, they took a cruise, they did … now, we're going to delay that gratification until age 75, because it's not being forced out.
So, we don't want to do that because we talk all the time on this show about getting on that airplane and turning left. If you've got it, you've got the money and you saved it all, why are you going to leave it to your kids who have to now, get it out in 10 years?
So, I want to be clear. In 2023, if you were 72, if you had not turned age 73 in 2022, then you don't have an RMD, unless you turn 73 this year. So, I think I'm being clear on this, guys, you can fix me.
Tommy Blackburn: If you had an RMD before this law came out, you continue to have an RMD.
Michael Mason: There you go. So, your new RMD level is age 73. I was born in 1961. I've done the math, in 2033, the new number is age 75. So, if I choose to benefit from that, it looks like I can delay my RMD all the way to age 75.
John Mason: So, other big changes, guys, as far as it relates to RMDs is one, we had that pushback, which right, wrong, indifferent, we don't think provides a ton of value. But two other things happened.
One, they reduced the penalty from missed RMDs, assuming they're corrected fast or timely. And then two, they eliminated the required minimum distribution on employer sponsored Roth plans. So, a Roth TSP or a Roth 401 or 403. So, we have a watered-down penalty for missed-
Tommy Blackburn: Which we got to spend some time on that because the RMD penalty under the previous regime was 50% when you missed it. And there was no statute of limitations really either. So, that thing could haunt you for the rest of your life, potentially, your heirs. I mean, it was pretty nasty. So, I think this was a big change.
So, that now, Ben, what is our new penalty under SECURE 2.0?
Ben Raikes: I believe is it the next year that it'll go down? Is it this year that it's 25% and it'll eventually go down to 10%? So, we are seeing, Tommy, as you said, it was completely nasty before, but that is a much less burden than it used to be.
And the time to amend is set in stone as well, which is great if you can make it in a timely manner.
Tommy Blackburn: Right. So, in 2023, as we get our years straight here, (I have to think about it, I can't believe it's 2023) the penalty is now, 25% if we miss that RMD. And if we correct it in a timely fashion, which means we should really just correct it as soon as we realize we made the mistake, it's a 10% penalty. So, it's a much more manageable penalty.
The other thing here is if you forgot it now, once you've gone three years past your due date of your tax return, they're not going to come back after you. Whereas, it used to be really no statute of limitations because you didn't report anything, so there was nothing.
So, they specifically have made that a little more … this is favorable. Like this is just favorable to retirees, people in this situation.
Michael Mason: Yeah, I think it's clear to identify what that penalty looks like. So, if your RMD was $10,000 and you didn't make it, the new penalty is $2,500. But then you still have to go into the IRA, take out 10,000. And let's say you're in a combined 30% tax bracket-
Tommy Blackburn: The penalty is on top of a tax bracket.
Michael Mason: Right. So, you could see 25 and 3,000, you could see 5,500 of it go away.
John Mason: Yeah. So, penalty was huge. I think we're all big fans of the fact that it is lower now. And most people are taking RMDs so they're going to be satisfying this regardless.
But there's so many IRAs, there are so many 401(k) plans out there. People's assets are scattered. They're not necessarily consolidated with a financial planning team like us who's helping them manage those distributions. So, I do feel like it's a big win for the United States and for consumers and taxpayers to have that reduced.
And then it's also, a big win that we're not going to have required minimum distributions on Roth TSP and Roth 401(k)s aligning those vehicles with Roth IRAs.
And our opinion was a no-brainer. It's kind of takes some sizzle out of a recommendation. It was always really nice to be able to talk to a federal employee and say, “Hey, Roth TSP was great, but we have one, two separate five-year rules we have to worry about now. And oh, by the way, there's an RMD.”
So, they kind of close that-
Tommy Blackburn: Part of it.
John Mason: … part of that recommendation as to, “We're not simply leaving employer plans to avoid RMDs anymore,” which we think is a good thing.
Ben Raikes: John, it wasn't that long ago that we were all sitting in this room and talking about how worried we were that some of the Roth benefits that we had were going to go away, that we could no longer do the backdoor Roth, we could no longer do Roth conversions.
But what are we seeing now, with SECURE Act 2.0 with the kind of air quotes here, “Rothification” of some of these assets?
Tommy Blackburn: Congress is moving full force to Roth and they seem to want to encourage them, (we're going to get into some other points here) everything they want to push the Roth.
And here's the cynical side of me and I think probably everyone in the room is it's for budget reasons. So, when clients, prospects, the general public worries about, “Well, what if they do away with the Roth IRA?” This seems to be a concern sometimes.
All signs are pointing to they want to move everything to Roth. And the reason is because it gets tax revenue in the door today. And Congress when they budget, they don't budget like you do in your financial plan for 20, 30 years. They're looking at a 10-year window.
So, they want that revenue today because they can then say, “I balanced the budget, I paid for whatever.” So, signs are Roth IRA is not going away, it's only going to be pushed more and more to that. And you see that in this law.
Michael Mason: Oh, and you know me, I always like to look at Congress and what their ulterior motives is. You're going to get that president that gets in for eight years, two four-year terms, right about the time that people are dying, leaving trillions of dollars in pre-tax money that has to come out in 10 years.
Boy, I would love to be that president that gets eight of those 10 years and when that window comes where the only way you can do the postage 60 extra catch-up, it has to be Roth so that you're putting that money in in paying taxes. That's going to be a windfall.
Tommy Blackburn: Robbing Peter to pay Paul. But at least in the short term, it looks pretty good.
John, one thing I wanted to mention on the plans, the Roth, 401(k), TSP, it is great that we no longer have RMDs on it. But one difference there is that your Roth IRA (just for our listeners to keep in mind) are still more favorable in the sense that your order of distributions, so contributions come out first on a Roth IRA, which are always tax and penalty free because that's after-tax dollars.
You go to the Roth TSP, that's going to be a pro rata of distribution of earnings and principle. So, if you haven't satisfied the five-year rule over there, you could run into some issues.
So, this is good. And it's not to say that the Roth TSP and 401(k) did just get more favorable, but I would say Roth IRAs still have a little bit more of an edge.
Now, that's not why you should hire a planner anyway. You should hire a planner to give you the whole scope of services and advice. But it does seem to me like Roth IRAs still have an advantage.
John Mason: Significant advantage. Even more so if you are younger. So, I think our order of operations for how we would counsel a young saver or somebody that's maybe like younger or mid-career would be receive your 5% match in TSP, probably you're saving Roth and Roth TSP, then max out your Roth IRA and your spouse's Roth IRA.
And then if we still have money left over, then we go back and we start putting more money in Thrift Savings Plan.
And the reason for that, Tommy, is one, IRAs are liquid before 59 ½, where TSP you have some issues. Now, granted, that also changed with SECURE, there's additional bailout provisions and ways to get your hands on your retirement funds before 59 ½.
So, there have been some changes there too. But largely speaking, Roth IRAs have more favorable distribution rules and they're accessible as like a second or third tier emergency fund. So, I think that's good for our younger audience just to highlight that benefit too.
Tommy Blackburn: Absolutely. And I think we all do agree. And so, now, as we talk about, Mike, you kind of hit on catch-up contributions, maybe we'll weave that as well as what's going to happen with our Roth, kind of like how this gets Rothified as well.
Michael Mason: Well, first and foremost, let's talk about it. It's a big change. And you guys correct me if I'm wrong, but the new limit for me I know is 30,000. So, I'm doing like, what is it, 22,5 and-
Tommy Blackburn: 7,5.
Michael Mason: And 7,5. And that number's now, going to be tied to inflation as well, right?
Tommy Blackburn: So, you are correct. IRAs have been stuck at a 1,000 since I think 2006. Those now, get an inflation adjustment. I think that starts in 2024. So, different things kick in at different times in this law.
And then there's now, going to be a super catch-up for our plans. So, plans have had the COLA, that inflation adjustment, which is now, up to 7,500, but I think is it in 2025 it looks like, we're going to get our super catch-up. And that's where those who are age 60, 61, 62 and 63 I believe, and they're now, going to get another special treatment.
Michael Mason: Right. And I'm going to miss out on that because I'll be 64 in 2025. But so, the bottom-line number under age 50, 22,500 this year, 50 and older, 22,500 and 7,500 in your 401(k)s, your 403(b)s, your TSPs.
Tommy Blackburn: And eventually, in 2025, if you're in that special 60 to 63, you're going to get that catch-up of 7,500 or $10,000, which would be higher. So, you'd get that or 150%. So, they're going to give you a super catch-up, say it's going to be at least 10,000 instead of the 7,500 it is today. So, that's coming in 2025.
And the other thing about that, if we talk about Rothification on these catch-up contributions.
John Mason: Yeah, both the normal catch-up contribution and the super-duper catch-up contribution are going to be forced to go Roth if you make over 145,000. I think W-2 and they'll probably be some additional clarification for self-employed people and what really counts as earnings and counts towards that 145.
But 145's the current number, Tommy, where if you have income over that, Mike, you're 7,500 and the additional 10 that all has to go Roth now. And it gets really nasty because there's still a lot of 401(k) plans that don't have Roth options.
And I believe this current SECURE 2.0 says if your plan doesn't get on board, nobody in your plan can do catch-up contributions if we don't have a Roth option. So, I think this just gets, now, it's a paperwork nightmare for even more.
Michael Mason: You see the smile on John's face when, “It's all going to have to go Roth, dad. That way when I get it, it'll be tax free.”
John Mason: Shoot, I’ll have to really close out that tax free asset over a 10-year period.
Tommy Blackburn: Maybe John's been lobbying though as they were working on SECURE 2.0, “You know what you guys should do and would help the budget?”
John Mason: Well, good for our audience to hear this example. So, Mike and Bobby, they're going to save a bunch of money, maybe do a lot of Roth conversions in their tax planning window.
If me and my sister were to inherit those assets, one thing that we would do is we'd want to defer closing those Roth accounts, Mike, for as long as we can. So, we'd have no RMD. We'd have no RMD during that 10-year period because you didn't have an RMD requirement.
And then my sister and I could defer closing those Roths for 10 years and maybe that's a double. Maybe that's another tax-free double liquidated all in a single year. Everybody wins. Well, you don't win, I win.
Now, if that's an IRA and I do that same thing, now, I've got a tax bomb. So, thinking about how folks are going-
Tommy Blackburn: Pre-tax IRA is what you meant.
John Mason: Yeah.
Tommy Blackburn: Okay. Pre-tax, right.
John Mason: Yeah. So, now, pre-tax IRA, if you defer it 10 years, you've got a huge tax bomb at the end of it. So, legacy planning, again, I'll just want to echo to everybody here that it's getting a lot harder.
Tommy Blackburn: It is. We've got a number of other things that we could potentially hit, maybe just a few more.
One thing I think that's definitely applicable to our federal employees that we're really trying to speak to here is something special about FERS special, our LEO, our law enforcement public safety officers that came out of this bill.
John Mason: I think what you're talking about there, Tommy, is that for example, if you were any of those acronyms, (so, Federal Bureau of Investigation or ATF and these other acronyms) then if you have 25 years of service, then you have access to penalty free distributions from Thrift Savings Plan.
And that wasn't the case before, it used to be tied to 55 and then I think a recent law changed it to 50.
Tommy Blackburn: That's correct.
John Mason: If you were 50 and you separated and retired. And it was weird because there was one definition for the retirement system. So, you could retire under first special with 25 years of service in any age, but if you are under age 50, you couldn't get penalty free distributions from your TSP.
And it's interesting because, John, I know you and I worked a case where we were thinking we were going to have to do some fancy what's called 72(t), try to set up distributions from an IRA.
Well, this is potentially I would say a game changer for many of these public safety officers, these first special people because now, you can retire at 25 and any age and your TSPs liquid.
John Mason: Makes a big difference. And I'm not an expert on 72(t), but I think some of the 72(t) rules also changed and became more relaxed under SECURE 2.0.
So, if you are that person 25 years and any age law enforcement and you were delaying retirement for all of these reasons, it may behoove you to give us a call or somebody like us and see if it now, makes sense for you to reconsider maybe that earlier retirement.
And just one other nugget here, remember if you are retiring under FER special, you can retire and make unlimited income until MRA. At MRA, all of a sudden, now, that FERS annuity supplement's going to be income tested.
So, just one of those little nuances that as retired public safety officer, you've got a little bit different as well as different COLA rules than your counterparts.
Michael Mason: Kind of back to Ben's statement maybe 15, 20 minutes ago, thank Congress and all these leaders because how do you do this on your own? We're going to do this episode sometime in the future. It's like, “I can do this, I can be a rocket scientist by day and a financial planner by night.”
You just can't keep all those rules. People that do it for a living don't work hard enough to keep all these rules. So, it was really good statement, Ben.
John Mason: Maybe one last big thing to hit on, and there's probably a lot more we could, is a big change as it relates to 529s.
Tommy Blackburn: Yeah, I knew that you would want to hit on that, I think we should definitely cover it.
John Mason: I like that one. And then maybe just because Ben touched on it earlier, maybe just a few statements on what wasn't included in SECURE 2.0 and what that means for our clients and for those listening to the podcast.
So, I'm a big fan of this next thing, Mike, and I think all of us are. Is that unused 529 contributions or balances will now, be eligible to transfer to 529s or Roth IRAs, I mean.
So, unused 529 balances will be able to transfer to Roth IRAs if you satisfy some of these rules. Like you can't transfer anything that's been contributed in the last five years. The account had to be like 15 years old. I believe the beneficiary of the 529, the funds have to go from that person's 529 into a Roth IRA for the same beneficiary.
But basically, it's like, yes, save for your kids college, save for your grandkids college and if you don't need it, there's a bailout provision up to 35,000 where we can get those assets growing tax free in a Roth.
Tommy Blackburn: I agree. I think it's awesome for encouraging people to utilize these 529 accounts and take some of the sting in the fear off of, “Well, what if they don't go to college or what if there's leftover funds?”
Well, we can roll it into a Roth, we've got some options so that we don't lose all the tax favorability of this. I don't know if you mentioned it, John, but one is there's a lifetime limit. I think it's per beneficiary.
So, these rules still have to be really ironed out. This is what we're gleaning, it's a lifetime limit of 35,000. So, after the 529 has been used, hasn't been used up to 35,000 could go to your son or your grandson for example.
Ben Raikes: And, John, you mentioned the 15 years. I think what that also says to me is not only do you have some more options on the back end of what can we do with extra funds left over, but on the front end, let's go ahead and open up those accounts even if you're on the fence.
M aybe we just put a $100 in them, but go ahead and get that 15-year clock started. There's so many people that start thinking about 529s when their kids are in high school. That's going to be a long time until you can do that rollover if you have to wait another 15 years. Go ahead and get that clock started.
Michael Mason: So, guys, thank you and I don't mind telling the audience that I haven't read that deep into it. So, this is news to me. So, let me give you an example.
I've got a client with 50,000 and a 529 for her son. 25,000 is cost based, 25,000 is gain. The Roth IRA, which you've just told me needs to go to the son. She can't make it a Roth IRA, right? Because son's the beneficiary.
Tommy Blackburn: Well, here's the thing that's unclear is can you change the beneficiary now to back to yourself, for example, make yourself the beneficiary, roll it to your Roth IRA? I think it appears it reads that way. However, I think most people don't believe that was Congress's intent.
So, I think your original example of going to the son is the one we should stick with until we have clearer guidance.
Michael Mason: And as we go down this path … and let's just say it was 35 exactly, 17,5 and 17,5. 17,5 a basis, 17,5 of gain, all 35 goes to the son and it's all now, growing tax free in the Roth. That's a huge benefit, folks.
John Mason: And there's no, if I understand correctly, you don't have an income threshold. So, to put money into a Roth IRA, typically, that client's son or daughter would have to have earned income to be able to do Roth IRA contributions. My understanding is that to get money from the 529 to the Roth, there is no earned income pathway, but there is a limit on those annual transfers.
Tommy Blackburn: Right. So, you are limited to, let's call it 7,000 for easy math. 7,000 a year is what you could do to an IRA or Roth IRA. So, that's what you could transfer out of that 35,000 into that beneficiary per year.
So, it might take you a few years to use that whole 35,000, but at least you have a pathway now, to do something productive with those funds.
John Mason: So, what wasn't in SECURE 2.0, number one, was the elimination of the backdoor Roth. And the backdoor Roth was something that we've loved, Mike, since 2010. And for our audience, what this means is no closed loophole on the Voluntary Contribution Plan.
Michael Mason: CSRS Voluntary Contribution Plan. And if your CSRS, you're retiring soon. If you're still CSRS, you're the dinosaur, you're about to be extinct as an active CSRS. So, you can still do the biggest backdoor funding of a Roth IRA called the CSRS VCP, Voluntary Contribution Plan.
John Mason: So, us around the table, we do 6,500 or 7,500 backdoor Roth every year. CSRS and active CSRS offset are able to put 10% of their lifetime earnings, Mike, into VCP, which could be a 100, 200, 300,000 or more.
And the next day, transfer it directly to a Roth. So, it would take me decades to do a $300,000 transfer and these folks can do it in a single day.
Michael Mason: Well, let's Fauci-ize this. Dr. Fauci, the CSRS, he was at least hired CSRS, we don't know if he retired that way. $450,000 was his final compensation. We know he had a bunch of money because of all the TV shows that he did. He could do — it would've easily been a million after tax wash it into the VCP. And he probably didn't even know it.
John Mason: And so, there was no elimination of the backdoor Roth, thus no elimination of the mega backdoor Roth or the mega mega called VCP to Roth IRA. So, that was big, Tommy. What else didn't make it done?
Tommy Blackburn: I think those are the main ones that I was thinking of. And so, the mega backdoor Roth for the private sector would be like your after-tax contributions to your 401(k). It's not going to be as big as the mega mega VCP, but you still could be talking 30, 40,000 a year extra that could then roll into a Roth. So, that was nice to see that QCDs are still saying at 70 ½. John, just wanted to let you know.
And I didn't know this, I was checking it as you were saying it and because this is a new law, we're all digesting this, just going through some of the materials we have around the table.
It looks like on that 529 transfer the beneficiary is supposed to have compensation as well. At least that's what I'm reading here.
So, again, folks, this is hot off the press, we're still digesting and learning the ins and outs of this. So, it's one little minor correction, just want to make sure everybody has out there. But I think the backdoor Roth, mega backdoor is still being open. That's huge.
John Mason: Yeah, and I guess, staying on the Roth conversion, we don't have any income limitations on who can do Roth conversions, which I think that was something that had been kicked around quite a bit, was highly compensated. People wouldn't be able to do conversions and that didn't make right.
Tommy Blackburn: That wasn't in Congress' favor. They want to balance the budget, they want those highly compensated to do conversions.
John Mason: That's right. Well, folks, this has been another episode of the Federal Employee Financial Planning Podcast. Thank you to my co-hosts. What an awesome show talking about SECURE 2.0.
We'll have more to follow, more guidance coming sometime in the next 1 to 15 years on all the changes that Congress just made to your tax plan. We're Mason & Associates. masonllc.net, mason llc.net. Thank you. We'll see you next time.
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