Read The Transcript Below:

We’re not overpaying. No, we’re not overpaying. We’re not overpaying anymore. The tax code’s complicated, boring, and overrated. You don’t want that, you want a pro. One thing that you should know: this is a radio show. It’s not tax advice, don’t take it that way.

Steven Jarvis: Hello everyone and welcome to the next episode of the Retirement Tax Services Podcast, Financial Professional’s Edition. I am your host, Steven Jarvis, CPA, and I’m excited to be recording my first session of 2023.

Now, of course, this is airing on January 16th. It’s not the first session to air this year, but it is the first session that I’m recording. And surprising no one, I’m going to go ahead and talk about SECURE 2.0.

I really hope that everyone listening got to enjoy the holidays, spending time with family, taking a break, relaxing. Although I’m sure in the midst of all that, it’s really hard to completely disconnect. And you definitely saw headlines, articles about this lovely gift from Congress of SECURE 2.0.

Now, we’re already a couple weeks into this being a reality. And so, I would expect that a lot of listeners to this podcast have already read an article, watched a webinar, have started digesting this information. And it’s one of those things that 4,000 pages that were included in this bill, it’s going to take a while for any of us to digest this all the way.

I’ve definitely spent a lot of time on this. I may have spent more time than a lot of people listening to the podcast because that’s what I do, but I won’t pretend to know it all quite yet. And not only do I not know all those 4,000 pages yet, but there’s already things in those pages that clearly are going to have to be clarified at some point by the IRS.

It’s one of the joys of how these tax law changes work. Congress comes out and says, “Here’s what we think should happen, and go figure it out.” And then things inadvertently get created. That’s how we ended up with the Backdoor Roth contribution to begin with.

Not out of SECURE 2.0, but out of Congress having what they thought were great ideas and then the implementation not being exactly what had been intended. So, I’m sure over the coming months and most likely years, we’re going to continue to get clarifications on different elements of SECURE 2.0.

Now, that being said, that doesn’t mean we can wait. In fact, we absolutely shouldn’t wait until this is all crystal clear to start working with our clients. And as an example of that, we’re going to just skip over SECURE 2.0 for just a second because also, in recent past, the IRS clarified some of the rules around inherited IRA RMDs.

And the reason I’m bringing this up as I’m kicking off talking about SECURE 2.0 is just to illustrate that it can take time to get some of these things clarified. But just because the IRS and Congress haven’t given us all the answers, doesn’t mean your clients don’t already have questions. And so, quite often, we’re left doing the best we can with the information that we have.

This is definitely where we want to remember the straight-face test. And what I mean by that is, especially in situations where we’re dealing with incomplete or unclear information, we want to take an approach that we are going to feel confident sitting down across a table from an IRS agent and defending.

It’s unlikely that’s ever going to happen to any of us. But in the event, that’s the lens that I like to look at this through. If I had to sit down and argue and sit down and defend this approach to an IRS agent, could I do that with a straight face? This isn’t testing your skills at not laughing at dad jokes. This is, would you feel confident sitting down and giving that defense?

So, coming back to inherited IRAs, hopefully, you’ve seen this. But just a quick update on where we’re at currently, the RMD requirements were waived for 21 and 22 when there was still a question mark as to whether or not RMDs would be required on inherited IRAs.

And that’s an important clarification because just today I had an advisor ask me that question of, “Wait a second, now that we know RMDs are going to be required in certain situations for inherited IRAs, do we have to go back and catch those up?”

And thankfully, the IRS said, “No, we’re going to waive those two years.” And don’t give them too much credit for that being generous. I mean, they’re the ones that didn’t clarify what we needed to be doing. But you don’t need to go back and catch those up. You just need to look at clients who have inherited IRAs.

There’s non spouse beneficiaries who the decedent was already taking RMDs. Now that’s something that you’re going to want to make sure that you’re going back and taking a look at that you’re really digging into the nuances there. I’m making it a little bit simplistic, but that’s at least what you want to be taking a look at for who should this be considered for.

And the potential outcome here is that a client might have to take an RMD each year and still have the full amount distributed at the end of 10 years of inheriting that IRA. And while the RMD requirement was waived for the last two years, that didn’t reset that 10-year timeline.

And so, even though we don’t need to go back and make up those last two years of RMDs on those inherited IRAs, we do need to make sure that we’re still having an intentional plan for how we’re going to have those funds distributed over the 10 years that’s allowed.

Because if we just wait until the very end or if we just took it all up front, that’s about the easiest way to get killed in taxes, is by just letting these things happen to us.

Alright, so let’s come back to SECURE 2.0, everyone’s favorite topic here in January.

If you’ve been working with any CPAs or centers of influence who are doing tax preparation, I’d be curious to hear how those interactions have gone. Because the CPAs that I’m talking to right now kind of just wish that everyone would stop talking about it until after this tax filing season’s over, because while advisors have already switched their focus to 2023 and moving forward as you should, tax preparers are very focused on how do we get 2022 wrapped up.

And thankfully, SECURE 2.0 did not drastically change anything related to tax preparation for 2022. So, just kind of a reminder there that as you’re interacting with centers of influence, make sure you’re balancing what year you’re focused on. And then just a little bit of extra grace on those CPAs who maybe don’t want to dive right into, “Hey, what does SECURE Act 2.0 mean going forward?”

So, depending on whose statistic you see — I haven’t counted the pages myself, but it’s about 4,000 pages of new information of SECURE 2.0. And I’ve heard over a hundred different changes related to retirement specifically. Haven’t counted them myself yet, but that feel’s about right. They are a lot.

And so, for today’s podcast, I’m going to hit just on some highlights of some things that impact a lot of the clients that I work with and that seem to be most applicable to the advisors that I work with. And again, I know there’s a lot of articles out there. There’s webinars out there, there’s a lot of information already being put out, which is great. There’s a lot of really great sources for that information.

What I really want to focus on today as I talk through some of these things is what action are you going to take? And I’ve got another 12 or 13 minutes here that I’m going to hit on some of these things. It’ll certainly come back up in other podcasts.

But we’re also going to do a really deep dive in our next RTS power session on January 25th at 9:00 AM Pacific. You can go to retirementtaxservices.com to get signed up for that webinar, for that power session.

And really, the focus there is going to be SECURE 2.0 from the standpoint of what actions do I take? Because information is great, but action is the only thing that counts. Action is the only thing that that adds value.

Alright, so let’s talk about a few things that are going to be most relevant out of SECURE 2.0. To make this simple let’s start with things that didn’t change. Couple of things that had been brought up or one thing in particular had been brought up at different times last year that ultimately did not change was the Backdoor Roth contribution.

So, this is an easy one. We can make sure we’re communicating to clients who either were already doing Backdoor Roth contributions or were interested in them that’s been a topic of conversation. Great news, we can still do those the same way we’ve been doing them in the past. There were no changes to the Backdoor Roth.

Another area that did not change was qualified charitable distributions. Those are still working the same way that they had in the past. It’s still at 70 and a half that we’re eligible to start making those qualified charitable distributions. And there’s still a great planning tool for helping to distribute funds out of our IRAs without paying taxes to support those causes that we cared about so much to begin with.

That one’s especially important to highlight to clients because this is going to be one of the areas where SECURE Act 2.0 creates a lot of confusion as dates move around, as ages move around. Because one of the most-talked about things out of SECURE 2.0 is the fact that RMD ages are changing as a result of SECURE 2.0.

And so, again, as this connects to QCDs, its great news, we have extra time before RMDs start. But we still have the ability to start QCDs at the same time. So, let’s talk about RMDs for just a minute.

I would really, really encourage that this is a topic we’re discussing with clients well before they are RMD age. Whether that’s the current RMD age, the new RMD age, the RMD age of 75, that’s going to take place in about 10 years. Or even the old RMD age of 70 and a half.

Really, I mean anywhere in that 60+, 55+. If we’re having conversation about retirement in general, then it’s worth making sure that clients understand how this works.

Not that every client meeting needs to be dominated with, “Here’s exactly when your RMDs will start,” but this conversation needs to happen early and it needs to happen often.

In fact, we’ve already drafted a letter that we’re sharing with members of RTS that’s one of our advisors has already got scheduled to go out to his clients, explaining exactly the buckets that people will fall in as a result of this change in RMD, where we’re just illustrating for the client to say, “Hey, great news if you were born in this year or earlier” and we’re using the specific years, not the ages.

Because we don’t want people to get the math wrong. And rather than making all of our clients do date math and say, “Okay, well wait. If I need to be 73 but it’s 2023 and next year it’s going to be 2024 …” We don’t want any math going on. We just want to say, “Okay, great. What year are you born?”

“Okay, if you’re in this range of years, your RMD is going to start at 73. If it’s this year, it’s going to be 75, or if you were already taking your RMDs, you’re going to continue doing that as you had been doing before.”

I think another potential area for confusion around SECURE Act 2.0 is I’m seeing these headlines and I get where they’re coming from, they’re technically accurate. But these headlines that say there are going to be no new RMDs in 2023.

Again, while that is technically accurate, that no one will have to start taking their RMD for the first time on their own IRA in 2023 because of how the rules are changing and pushing the age to 73 — this can be confusing terminology because what if I inherit an IRA, that’s a new RMD and I absolutely have to start that in 2023. What if this isn’t something I do every day, which is the case for all of your clients.

And they hear, “Oh, no new RMDs in 2023” and they think, “Oh well, I took an RMD last year, that means I don’t have to take a new one this year.” So, that’s something we want to make sure that we’re communicating to all of our clients.

And I’ve already started diving down my bullet points, but we can kind of take a step back here and say, “Okay, this is airing on January 16th.” Just take a second and just answer honestly: how many of you listening have already communicated with all of your clients about SECURE 2.0?

Now advisors I’ve talked to, it seems to be kind of a mixed reaction. I can think of one advisor that I know who has communicated to all of their clients, and they took a very similar approach to what we’ve done at RTS which I’ll explain in just a second.

I definitely know advisors who have selectively reached out to clients they think are the most impacted by SECURE 2.0. They’re clients who would have started RMDs this year who had just turned 72; clients who have 529 plans. We’ll talk about that in just a second.

But very few advisors I’ve talked to have communicated to all of their clients already. And you might be thinking, “Well, how in the world could I possibly send a valuable communication to my clients already, this thing isn’t even a month old. What could you possibly include in there?” But that’s a fair question to ask.

So, what we did at RTS is the first week of January, we sent an email because we do all of our things electronically with our clients to every single one of our clients. That basically said, “Hey, we hope you enjoyed the holidays, spend some quality time with family. You may have seen these headlines about SECURE 2.0 and the tax law changes that came with it. Great news, there’s no immediate action you need to take. And our team is working on understanding how this is going to apply to your specific situation. We are going to make sure that this gets covered in future planning meetings together. But we just wanted to let you know we’ve got you covered on this and that we’re taking care of it moving forward.”

So, just that simple, it wasn’t even a full page long. Just to let them know that we’re looking at this, we’re aware of this, we’re taking care of this. And not that this is going to prevent every question that comes in, but we’re proactively just reminding our clients, “Hey, we’ve got you when these things come up.”

This is definitely applying the dishwasher rule, taking credit for the things that we’re doing because we are absolutely looking into this and thinking about how this applies to our clients. And we want to make sure our clients know that we’re doing that.

Even if we don’t have a detailed action plan for every one of our clients yet, we at least are letting them know, “Hey, we’ve got you. There’s nothing you need to rush out and do. There’s no big catastrophes here.” And so, we’ve already taken the time to do that.

Now, depending on the timing of your other client communications, you might be gearing up to do a 1099 letter later this month, which is great. So, maybe more details about this fits into … or February when you might be doing an RMD letter or something like that.

So, you definitely want this to fit into your other client communications, taxes can’t dominate everything that we do. But we want to make sure that we’re being proactive, that we’re being intentional. We get way more credit for upfront saying, “Hey, here’s what we’re doing even if we haven’t done it yet, here’s what we’re committing to doing.”

As opposed to waiting for a client to reach out and say, “Hey, wait Steven, have you even thought about the SECURE 2.0 thing?” We want to make sure that we’re in front of these things, that we’re letting our clients know what we’re doing to take care of them.

Okay, jumping around a little bit here, that’s what you get when it’s me by myself looking at my notes here instead of talking to a great guest. But one of the other things I wanted to touch on, because this is definitely an area where we’re going to need clarification from the IRS, is this opportunity to have 529 accounts convert to Roth IRAs.

Now, I’m a little bit torn on this because on the one hand, I think there’s the potential for this being a really cool opportunity in very specific situations, but I also worry that this is going to be one of those things that gets kind of bandied about as the new favorite topic on social media or something like that where everyone talks about how fantastic is it that we can convert 529s to Roth IRAs, but that very few people actually are executing it in a valuable way in practice. Because there’s some nuance here.

One of the things that I’ve already heard people get wrong is that this conversion to Roth IRA is not like converting a traditional IRA to a Roth IRA in a really keyway. And that’s the fact that if we convert traditional IRAs to Roth IRA, it doesn’t count towards our annual contribution limit.

And yes, the SECURE 2.0 is doing all sorts of fun things to retirement plan contribution limits. We don’t have time to get in that in today’s episode. That’s definitely something you’re going to want to find a reference guide on. We’re working on putting together the one for RTS.

But a lot of those limits and rules are getting updated. But if we convert $529 to Roth dollars, that’s going to count towards our Roth contribution limit for the year. So, for 2023, that limit is $6,500 if you’re not eligible for the catch-up.

So, that means if I convert $6,500 of a 529 account to Roth, I’ve used up my contribution limit, which is different than a traditional IRA. I can convert $20,000, $30,000, $40,000, $50,000, $100,000 from traditional to Roth in a year as long as I pay the taxes, and it doesn’t count towards my contribution limit.

So, that’s one I’ve already heard people get wrong. So, there’s going to be a lot of these things related to 529 plans we’re going to have to keep coming back to.

Some of the things they’re going to have to get clarified is how the 15-year rule works as we change beneficiaries because the conversion has to happen in the name of the beneficiary. So, there’s definitely some things that are going to need to get sorted out here, but it is definitely a potential opportunity.

It’s something I’m going to want to be talking to clients about who have 529s so they’re aware of it. So, they’re hearing it from me, that it doesn’t become one of those things where they see it on social media, they hear from another advisor and wonder, “Hey, why didn’t my advisor bring up the fact that 529 plans can get used in this new and interesting way?”

Like I said, we’re not going to get into all of the changes to retirement plan contributions, but the one I did want to touch on that I think again, will probably create some confusion, especially in this first year, is the fact that employers can now make Roth contributions to employee 401(k) plans.

And just as a reminder, I’m sure our listeners are great at this one, but in the past, if I as an employee make a Roth contribution to my 401(k), if that option is available to me and then my employer matches those dollars, in the past, those have always been pre-tax dollars. That no matter what kind of contribution I’m making, that the employer’s contribution is pre-tax now.

So, going forward, because of SECURE Act 2.0, employers can now make matching contributions in Roth dollars. Again, the piece that I’ve already heard people get wrong about this, the piece I’ve heard people miss already is that if my employer matches my Roth contribution and contributes Roth dollars on my behalf, that becomes taxable income to me. So, now great news: I’ve got more in my Roth bucket, which ultimately, really is a good thing.

But if I’m not expecting that extra tax hit, and it’s a tax hit that doesn’t come with cash flow associated with it, which can come as a less than friendly surprise, I might be a little frustrated at tax time if I’m not keeping those things in mind.

So, there are a bunch of changes with 401(k) plans and how Roth is going to work. There’s these new rules about mandatory catch-up contributions being mandatory to go into Roth over a certain income limit there.

There’s a whole bunch of things that have changed, and there are things that you’re going to want to keep coming back to and that we’ll keep talking about throughout the year. Again, we’re going to dive deeper into a lot of this on January 25th at our next RTS power session.

If you’re listening to this after January 25th, great news, you can become an RTS member, reach out to advisors@rts.tax and you can go back and watch the recording. But we’re going to cover a lot of great information there and we’re going to really focus on where does this live on the calendar, what are the actions that I can take. For everything we talk about, we’re going to specifically share, “And here’s when you should be doing this to make sure that it’s a reality.”

So, like always this podcast is always focused on helping people take action. And so, to just sum up what we’ve been talking about here today, action item number one is get signed up for the next RTS power session.

If you’re already an RTS member, you’ve already been registered, go back and look in your email; you have a link. If you’re not a member, go out to the Retirement Tax Services website so that you can get registered.

Action item number two is to make sure you’re blocking out time to come back to SECURE 2.0. Whether you’re listening to the RTS Podcast, you’re getting your information from other sources, this is something you’re going to need to revisit time and time again this year.

You can’t just take one class on it and think that you’re all set. That’s one of the reasons that in our session we’re going to really focus on getting this on your calendar, making sure you know when to come back to it because no matter how smart you think you are, reading one article, no matter how detailed it is, did not make you an expert on SECURE 2.0 to the level that your clients need from you.

Last action item is, of course, to get tax returns for all of your clients every single year. I know that always feels like a big shift when I jump right to that no matter what topic I’m discussing, but that’s how you’re going to have the insight into which of these are relevant to clients, which of them you need to focus on, how you’re going to help them going forward.

And as we talk about this in January, we might in fact be talking about getting not just the 2022 tax return that should be getting worked on here soon. But going back, I always like to request three years of tax returns from clients, but that’s because I’m a tax nerd.

Alright, thanks for listening everybody. Until next time, good luck out there and remember to tip your server, not the IRS.

We’re not overpaying. No, we’re not overpaying. We’re not overpaying anymore. The tax code’s complicated, boring, and overrated. You don’t want that, you want a pro. One thing that you should know: this is a radio show. It’s not tax advice, don’t take it that way.