0:02 hello and welcome to people making money one of the way to wow shows I'm your host Kevin bamel and normally we're here at 10:00 a.m. Pacific time but uh due to uh scheduling conflict I'm broadcasting early today it's 9:00 am here on the West Coast and of course that makes it noon on the East Coast hopefully you're able to join me in any in any event and uh we talk about uh how to gain Business and Professional success and build wealth so all of those it's a fairly uh broad-based topic uh hopefully one that
0:40 has helped you along your path to success so today I'm going to talk about um changes in retirement account um legislation or rules I should say and um um excuse me about uh I don't know week a half ago or so I I read an article in the Wall Street Journal by a writer named Leonard Sloan um I thought I would mention his name because it was very well done um for for those of you who are not Wall Street Journal subscribers
1:15 like me well so all I can say is uh it's it's a well-written newspaper um especially if if you're interested in in you know the business world and and in professional success and and in what's happening with the the economy so um I I I tend to read the business section more thoroughly than the news section um and it really keeps me up to date on various industries by the way I have no interest in the Wall Street Journal or its parent company or anything I'm just a a long
1:50 long time subscriber to it and uh so I I thought I would mention that and also Mr Sloan who who wrote this article and he's one of of many excellent writers uh who chime in on on all kinds of topics relevant to to our lives so um the um about um a year and a half ago uh Congress passed something called the secure 2.0 act and it made a number of changes to how retirement
2:25 accounts work uh first of all and I'm not going to talk about this this is kind of a different subject and and one that candidly I I don't have a lot of familiarity with but it created a number of incentives especially for small companies to create retirement plans for a1k plans for their employees and and those plans include things like um tax credits or or um rebates for things like uh the fees for um for maintaining those
3:04 plans um they I think there's some tax credits for some for Pro for offering matching funds to your employees now they they don't go on forever I think they're I think they they're they go for three years as I recall um but if you're a if you have a small company without a pension plan or even if you do have a pension plan um I I encourage you to to get in touch with um either your plan operator if it's an existing plan or your your your plan you know domicile or someone who can help
3:40 you um look at creating a plan because these these tax incentives are are quite generous and look these days where um unless you work for a government entity or possibly a union um where you might still have a defined benefit pension really the future of retirement savings is in defined contribution savings IR res 401ks Etc and so you know having that benefit for your employee for your employees as well as for yourself um Can
4:17 can give could could potentially give you a Competitive Edge so I I know I'm I'm looking at a plan for uh one of my clients and um I think um we're you know we're going to move move forward with that so it's it's been an interesting process um you know learning about these um but the the rules I'm going to talk about really relate more to us as individuals some of the things that we might want to take a look at in our own retirement savings how we handle it how how um both in the accumulation as well
4:55 as in the um I don't know dissipation stage of use stage whatever you want to call it and I'm I'm just going to go through a few of them so you can get an idea um some of the change most of the changes are for our benefit um some some you know less so I think I think there there there was probably some sense of tradeoff in okay so these are likely to lead to less tax revenue you know to the IRS um and these other things could
5:30 potentially increase the revenue and so I think there may have been an attempt to make the bill somewhat Revenue neutral although overall I I I haven't seen the projections but overall it sure looks to me like um this is going to decrease uh tax revenue so um first of all I just want to take I've talked about this on a in a previous show and I will look that show up and and put a link to it in the show notes notes for those of you who haven't seen it but there's basically two types of retirement
6:07 Vehicles Each of which have sort of two iterations so there are IRAs and there are 401ks Ira is an individual retirement account a 401k um is is just that it's a 401K retirement plan so um and excuse me generally speaking IRAs are we set them up as individuals 401ks generally speaking are company sponsored plans now there are traditional versions of these and there are what are called Roth versions and
6:42 the main difference between those is a traditional um plan the the contributions to it are made pre-tax meaning before you you pay your taxes and with a Roth uh version there may made after tax so what you're going to see in these rules changes is that the some of the rules um were were changed in in order to really make the the differences
7:17 between the benefits of the traditional and the Roth clearer okay and so the first one I'm going to talk about is rmds required minimum distribution so so when you have a traditional retirement plan IR or 401K because the income was um I'm sorry not because of the income because the contributions were made pre-tax the government has not get what has not gotten not getting getting well the getting is good the government
7:52 has not gotten what it considers to be its fair share you know right it's its tax bite out of the money you you contributed to that traditional plan and so it sets up required minimum distributions that that you have to take which then are taxed when you take those distributions so the government gets like I said what it views as its you know share of taxes on that now with a Roth IRA since those contributions are made
8:27 after tax you've already paid taxes on that that money so it used to be nonetheless that the government required or the the tax code really required minimum distributions but the reality was on a distribution for a Roth IRA so you would have to pay taxes on the gain in uh value of of the account but not on the original principle invested because you already paid taxes on that so that's
9:04 that was the rationale for requiring minimum distributions even on a Roth version of a retirement account now the secure two act has changed that so so there are no required minimum distributions for a Roth type account so on a four a Roth 401k there the rules for that now mirror the rules for a Roth IRA okay and so what this allows you to do is leave your money in longer
9:39 accumulating uh you know additional value and and if you don't need to take distributions to live out of your Roth IRA or your Roth 401k now uh you can build up a larger value and and you're not being forced to take distributions that shrink the size of the accounts so that's that's definitely a benefit now when I was talking about the tax neutrality of of the secure 2 act you can see that if people delay their contributions it also delays potentially
10:15 take I'm sorry if they delay their distributions if if people delay their distributions since they don't not they're not required to make to take mandatory ones now so the part of the distribution that might have been taxed because it represented an increase in value for the account right the government is not going to be collecting that tax um necessarily as soon as it would have under the old rules um that's one of the benefits for for us as as taxpayers and account holders um none
10:50 nonetheless um you know eventually when you take the distributions there there still can be uh you know some kind of of tax on them but at least in the meantime the account can grow with without that reduction okay next is there's something called catchup contributions so for people um over 50 years old or actually age 50 and older they're allowed to make larger contributions than people who are under 50 people who are 50 and older like me right work presumably closer to
11:27 retirement and so we need to be putting away more money in theory although it would have been better for us to put more money away when we were younger because it'll the account would grow better um nonetheless there is now a rule that um for uh taxpayers or plan plan participants in 401ks who are 50 years and older or older and whose annual income exceeds $145,000 um uh wait a minute I lost
12:02 this so um they will have to make their catchup contributions on a Roth basis okay so what does that mean that means if if originally let let's say you've been making catchup contributions on a tra on a traditional basis where you were making those catchup contributions on a pre-tax basis starting in 2026 you will have to make those contributions on a Roth basis because
12:37 your income is $145,000 or or more and and in that way you'll have to pay the taxes on those C catchup contributions upfront rather than you know down the road the way you would with a traditional uh with a traditional 401K right so that's a provision that could potentially in increase your tax burden right and you may say well you know $145,000 wow that you know that person is making a lot of money well certainly in in some locations that would be true but I can tell you here in you know
13:13 Southern California especially on the the you know coastal cities $145,000 income is is is is not enough to to live in most Coastal communities it's you know living is is expensive um you know here in a place like Los Angeles Orange County San Diego San Francisco um and and and other coastal cities including coastal cities on on the East Coast so um this could be you know a a it could be a a burden added burden for what are really after all um
13:51 middle class people but nonetheless so this is one of those things I think they were balancing out okay we may lose Revenue by not requiring um mandatory U or required minimum distributions on excuse me raw 401ks um and one way they're going to make that up is by re requiring catchup distributions for people who are 50 or over and have an income of $145,000 a year or more by making them pay make their contributions on a Roth basis which means they're going to be
14:27 paying their taxes upfront so you can see how there is probably some kind of of balancing act there okay um next if if you're if if you are married and um you have an older and a younger spouse and the younger spouse has an IRA an individual retirement account and the younger spouse pred deases the older spouse it used to be that the older spouse was um required to make uh to
15:05 take um distributions based on the older spouse's age now the older spouse can in essence um treat distributions as if they're being made based on the deceased younger spouse's age okay and and and that can be a benefit because as you get older uh the required minimum distributions get larger because the time that you have to take them in gets shorter okay so if you're given an opportunity to stretch out your required
15:41 minimum distributions number one the money can last longer and number two it allows more opportunity for growth okay so um this can be very important in in having a more sustainable um uh you know retirement uh retirement income so and and you know again this would potentially um tend to um reduce uh you know tax collections um maybe not
16:16 a whole lot it's hard to say um you know and then the bottom line is while these changes are made how they're really going to affect people's behavior I'm not sure it's it's very predictable but but in any event um this this will be a benefit for older taxpayers who um will will benefit by being able to stretch out their their distributions over a longer period of time and potentially get more um growth tax deferred growth in their retirement account and as
16:51 people live longer and longer um this is this can be very important so I know um earlier this year my mother turned 90 you know God bless her and um you know she she's lived much longer than my father my father lived to uh 707 yeah 77 so look she lived all she's already lived another 13 years um than my father did and I'm I'm I'm hoping for my mother's lifespan right um and and uh you know she's she's evidently still going pretty strong so um the ability to
17:30 spread out our retirement distributions uh you know is is is a true benefit um okay next uh the penalty is reduced if you miss taking required minimum distribution so starting last year uh 2023 the penalty for missing a required minimum distribution was reduced from 50% to 25% so let's say you had a $10,000 required minimum distribution
18:07 that you didn't take okay in 2022 the penalty was $5,000 okay in 2023 the penalty was $2500 so half that and if you correct the Mist required minimum distribution within two years the penalty may drop to 10% so let's say you forgot what may maybe you were sick who you know who knows you forgot to take your required
18:42 minimum distribution last year and so you take it this year you might only pay a 10% penalty meaning ,000 which is obviously a huge savings over uh uh uh you know the previous penalty in 200 in 2022 of $5,000 so that's that's a real benefit now obviously you're better off making your required minimum distributions on time and paying zero penalty but you know things happen um like I said we get sick we we forget we
19:17 get you know busy taking care of you know a relative or who knows all these things can happen and if we don't have a financial advisor or an accountant keeping an eye on these things for us which which many of us don't so it can be an easy thing to miss now I do I do recommend by the way that if you have a retirement account from which you're required to take U minimum distributions that you have some sort of reminder to do that I I keep all of my reminders in what's called uh I think
19:52 it's called reminders uh yes it's it's a you know it's an apple program um it's really nice way to organize I've talked about it before but there's lots and lots of apps out there to use to remind us to do things but but nonetheless I think the the important thing is that we schedule and do take those required distributions now again that only applies to a traditional IRA or a traditional 401K because as I mentioned at the beginning Roth IRAs and now Roth 401ks no longer require minimum distrib
20:28 tion so you don't have to worry about that you can just take them as as you need them now by the way if you have an inherited um retirement account those typically also have required minimum distributions okay and that's that's a something that when you inherit that account you really need to look into because even though you're not at retirement age you may be required ired to take distributions from that inherited account so make sure that you
21:05 you check that out and and do the right thing so you don't get hit with penalties okay next um it used to be that if you missed a required minimum distribution um there was no statute of limitations uh for the penalties and in essence could they could go on indefinitely now um the secure two act um interest and penalties for missed rmds have a three-year statute of
21:41 limitations so so if you you know previous like if you missed a a a a required minimum distribution in 2022 you would pay the $5,000 penalty plus interest each year that the distribution was takeen now here in now it's 2024 we'll say so if you do don't take a required minimum distribution this year is if you take it within two years um you'll um you will pay a a 10% penalty let's say
22:16 you take it after two years so you'll pay a 10% penalty plus you know whatever a year plus of interest um if you take it after three years you'll pay uh 25% penalty plus you know two plus years of Interest after year three that's it the penalties I mean the interest doesn't continue to accumulate so the most you'll pay is the 25% penalty plus interest for the three years so again that's a benefit for taxpayers now just like I was saying before obviously you
22:53 don't want to pay penalties in interest for missed required minimum distributions but if you do for whatever you know if if you end up having to do so for whatever reason this at least limits your your damage so that it you know it doesn't keep accumula on and on and on and you know really start defraying um the either the value of the account or at least um your you know other sources of of of of wealth if you will or other sources of savings okay there's also a new statute of limitation on having made
23:31 excess contributions so um right now the maximum contribution that can be made to a retirement account for someone under 50 is $77,000 and for someone 50 and over is $8,000 so let's say you're uh 35 years old and you make a $10,000 contribution you've made a $33,000 excess contribution so you would you would pay a 6% penalty
24:08 on that for having made the higher contribution again plus interest until you fix the problem and that used to just go on essentially until the problem was corrected now there is a six-year statute of limitations so so just you know similar to the issue were just talking about um instead of potentially you know like let's say you made that you know $33,000 excess contribution not realizing you've done it and you know 10 years later um you your financial advisor is is reviewing your account and
24:44 they say hey do you know back 10 years ago you made a $3,000 excess contribution um you know you're you're not allowed to do that you're going to have to pay penalties in interest for you know 10 years okay now the most you can be held responsible for is the penalty plus six years interest so it does uh shrink you know the the the expense of making that kind of mistake okay um next is um there's something called a sep and a simple IRA um these
25:22 are so a seep is a self-employment plan basically and these are are small employer plan I mean these are um retirement plans for small businesses often times they're used by people who are you know so-called solopreneurs right and they'll set up a a SEP IRA or a simple IRA as their retirement plan okay so um it used to be um that um contributions um so uh wait let me sure
25:58 I'm explaining this correctly to you so um so contribution to a seep is made only by your employer and contributions to a simple IRA can be made by both you and your employer so if you're working for a small business the thing is now Roth contributions can be made to those accounts so in addition to making pre-tax contributions you can make post-tax contributions now why would you
26:35 do that well because um it it may just be more beneficial for you overall um to go ahead and pay maybe you're at a a lower tax bracket now then you will be um down the road um when you retire people think of when we retire we're going to be in a lower tax bracket that's not necessarily the case Okay so it can be that right now we're at a lower tax bracket and so we're better off paying the taxes now um than we would be when we retire that's something for you to discuss with your accountant
27:12 or with your financial advisor is it better to to make contributions on a pre- or post tax basis okay and and and analyze that but that's definitely a question you want to ask but now at least with um seps and simple IRAs you have that option as well and then finally um now um under the secure 2 act employers can make uh can make matches on a Roth basis so so again this this all comes down to which is more beneficial for you from a tax standpoint
27:49 making pre-tax contributions or post tax contributions to your retirement account um but it used to be that employers uh had to make um matching contributions on on a pre-tax basis now they can make them on an after tax basis as well and so there's additional flexibility okay and and that gives us more more choices which means that we can better plan based on our current and projected future circumstances so again you can see in
28:27 some of these they're going to decrease potential Revenue um to the government to our benefit in other cases they looks like they'll increase tax revenue to the government which is to our detriment there seems to be a balancing here in the secure two act but overall um it appears to me that um things like penalties and interest for having made mistakes are potentially reduced or at least um C you know there's a statute of limitations now so
29:02 they don't go on forever and ever and ever that's number one and number two there's more flexib we have more flexibility on how to deal with both the accumulation phase of our retirement plans as well as the distribution phase of our retirement plans what does that mean well what it means is we need to get good advice so unless unless you know you as an individual really have a high degree of knowledge in this area I I I recommend you seek out a financial
29:37 advisor and or an accountant who can help you make these decisions okay in many cases that advice will cost you little maybe nothing depending on who who you know who where your account is domiciled so it's you take advantage of you know of that advice now the key thing is to be as open as you can be about your overall financial situation so that your advisors can give you the best advice so you know for example um
30:14 you know tell them what you make in salary and what your deductions are what your expenses are what your plans are so information they need is not just financial information but it's also what kind kind of Life do you want what kind of plans do you have for the future do you want to retire where you're at do you want to move somewhere else are you looking to shrink your your living quarters when you retire are you looking to expand them because you're planning on having the kids and the grandkids or whatever it's going to be all of these things are important factors to examine
30:51 as you do your retirement planning and so the more information you can give your advice ERS the better the advice will potentially be now if you have an advisor who's not asking you a lot of questions okay so then I would encourage you to consider talking to other advisors the the most important quality of an advisor after being you know honest is that they be shall we say curious curious about you your finances your lifestyle what find what kind of
31:29 issues there are for you so that they can be as thorough as possible in in looking at your situation researching options and explaining those to you in the final analysis a financial advisor is really an educator and you'll you'll you'll see if you if you haven't already that quite a number of financial advisers it seems have come from the education world so I have a friend for example long-standing friend was she was a teacher for many many years now she's
32:04 one of the top real estate agents here in the Greater Los Angeles area I'll say her name I'll give her a plug Sarah dempy she's been a guest on my show I think a couple of times and I think one of the benefits of of having Sarah as your agent is she has this educational background so when you're going through the purchase of a home right Sarah can help you understand it and that's important because these are big decisions they can have tremendous uh consequences to to our lives and so we
32:39 want someone who's very focused on making sure that we understand what we're doing so so you know it's it's all good and well these what my my purpose in going through these changes wasn't to bring you up to date on every single thing in the secure two Act because it's much too broad for me to do that what I did is I I hit the highlights on some of the issues that Leonard Sloan raised in his article because I thought he really picked out some important ones but it's all I also did this to stimulate you to
33:15 think about these issues and make sure that if you don't know enough about them yourself either you take steps to learn more about them or find someone who can help you okay even if if you're you know a person of fairly modest means it's still it's still good for you to have a 401k or an IRA especially if your company has one and and offers matching so you can build it up even if you're only putting you know $100 aside a month or something like that that's better than zero
33:50 especially if you're young if you're young 20s 30s and you have an opportunity to put money aside you've got Decades of potential growth ahead of you and so even a small amount can grow quite a bit and and the idea that um you could end up uh you know 30 years from now with you know2 $300,000 you may say well Ah that's that's going to be nothing in that time well I I mean you know two $300,000 in today's dollars it could be you know half a million 750,000 in dollars 20 30 years from now
34:27 just by setting aside maybe a hundred or you know $150 a month or maybe even less than that and building it up periodically start at 50 75 100 whatever you do the sooner you start the better it will be for you over the long term because the compounding effect of growth F from Investments is incredibly powerful and it's most powerful over the longest period of time that you can arrange so you don't have to um you know become an expert in these
35:02 things there are you know a huge number of people around who will help you with them there are some that they do charge you a fee there are others that because they sell products and they get a commission on the products um they they won't charge you a fee because in essence the product promoter is paying them there are pluses and minuses to both people who you know charge the customer the client say well that way I'm I'm neutral in terms of which product I recommend to you and that's certainly the case uh that's generally the case I
35:38 should say for people who um are being getting a commission from the from the product promoter still just because they're getting a commission doesn't mean you're getting biased advice it depends on the um the the the ethics of of the person number one one and number two if you can't afford to to pay fees to to an advisor so then you know at least this way you're getting some some Financial advice and you're getting going and and and and you're not having
36:13 to pay for it so just you know as I as I said a few minutes ago the number one quality that that I recommend you look for in a financial advisor is honesty honesty honesty honesty so you know talk to people ask them who who they work with what they think about the person so honesty number one and ability to help you learn number two because as you accumulate wealth right the questions get more complex so you want your
36:48 knowledge to build up along with the money that you're accumulating all right so kind of a shorter show today um but um that is our show and tomorrow at 5:00 p.m. Pacific time is my newest show jigger's place it's an opportunity for us to relax as we head into the end of the week and talk about all the things in life besides Business and Professional success so my other three shows are all
37:24 focused on on you know business and and wealth building and and and those kinds of topics at in jigger's place I make a cocktail we sit back we relax and we talk about bigger issues potentially more important issues so tomorrow at 5: PM Pacific I'm going to be talking about what are the qualities that exemplify a man so I think this gets bandied about a lot and and I I you know I I I feel compelled to weigh in this it's it's something that I find myself talking to
38:00 people about quite often and and I think it's something we as a society really need to think about so so do join me for a cocktail and a chat uh tomorrow again 5:00 pm Pacific Time 800 PM Eastern and of course an hour in for Central and um mountain time so thank you very much for joining me today wishing you a oh and and of course course I I should mention before as always you know starting Monday at 10: a.m. next week is is uh
38:35 trust and Estates weekly Tuesday at 10 AM next week is business lessons from the military and then of course seven days from today is the next edition of people making money so again thank you so much for joining me wishing you a wonderful rest of the day and signing off Marie darling you are my bell courage at all times my friend