TRANSCRIPT – Tackling Your Family’s Year End Financial Plan Part 2

By Hightower Great Lakes on December 28, 2023

Welcome to the Wealth Stream Podcast. The team at Hightower Great Lakes share their insights and passions for empowering their clients to live their best life. In this energetic podcast, we will take you on a journey to help you navigate your financial future, overcome life’s challenges to reach your financial and find the financial clarity you’ve been searching for. Let’s explore the downstream impact of your wealth and what it means to you, your family, and your community, to live greater. Transcript lightly edited for clarity.

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ARIC: Hello and welcome to the Wealth Stream with Tim Scannell from Hightower Great Lakes. Listener, here’s the deal. This is Part 2. If you are a business owner or in love with a business owner (and make sure they know you are) share the last podcast with them because Tim is going to be covering some things today that are part of SECURE Act 2.0 as he’s going to call it and he’s going to introduce this here in a moment.

But the first part of this podcast – the last podcast – was focused on business owners and what’s changing and [there’s] some pretty amazing stuff in that [bill], Tim, some things that were really, really surprising.

TIM: Yeah, when they said they were coming out with this 1.7 trillion budget bill while we were all celebrating the holidays, I thought, huh, 4,000 pages. There’s got to be some crazy stuff in there (and there probably is). But tucked in there was the SECURE Act 2.0 and there are some really nice features/strategies that we will use with our clients as we enter 2023. So, I thought I’d go through that.

ARIC: The last [episode] was focused on business owners and how it’s going to impact businesses. This one is more about individuals and families. This is the perfect coupling because business owners usually have families, and they are individuals as far as I know.

TIM: Exactly. When we work with our individual clients, we always try to focus on what we call enhancing their wealth. It’s a focus on enabling them to more efficiently (or tax efficiently) or more quickly reach their freedom point: the point where they could exit if they want to, retire if they want to and live a less stressful and hopefully a more fulfilling life.

As part of that, we always try to keep current on law/regulatory changes to make sure that if we need to update our strategies that we’re recommending, we do, and this was a really big one.

I talked in the previous podcast Part 1, a little bit about the fact that back in 2019, the SECURE Act was passed and the goal was to provide [new] incentives and expand [existing] incentives to make it so that more people save for retirement. [Congress] tried to do that initially by focusing on some of the features that companies can offer.

But they also expanded some of the things that individuals can do through the SECURE Act 2.0, which is part of this omnibus bill [Congress] just passed. It’s an attempt to enhance or correct some of the things that they thought could improve to help you as the individual retire sooner, retire faster.

I thought I’d focus today on that and like in the last podcast, I stress that when Congress passes laws, they then pass the buck to the IRS and say, please study this and issue guidance. And that can take whew, oftentimes months, sometimes years. So just a note – if you’re interested in finding out more of the details as they’re released by the IRS.

You can follow us in our social media check on our website, but as the IRS issues more specific guidance, we’re definitely going to be getting it out to everybody. but I thought it was some of these changes were so important that I wanted to discuss them generally before the end of the year as people are making their plans for 2023.

ARIC: Yeah. Well, for any of our long-time listeners, they know you are constantly bringing as much updated information as you’ve got. And this is something, this is huge to tackle – 4,000 pages for crying out loud. It’s huge to tackle. So I know you’re just skimming the surface.

But like I said on that last podcast, there were some things that were absolutely shocking to me that I’d never heard of before, which are very interesting and very beneficial for business owners. And I know [that will be the same case] for today. You’ve got things that are going to benefit families. People need to be paying attention to this and following along.

I don’t want to put the onus on the listener. I don’t want you to feel like I’m giving you this guilt trip. But we have to own our own stuff to a certain extent. We bring in a professional to help us refine what we’re doing. At the same time, if we’re not paying attention and have our head in the sand, it doesn’t make much sense.

TIM: Exactly. So, I’ll start with a couple of things. One is going to affect you as you’re changing your job. Aric, if you read about it, you’ll find that people switch jobs more often than they used to.

And when you start a new position – and we’re hiring somebody who’s starting in January. They typically get an option to participate in the 401k and in our plan, we have what they call auto enrollment. Auto enrollment [means] we’re going to automatically enroll you and we’re going to automatically set it up so that 3% of your pay goes into the 401k which we match.

That was optional [before]. We do it, but not all companies do it. And what [Congress] has changed is, going forward it’s going to be required. Ifyou’re changing jobs, one of the things you’ll notice when you get your benefits package is that they’re likely going to auto enroll you. I hope you don’t opt out, but if you do not want to participate, you need opt out. That’s going to be something that’s mandatory and I think it’s good for everyone out there.

ARIC: Yeah. Again, it’s great for folks that are entering the workforce that aren’t paying attention, they’re overwhelmed with their new job, new position, new things to learn – and this can go by the wayside. I love the auto enrollment part.

TIM: Aric, you’re a young guy – but for me, as I’m getting older a lot of my clients are also aging with me. One of the big things we focus a lot of time and energy on with clients is what they call required minimum distributions or required mandatory distributions or otherwise they’re known as RMDs.

For a long time, the year you turned 70 ½ you were required to start making withdrawals from your IRAs. In this SECURE Act in 2019, they shifted that out to 72. Sonow when you’re retiring, a lot of clients will want to take money out of their IRAs, but oftentimes if there’s money like from a sale of a business or other sources (social security, pension, et cetera) they might want to defer withdrawing.

I think this is a way that Congress is saying we’re now going to allow you to kind of defer it a little longer. So currently it’s 72 based on the SECURE Act that was passed in 2019. What the new law states is that it will become age 73 starting in 2022, and then ultimately increases to age 75 in 2033. So over time.

This is a big one because when you work as an employee, as a business owner, there’s not as much tax planning that you can do because you’re getting a W2, you’re getting wages. The way the tax code works right now is that there’s not as many things to deduct. When you retire and all of a sudden you have different sources or different buckets of income like social security, a pension, you’ve accumulated money outside of retirement.

We can do a lot more tax planning with you and we typically like to schedule it out for 5, 10, 12 years. This gives a little more flexibility and I’m pretty excited about it because we have a number of people who can benefit from this one and hopefully reduce long-term taxes for them and their next generation who’s going to receive the money.

ARIC: Yeah. Again, you’ve spoken about that on so many podcasts, generational wealth, generational planning. I don’t know any family member, any patriarch or matriarch that’s sitting back going, eh, I’m going to spend it all. I don’t care. I don’t care about the kids, grandkids, anybody else. There’s usually a component there where they really want to make sure to set their family up correctly.

TIM: Exactly.

ARIC: Yeah, I love that.

TIM: And then the other thing too is oftentimes, I mentioned this in the last podcast, and I’ll work with a couple or work with an individual who will ask me, am I saving enough? How am I doing relative to where I should be?

And what we find, what the industry statistics show is that oftentimes retirement contributions, saving for retirement is what we would call backend loaded. You typically start in your fifties and maybe even into your sixties where you start maxing out the contributions because early in your career, maybe you bought a car, you’re paying off your mortgage, you bought a house/condo, you choose to get married or have kids.

They’re expensive, as everyone knows. You don’t often have the cash flow until maybe in your fifties. One of the changes they’ve made: currently, if you’re 50 or there’s a $6,500 additional contribution you can make. They call it a catch-up and for $3,000, if you have a SIMPLE plan, they’ve increased that to $10,000 and they’re going to start increasing that when you hit age 60 and 63.

And again, the IRS will come up with the guidance specifically on that. Conceptually, they’re bumping up the amount you can backend load, which I think will help a lot of people reach their freedom point or their financial independence faster.

ARIC: Yeah, and of course that’s a lot of planning, right? It’s great to be able to have that catch up opportunity, but #1 – people need to know about it, which is what you’re doing. But #2 – they need to be able to say, okay well, if I have that opportunity, I need to make sure that it’s a priority.

TIM: Exactly. The next one – and we talked about it in the last podcast and I think it’s such a cool, creative idea coming out of coming out of Congress. We talked about it as a way for employers to add this feature where they can basically match student loan payments to attract and keep people.

But I mention this to individuals because if you’re working somewhere where the company is not currently doing this (and nobody’s doing it yet), but hopefully they’ll all start doing it next year (2023). Prod and encourage your employer to at least consider adding this feature.

A lot of individuals who come out of college – especially if you have advanced degrees, master’s degrees, a PhD – you have large student debt balances. So, attorneys, doctors, and other professionals. I live in Valparaiso (home to Valparaiso University), and I work with a lot of professors who come out of school with a lot of debt.

It’s hard for somebody with a lot of student loan debt who’s making student loan payments to participate in a 401k. So, what Congress said is companies will be able to match student loan payments [to your retirement account].

Let’s say for example, you’re making a student loan payment of $5,000 a year. It’s not going into the 401k. It’sbeing paid directly to the [student] loan provider. What the company can do is they can match that and put the match into your 401k. It’s an attractive way to allow you to continue paying your student loans down, but at the same time have some money going into your retirement plan.

On a parallel path, you can move along faster than you may have been, had this provision not been there. I don’t know how it’s going to work. The IRS has to come up with guidance on it, but I’m pretty excited about this one and I think that a lot of companies will offer it. And I hope that a lot of employees will encourage employers to offer it.

ARIC: Well, you mentioned this on the last podcast – the thing that I didn’t even think about – when you and I were talking about it last time was the fact that this would highly encourage somebody to try to get out of that debt quicker, right?

I’m assuming, this is the way my brain’s working here, Tim, tell me if I’m wrong, but if they’re making $3,000 a year payments on their student loans and their employer will match up to $5,000 worth of payments, why not kick it up to $5,000, right? If you can pay $5,000 off your debt and your employer’s going to put five grand in your 401k, good lord.

TIM: No, absolutely. One of the things we do when we work with anybody with student loan loans is we model it out for them. We look at each loan, we look at the payment, the interest rate. We schedule it out into the future and we help them prioritize what to pay down first, second, third, et cetera. And with this plan, if you’re working with a company that chooses to offer it (which I hope you do), I think you’re right, it’ll encourage you to pay it down faster and then you’ll also accumulate retirement assets faster.

I think it’s a great way for companies to attract and retain people. But it’s also an amazing way for a lot of individuals who are struggling with student debt to get their footing with the retirement plan.

ARIC: The other piece of this is that I’ve worked for smaller companies before. Tim, I know that you’re an amazing mentor to the people that work underneath you and with you. That is one thing that we’ve talked about before – off air and on air – being able to mentor people within your organization.

For business owners – what better way to be a mentor for a young new professional, to be able to help them to get out of debt as quickly as possible and encourage them by showing them this and being able to be a key driver of everything they’re doing at the very start of their career. To be out of debt and to save for retirement, to set themselves up for the future. That’s a mentor right there.

TIM: Yeah and the more you save now, the less you’ll have to save later. So if they’re starting quicker, I think it’s going to be amazing. I hope that a lot of companies utilize it.

ARIC: Yeah, absolutely.

TIM: There’s one other thing that’s in this law, which I thought was a great idea. So we work with a lot of people who are saving for college for their children, grandchildren, nieces and nephews, et cetera. And they oftentimes use 529 college savings plans. And the tax benefits for the 529’s are different with each state that offers them.

In Indiana for example, you get a 20% tax credit up to contributions up to $5,000. If you put $5,000 into a 529, you get a thousand dollars credit back when you file your Indiana taxes. They’re pretty competitive. Then if the money’s used for room and board or tuition for a university down the road, it can be taken out tax free. If it’s not used for that it’s tax deferred.

We’ve had a lot of clients, and I’ve seen this – but I’ve also read about it through financial planning and the CFP – you’re estimating what you need to accumulate, and oftentimes you end up accumulating too much. Let’s say your kid gets a scholarship for some reason, athletic or academic. Also, there’s situations where they don’t go to college.

Then you’ve got these 529s. So, one thing [Congress] changed with this rule is they’ve said beneficiaries of a 529 account. So, let’s say I set up an account for my daughter and there’s money left over. My only option in the past was either to transfer to one of my other kids or to cash it in and pay taxes and penalties. My daughter could take the balance in the 529 and roll up to $35,000 into a Roth IRA in her name.

In the past, if you over-accumulated, you were penalized. And now what they’re saying is for at least $35,000 if you’ve over accumulated, we’ll let you do a tax-free/penalty free rollover into a Roth in the name of the beneficiary. I think that’s an amazing feature.

ARIC: That’s huge. That should have been years in the making. That should have been done a long time ago because I think a lot of people were really hesitant because they don’t want to pay penalties and taxes and all this other stuff, man, again, that’s amazing.

TIM: Yeah because honestly, a lot of our clients have over accumulated, either they just put too much in, or the performance has done great. Wherever the kids went, they didn’t spend as much. Then they’re carrying them forward to the next generation for their grandkids. This is a way to basically help the retirement for your kids if you’ve done this. I think it’s a really great feature.

ARIC: Yeah, absolutely.

TIM: One of the things that that we talk about, like tweaking or changing something that wasn’t right: if I have a Roth IRA (and we talked about the required minimum distribution) I’m not required to make any distributions, but if I have a Roth 401k, there’s different rules. [Congress] tweaked it so they if something happens where you have a 401k that’s in the Roth account, they change the rules so that the RMD requirements don’t impact it.

That’s a small thing, but it can impact you. Oftentimes clients will ask, I’m contributing to the 401k. I have the option to go traditional or Roth 401k, which should I do? We have a lot of clients who do contribute to the Roth 401k and while they’re working, if something happened, they were required to distribute it and now they won’t be.

It doesn’t impact a lot of people that we work with, but it does impact some. And I think it’s a nice thing; an example of how to correct something [Congress] didn’t think about last time.

ARIC: Yeah, that’s great.

TIM: The last one I’ll talk about is: we have a lot of clients who make what are called qualified charitable distributions (QCDs).

Aric let’s say you’re 70 ½ or 72, and you’re required to make these required minimum distributions and let’s say you also have charitable intent. [If] you give a thousand dollars a year to your church, your university, etc., the way the tax code works right now, most people don’t itemize. So, a lot of the charitable contributions you make are not deductible. That’s not the case with everyone, but the IRS purposely made it that way so that fewer people would itemize. As a result of that, unfortunately, a lot of the charitable contributions are not deductable.

What some people will do is when they’re required to make distributions, instead of pulling money out of the IRA, paying taxes and then not being able to deduct the contribution, they take the money directly from the IRA and they transfer it directly to the charity. So, it’s a more tax efficient way to fulfill your charitable intent to give the money to your church, to your university, to whatever organization you favor.

There’s something called a charitable remainder trust (CRT) or these different techniques that we use for advanced charitable planning. And what [Congress] did was they said you can do a one-time $50,000 contribution from your IRA tax free into one of these qualified charitable remainder trusts.

It’s a complicated topic. It doesn’t impact a lot of people, but I would say at least a third of our clients will benefit from it. So as a tax nerd, I’m pretty excited about it. There’s too much detail to really get into it in this podcast, but I guarantee it’ll be on the agenda for all of our clients in 2023.

ARIC: All right, and for those that are not clients yet, and they have questions?

TIM: Yes, they can reach out and I promise we can provide great information about it. Talk about the pros and cons, the benefits, etc.

ARIC: Fantastic. Alright, Tim, wonderful podcasts. Part 2 was, again, there’s so many things in here. It’s weird to say that [Congress] might have gotten a few things right this time.

TIM: I do too. It’s funny because they were passing it in the middle of the night, right? And you’re like, well, why did they tuck the SECURE Act 2.0 into this? And that’s just how it works, I guess. But if I was passing the SECURE Act 2.0, I would pass it separately and I would tell everybody I did it because I think there’s some really nice features in here.

ARIC: Yeah, absolutely. All right, well, let’s get that contact information. For the folks that have not begun to go on this journey with you or haven’t had a chance to speak to you in person yet, how can they reach you?  

TIM: They can always call me at (219) 531-4941 or send me an email at tscannell@hightoweradvisors.com. You can also follow us on social media and as the IRS gives more guidance on these topics, we’ll release it or go to our website where you can see some of our podcasts and our videos.

ARIC: Fantastic. Tim, thank you so much my man. This has been great.

TIM: Oh, thank you. I appreciate it Aric, as always.

ARIC: You bet. And our last thank you always goes to you, the listening audience. Thank you so much for tuning in and listening to the Wealth Stream podcast with Tim Scannell. If you have not subscribed to the podcast yet, please click the subscribe now button below.

This way, when Tim comes out with a new podcast, it’ll show up directly on your listening device. We humbly ask you to share this podcast, rate it, and leave a review as this actually does help others find the podcast. Again, thank you so much for listening today. For everyone at Hightower Great Lakes, this is Aric Johnson reminding you to live your best day every day. And we’ll see you next time.

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Hightower Great Lakes is a group of investment professionals registered with Hightower Securities, LLC member FINRA and SIPC and with Hightower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities, LLC. Advisory services are offered through Hightower Advisors, LLC.