This week on Retire with Balance, host Kristen Oakley and financial planner Rob Auclair tackle the complexities of retirement planning, with a special focus on RMDs and the implications of the Secure 2.0 Act. Whether you’re a seasoned saver or just starting, this episode is packed with essential insights to help you navigate the ever-changing retirement landscape.
Topics Discussed:
- Secure 2.0 Act overview
- Required Minimum Distributions (RMDs)
- Tax planning for retirement
- Leveraging Secure 2.0 Act provisions
- Importance of consulting a financial or tax professional
Transcript:
Kristen Oakley:
Hello Rhode Island and welcome to this week’s edition of Retire With Balance, the show that helps take the complexity out of your retirement planning. I’m your host, Kristen Oakley, and joining me in the studio is Rob Auclair. He is a financial planner with Balanced Wealth Management based right here in Rhode Island. Rob, my friend, what’s on your mind this week?
Rob Auclair:
I don’t know. Let’s see. Cold weather’s here, so it gets really, really cold and I don’t know, it gets dark early, right? All those things getting, but it gives you more time to think about this stuff.
Kristen Oakley:
Exactly, which Is so important.
Rob Auclair:
Instead of having all the fun that we have in the summer.
Kristen Oakley:
Well, I know we like to have a lot of fun on the show, but also talk about really important topics that affect all of you who are at home watching. And this week we have a very important subject to talk about that affects all of us in retirement and with our retirement planning. And to set up the context, I want to share a quick story with you. So I was talking with a dear friend of mine about being on the show and she was asking me some questions. And this often happens, right? People find out what I’m doing and they want to ask questions about their own financial situation. And she’s 65, she’s been a really great saver, working for a long time for the same company, putting a lot of money away in her 401k, her husband is 70, and I happen to mention the acronym RMD.
I say, what you really need to start thinking about is planning for your RMDs. And they have already been working with another financial planner for many years from a big corporate name that we would all recognize that name that’s on every street corner, right? And so I said this RMD word, and they looked at me and said, “What is that? We’ve never heard of this before.” And it turns out that their planner has yet to even bring this up with them or have a conversation with them about RMDs, which of course stands for required minimum distributions. So we’re going to unpack all of that today because it’s really important to understand how RMDs work because if you get it wrong, not only could you have to pay the tax that you owe, but additional penalties from the IRS and we don’t want you to fall into that trap. So we’re going to talk about that today along with some changes that were recently enacted with the Secure 2.0 Act. But let’s start with that. A lot of folks might have heard of the Secure 2.0 Act that was put into effect in the beginning of 2023, but what is it that people need to understand about this new law that was passed and how it affects them?
Rob Auclair:
So there’s actually a hundred provisions in it, and out of those hundred we can only, as you say, unpack a few of them, but there are so many, and really what the incentive is for this is for Americans to save more money or to incentivize them to save more money. So it’s either saying you can save more in certain areas or it’s just going to make it easier for them. And so there’s a lot of good things in there that I think that people need to be aware of. And one of the things you say is the required minimum distribution. So we have a couple top things on one of our lists here for the Secure Act 2.0. And inside this list, one of the things you mentioned is required minimum distribution, and we’re going to get into that in the next segment. But all that is saying at some point in your 401k or IRAs, you are going to have to take a required minimum distribution.
And I had a client say to me from their required, can I pick whatever amount? No, it’s calculated. The one rule that did change is you used to have to take it at 70 and a half, 70.5, now it’s 73, and in 2033 it’ll be 75. Some other pieces in there, there’s some catch up provisions. So if you’re over the age of 60, you can now contribute not an extra either 5,000 or 5,500, some plans, but another $10,000 in some of the plans. The 529 plan, which is used for education – some people would say, well, I might not use the money for education, and in that case, maybe I just won’t put it in there. Now, this allows you to put up to 35,000 into a 529 plan. If you don’t use it for education or don’t transfer it to someone else to use for education, you can convert it to a Roth IRA.
Couple other ones in there – Retirement plans now allow for Roth contributions. So before it used to be just 401ks. Now it’s 401ks, 403bs. And again, these are eventual changes. This one doesn’t happen right away. And the last one on there is some auto movement. So auto portability, and we can come off the screen there, but what auto portability means is when you leave an employer and you go to another one, we can just automatically, or they can just automatically roll it over. A lot of times you have to wait, do specific transfer of paperwork. You can’t always do it to the new plan because that new plan might not accept the distribution or the contribution. So it can be really, really confusing on that end. But some of the best parts of this, and we’re doing this right now, is some small businesses that don’t have retirement plans are going to eventually have to have retirement plans for their employees, and they do incentivize.
So we’re working with a plan right now where up to a thousand dollars of what you match, you’re going to get in a credit year one. $750 year two, $500, year three. That along with if you just are opening a new plan, you could get up to $3,000 more just for some administrative expenses. So those incentivize us to do it, but a lot of these plans are going to be, you’re automatically going to be put in the plan, so you’re not going to opt in any longer. You’ll have to opt out.
So what they’re really saying is people don’t have these retirement plans because they just didn’t answer an email. So now they’re like, you’re in it. You need to answer an email if you don’t want to be in it. So you need to kind of be aware of those things sometimes. I mean, we all talk about savings, but there’s certain circumstances where you might not be able to participate. It’s going to bring your income down. And so I think make sure that you understand that’s on its way and its core reason, I guess behind it to the American people is really to have you save more money and to incentivize you.
Kristen Oakley:
And I’ve heard a rumor that a lot of this is happening because of social security, potentially the insolvency that’s pending. It’s almost like they’re suggesting highly to folks. We need to be retiring, investing more aggressively for our own retirement, right?
Rob Auclair:
Between that and just people living a lot longer and medicine extending lifespans, that’s a worry for the government. How much are we going to be able to provide? Social security is a whole different discussion that we can have. Is it going to be here? What year does it last to? When’s it going to be fully funded? But I think what people really need to understand is you need to be contributing to your 401k, especially if you can. You need to increase it every year, minimum every year. I always tell people, hey, if you do your tax return, go into your 401k and at least increase it 1%. And there are now a lot of plans that say, check the box here and on your birthday we’ll increase it by 1% and we’ll give you an email to let you know. Those are great things. I mean, think about how simple that is. And again, what you need to think about is how does it affect the dollars in my pocket because I’m saving on taxes if it’s a traditional 401k, right? You
Kristen Oakley:
Take the tax deduction in the year that you make the contribution,
Rob Auclair:
Right? Yeah. So for every dollar you save, maybe it’s costing you 80 cents. So I think a lot of these things are, we need to, as a country, probably spend a lot less and save a little bit more. And I’m guilty of that too. We always want everything like yesterday, and these are ways that we need to start balancing things out. Yes, still enjoy, but pay yourself first. My dad would say that over and over. Pay yourself first.
Kristen Oakley:
Well, and what’s so interesting is back when these plans were first enacted, really the retirement burden was placed on our shoulders because I know Rhode Island’s special that a lot of people do have the state pension or access to a pension plan, but as a whole across the country, pensions have really gone away. And now it’s up to us to know how to be saving, how to be investing, how to plan for our own retirement. And it was like this was thrust on us with no rule book or instruction manual, but this is where you come in. This is your expertise, this is what you help people with –
Rob Auclair:
That’s why we have a job.
Kristen Oakley:
Day in and day out.
Rob Auclair:
So yeah, I do think it is super important that people realize that. And when it comes to this stuff, that is what we do is we actually are able to help people like you that say, well, I have no idea how to get into my 401k plan and check the right box. That’s something we can help you out with because we do it every day and we’re familiar with a lot of the different portals. We’ll get your login, see what you have, oh, check that box for auto rebalance, check that box for increase. And when you come in, like we said, we want to take a full picture of where you’re at. We see your balance sheet. We take a look at all the different investments that are inside that plan to make sure, hey, if you’re putting that money in, let’s make sure you’re putting it in the right spot.
And also if you can help contribute every year a little bit more, that’s going to help. And then finally, is what I’m putting in going to last, and that’s how we want to put it all together in that last piece. So when we kind of bring to you that financial plan, you’re able to see that. So that kind of encompasses a lot of stuff for us to get to know each other. It’s to get your comfort level with us to ask lots of questions, but really to bring your anxiety maybe from here to here, and then it’s your decision to say, I need a little bit more help, and I’ll engage with Balanced Wealth at that point.
Kristen Oakley:
Wonderful. Rob, thank you so much to our viewers at home. That number to call to get your own complimentary written financial plan is there on the bottom of your screen. Simply dial 888-398-2001. You’re also welcome to take out your smartphone. You can open up that camera app, just point scan and click that QR code down in the bottom right-hand corner of your screen that will take you over to a landing page, ask you a few short, simple questions, and then a member of the team from Balanced Wealth Management will reach out to you to schedule that time for you to come in and receive your complimentary written plan that way as well. When we come back, Rob’s going to go into more detail about these required minimum distributions. What do you need to know about them to make sure that you avoid paying an unnecessary penalty? Stay with us more after this
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Kristen Oakley:
Welcome back, Rhode Island. You’re watching Retire With Balance with Rob Auclair, financial planner at Balanced Wealth Management. I’m your host, Kristen Oakley. We are talking today about required minimum distributions and a lot of the changes that have come with the Secure 2.0 Act and how they affect your retirement. So Rob, let’s go into a little more depth about RMDs. These required minimum distributions. The calculation can be very confusing. I’ve heard nightmarish stories of people trying to do these calculations on their own, getting them wrong, and then being hit with that excess tax of 25% penalty on top of that.
Rob Auclair:
And that’s the big thing, right? You have your federal taxes, your state taxes, and 25% penalty. We could be talking upwards of losing 50% of your money,
Kristen Oakley:
Which is really scary to think about. And for those that may not be aware, it used to be 50% was the penalty. Secure 2.0 Act change it to 25%, how nice of them to do.
Rob Auclair:
Right? We don’t want to motivate people though to take out,
Kristen Oakley:
So yes. So start at the beginning for someone this might, my friends that I was talking to, this was completely new to them, so talk about what they are.
Rob Auclair:
Yeah, so I think before we get to the calculation, you’re absolutely right. I always take it for granted. It’s a simple calculation, but the reason why we have required minimum distributions is this, is that it is going to be on accounts that you’ve already put dollars in, but you’ve gotten a tax advantage. So you put money into a 401k plan, you don’t pay taxes on it, you get a tax deduction, it grows tax deferred. If the government gives you a break upfront, we know it happens on the backside, you don’t get the break. So at that point, you have to take the money out. If you’re not taking money out or not taking enough money out, the government says, listen, we want our tax dollars back, and we don’t want to wait until you pass away to get them. So what they said is when you go to pull ’em out, now you have to start pulling them out at age 72. The Secure Act changed it from 70.5 to now 72.
Kristen Oakley:
And now 73.
Rob Auclair:
And now 73, correct. And then it’s going up to 75 in the year. 2033. Yeah. Alright, so let’s take a look. I want to go through the calculation because it can be something that is not as daunting as one might expect. Here are the factors. One would be you want to take the value of the account on 12/31 from the year before. So let’s say in this instance that Mr. Smith, let’s say on 12/31, his IRA was worth $958,405. We’ve got that number. We then divide that by an IRS life expectancy factor. So Mr. Smith, let’s say is, and by the way, the example says Gloria, I couldn’t read it, but I’m like, oh, Mr. Smith, right? Yeah. Gloria Smith. So at 74 years old, her factor is 23.8. So it simply comes down to 958, which was the value last year on December 31st, divided by that factor of 23.8, she has to take $40,269 out.
Kristen Oakley:
Just for that year.
Rob Auclair:
Just for that year. And so we can come back, I had a client that said, oh, as long as I take something, it’s fine. I don’t have to do the, I can tell them what I want. No, this the calculation. And if we think about it based upon that calculation in good times, hopefully when you get more good than bad, the account’s going to increase, but then the factor for your life expectancy goes down.
Kristen Oakley:
So the calculation actually changes every single year because guess what? Our life expectancy is getting shorter every single year, and nothing’s worse than thinking you’re doing it right, but doing the wrong calculation because you used the wrong life expectancy factor and bam, you’re going to be hit with that penalty.
Rob Auclair:
And like I said, why the government actually does this is they want to collect their taxes. A few things that come up is someone says, well, what if I have three different IRAs? Do I have to do these for myself? Each one of the three? Yes, but you can aggregate. So there are some exceptions to the rules on certain government plans that you can’t aggregate and you have to take it from each account. But if you had three IRAs, and let’s say one said you had to take 10,000, one 20 and one 30 for a total of 60,000, you could take it all from one. And so you can aggregate it that way. Now, for simplicity and accounting purposes, you might want to actually consolidate those IRAs anyway. The other thing is, I have to say is that most of the companies out there, so whether you have it at a Fidelity, a Schwab, a TD Ameritrade, if you’re at one of those brokers, they’re going to send you a letter every year and they’re going to remind you and say, your RMD for this year is this.
My recommendation is set that up early, especially that first year, set it up. If you set it up, you can choose to have it done one time every month, every other month, whatever you want. And then you kind of can set it and say, all right, I want to get this check every single month, or, Hey, I’ll take it on December 1st of every year. Make sure you withhold your taxes. But at that point, at least if you initiate it in year one, it’s ready to go. And you can always make changes after that, and you can take it in different ones. The calculation will be different every year, but the mode of payment can stay the same or change.
Kristen Oakley:
Well, and there can be so many ways that folks can accidentally do it wrong. To your point, if you have multiple IRAs, you may, or different accounts, you may be able to aggregate, but you also said some accounts don’t allow you to do that, and nothing’s worse than taking it from the wrong account, still taking the right amount, but if you take it from the wrong place, then you’re hit with the penalty again. So I always say with RMDs, don’t try this at home. Right? Don’t try to do it on your own. This is why people want to consult an expert to make sure that they’re getting it right.
Rob Auclair:
No, I agree. On the, I talk about beneficiary IRAs, so we see more and more of those in-house and one of the 2.0 provisions for the Secure Act has changed things a little bit. So I have a nephew that lost his dad, my brother-in-law, at a very young age. And so at age 18, he inherited his 401ks and his IRAs, and he had to take that for his life expectancy, which from age 18 to whenever was very long. So he had to at least take a little bit every single time, could take bigger amounts if he want, but he at least had to get that minimal amount out.
Kristen Oakley:
Right.
Rob Auclair:
The Secure 2.0 ACT says you need to take it within 10 years. So his circumstance, if he had a million dollars, he’s going to have to take out like a hundred thousand each year or all at once, as long as you get it out in that 10 year period. What that means is you have to do a lot of tax planning. That is something that we have recently had quite a bit. And what we say to, if you’re watching today and you were to inherit an IRA, that is something we’d be happy to help you out along with doing the balance sheet, getting that written financial plan together, going through your portfolio, taking a snapshot and answering all those questions that go along with, should I take it all at once and just get it over with? Should I spread it over time? And we want to kind of, every situation’s a little different, so it’s very unique.
Kristen Oakley:
For sure. Well, in tax planning, the person who wants to leave the money to, let’s say a child, a lot of folks don’t realize that now with this change of having to take that out within 10 years, that can have negative tax consequences for the child who’s inheriting that. A lot of times, folks who are inheriting those IRAs are in their higher working years, which means if they have to now take this money out, that’s going to bump them up into a higher tax bracket. We call it the ticking tax time bomb.
Rob Auclair:
Right? Yeah. You and I were talking earlier and you said it right? I mean, everything triggers something else. So it’s not as easy as, oh, I understand it, and that’s what it affects. No, it affects things as they go further on down the line.
Kristen Oakley:
And again, that tax planning is something that sets you and the team of Balanced Wealth Management apart. So talk about, again, what you’re able to do for folks specifically in this tax planning realm.
Rob Auclair:
Yeah, so I’ll say this quickly, which we hadn’t talked about this before, but we owned a tax practice for about 10 years, which makes it very, very helpful for us to, number one, understand your tax situation, but number two, also be able to communicate with your CPA that you work with. And what they like is that, yes, we’re financial advisors, but we understand the tax side of it. And so when you do kind of engage with us and come in and get that written financial plan, again, we will not only create that balance sheet for you, take a look at your investments and your financial plan, but we’ll also make sure that we’re cognizant of your tax bracket, where you’re at, and what you currently might be looking at and ways in which you can save some money.
Kristen Oakley:
Wonderful. Well, Rob, thank you so much to our viewers at home. If any of this is resonating with you, maybe you’re thinking, gosh, I’ve been working with another advisor, but he’s not or she’s not having these kinds of conversations with me, it’s time to get a second opinion. So we encourage you, pick up the phone, call that number on the bottom of the screen, 888-398-2001. Again, this is for no cost, no charge, no obligation. Rob and the team of Balanced Wealth Management would love to sit down and meet with you and be able to deliver you your own complimentary written financial plan. More on today’s episode right after this.
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Kristen Oakley:
Welcome back to Retire With Balance. I’m Kristin Oakley here with Rob Auclair from Balanced Wealth Management. We are talking today about taxation in retirement. We’ve covered RMDs, those required minimum distributions, some of the changes from the Secure 2.0 act, and you mentioned this earlier, and you know that I say this all the time. How you make a decision in one area of your financial life does and will affect all the others. This is why you have to look at things from a comprehensive holistic perspective. So specifically with taxation in retirement, a lot of folks were led to believe that they were going to be in a lower tax bracket in retirement. That’s not always the case these days. So what are some things that you’re able to help folks navigate through with Social Security, Medicare? I mean, there’s so much that taxes can affect in retirement. Talk about that.
Rob Auclair:
The first thing that we do is we make sure we get a copy of tax returns for all of our clients, and we want to make sure we know exactly where they are at any given point in time. We can actually help make the right decision from the perspective of their lifestyle to taxes. And so when we look at taking distributions during retirement, what we need to look at is the different tax brackets. So you’ve got social security, you’ve got pensions, you could have rental income, whatever it may be. You’ve got all these sources of income, and then you’re pulling from a lot of times an IRA. And when you pull from an IRA, that’s also taxable. So let’s take a look at kind of our tax pyramid, and when we look at that, just get a sense of from an income standpoint, what you’re taxed on.
So this is very general. There are very precise numbers, but the first $10,000, or let’s call it if you’re married, filing together on the right side, your first $22,000 are taxed at 10%. That means that first $22,000, the tax is 2200, we then move up, the next portion of 22,000 is taxed at 12%. Then we get to the next portion of 89,000, attacks at 22%. So as you can see, the more you add and layer into this, those dollars in each one of those bands are actually looking at you’re going to pay more and more taxes. So if we can come back off of that, and what we’re going to see is that everything affects everything. So I really can’t get away, and it’s a whole nother discussion to say, social security, when is it taxable? Pretty much most of the time if you’re earning enough income, it’s going to be taxable.
People get confused between that. And if I’m going to get less than my stated social security. And number two, you’ve got your pension in most cases always taxable. And then you’ve got the shortfall, and that’s coming from taking these withdrawals from your IRA. And when we have those, we need to make sure we don’t hit those different tax breaks. So if you’re staying in that 12% tax bracket, and then all of a sudden you’re said, I need a $10,000 withdrawal to pay for this, and it’s December, and you could throw that into next year and save that 10% and try to stay under that bracket. So you want to be cognizant of the timing of the withdrawals and what brackets you’re at.
Kristen Oakley:
Right? So you don’t unknowingly end up paying more tax than you have to, right? Yeah, that’s what we’re we’re about, tax elimination as much as possible. Right. Yeah. Well, and I know IRMA is another thing folks run into, it stands for income related monthly adjustment amount, and it relates to Medicare. So talk about that real quick.
Rob Auclair:
First of all, I knew the acronym and I actually knew that, but it was a tongue twister, so thank you. Thank you for saying I didn’t have to say it. So again, I’ll give you a real life example here, and we don’t even have to describe. This is exactly what happened. We had a client that came to us after she had done this. So she actually had a spouse who passed away. Her husband passed away, and she had enough money to live on. She had gone through her whole plan, and then she decided that she wanted to pay off her daughter’s mortgage, and it was a pretty substantial amount of money. And she said, well, I take that out, I’ll still be fine. She took out that whole amount added, let’s call it $75,000 to her income. She then went to a higher bracket, never looked at it. And she had told us, said I was a upset when that happened. But then a couple years went by, a year and a half, two years, and all of a sudden, her Medicare expenses went way up. And so what happens is as your income goes up, your Medicare expenses two years delayed go up. She had no idea. And that just –
Kristen Oakley:
Because there’s a two year look back to that, right?
Rob Auclair:
Yeah. So she’s like, oh, those are the taxes. That was terrible, but hey, it still lived there. And two years later now, she was paying for it by paying a substantially higher amount for Medicare. And so that is something that is very, very important to do. And so again, as we offer this written financial plan to you, we include that tax portion to you. So we go through and we take a look at your balance sheet, hold that up to you. We go through each of your investments, we kind of scrub that, make sure you’re allocated appropriately to where you’re at. And number three, kind of put the financial plan together. What’s coming in and what’s going to go out, and is your money going to last? And more importantly, telling you where that should come from, and are there investment vehicles for you today that you can find to put that money to get even more protection to do that. So I think for our viewers, that’s an important piece that they need to understand is we need to kind of take a look at what you have and if you have these other questions where, Hey, I am going to take this big withdrawal out, we can answer that upfront before you even become a client, or you can answer that.
Kristen Oakley:
That’s so helpful. I always say that when it comes to taxes, I think a lot of folks are playing a game that they don’t the rules to or know the rule book to. And that can be really detrimental. I mean, I’ve heard many stories of that where someone sold a house or did something. Next thing they know, their Medicare premiums go way up. They have no idea why, because they weren’t aware of the tax implications of how they made a decision in that area of their financial life. And so I love that you and the team of Balanced Wealth committed to engaging in that strategic tax planning, and that really sets you apart in this space.
Rob Auclair:
Yeah, thanks. We think so. And we hope that our viewers take a chance to get to know us.
Kristen Oakley:
Absolutely. For sure. Well, if someone’s watching today and they’re going, oh my gosh, I’ve never heard this stuff before. I need some help. What would you want to say to them?
Rob Auclair:
As I said before, call, right? But here’s the thing. We’ll help you understand what you have, and that’s really, really the most important thing. Tell us what you have. We can dissect it and get it back to you in a very understandable way.
Kristen Oakley:
Wonderful. Well, Rob, thank you so much. Thank you for your heart and your commitment to serve the wonderful community of Rhode Island. And to you, the viewers, we appreciate you watching. Again, we encourage you. Call that number on the bottom of the screen to get your very own complimentary written financial plan. 888-398-2001. We appreciate you being with us, and we look forward to being back with you next week. We love you, Rhode Island. Have a good one.
Balanced Wealth Management is a financial advisory firm that serves pre-retirees based in East Greenwich, Rhode Island. The firm creates and maintains wealth for its clients through long-term effective asset management. Their advisors aim to build client relationships based on trust, knowledgeable professional advice, continual communication, and swift personal service. They can be reached at (401) 398-2000, via email at info@balancedwealth.com, or on the web at www.balancedwealth.com.The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. While our best intentions are to provide accurate and timely information, you should always consult with retirement, tax, and legal professionals prior to taking any action.