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Jeff Levine: Cracking the New Retirement Code

The tax- and financial-planning specialist weighs in on how sweeping new legislation affects IRA withdrawals, charitable giving, 401(k) plans, and more.

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Our guest this week is tax and retirement planning expert, Jeffrey Levine. Jeff is director of advisor education at Kitces.com, home of the popular Nerd's Eye View blog. He's also the CEO and director of financial planning for BluePrint Wealth Alliance. Previously, Jeff served as chief retirement strategist at Ed Slott and Company. He has authored several books including, The Baby Boomer's Guide to Savvy IRA Planning, The Financial Advisor's Guide to Savvy IRA Planning, and The Definitive Guide to Required Minimum Distributions for Baby Boomers. Jeff is a frequent public speaker and media commentator, and he maintains a high profile on social media and on the Nerd's Eye View blog, where he readily shares tax and retirement planning insights.

Background

Jeffrey Levine bio 
Kitces.com 
Blueprint Wealth Alliance 
Jeffrey Levine on Twitter: @CPAPlanner
SECURE Act: Stretch IRA
SECURE Act text 

Stretch IRA definition 

SECURE Act And Tax Extenders Creates Retirement Planning Opportunities and Challenges,” by Jeffrey Levine, Kitces.com, Dec. 23, 2019. 
Navigating the Secure Act: What Retirement Savers Need to Know to Optimize Their 401(k)s and IRAs,” by Reshma Kapadia, Barron’s, Dec. 20, 2019. 
New Retirement Law Throws IRA Heirs a Curveball,” by Mark Miller, Morningstar.com, Jan. 21, 2020. 
Inheriting a Parent’s IRA or 401(k)? Here’s How the Secure Act Could Create a Disaster,” by Alessandra Malito, MarketWatch, Jan. 9, 2020. 
Who Should Consider a Roth Conversion Under the SECURE Act?,” by Liz Weston, MarketWatch, Feb. 1, 2020. 
The Stretch IRA Strategy Is Largely Gone. Here Are 5 Alternatives to Consider,” by Cheryl Winokur Munk, Barron’s, Feb. 8, 2020. 
Charitable trust definition 
SECURE Act: RMD Age Change
Required minimum distribution definition  

IRA Required Minimum Distribution Worksheet 

How Required Minimum Distribution (RMD) Changes Under The SECURE Act Impact Retirement Accounts,” by Jeffrey Levine, Kitces.com, Jan. 8, 2020. 

Why the SECURE Act Makes 2020 the Year of Missed RMDs from IRAs,” by Jamie Hopkins, Forbes.com, Dec. 18, 2019. 
Could Later RMDs Lower Your Tax Bill?” by Christine Benz, Morningstar.com, Feb. 3, 2020. 
Updated Life Expectancy and Distribution Period Tables Used for Purposes of Determining Minimum Required Distributions,” (proposed rule by the IRS), IRS.gov, Nov. 8, 2019.

SECURE Act: Qualified Charitable Distributions
How to Reduce Your Taxes and AGI by Giving to Charity,” by Mark P. Cussen, Investopedia.com, Jan. 16, 2020.
Coordinating QCDs with Post 70 1/2 IRA Contributions Under the SECURE Act,” by Jeffrey Levine, Kitces.com, Jan. 22, 2020. 
Tax Cuts and Jobs Act of 2017 
Adjusted gross income definition 
SECURE Act: Traditional IRA Contributions After 72
The Kaye Bailey Hutchison Spousal IRA Receives Congressional Agreement,” by Beverly DeVeny, irahelp.com, Aug. 9, 2013. 
SECURE Act: Open MEPs
Could Multiple-Employer Plans Be a Game Changer for Retirement Security?” by Aron Szapiro, Morningstar.com, Dec. 19, 2019. 
Secure Act’s MEP Changes Are a Game Changer for 2020,” by Robert Bloink and William H. Byrnes, ThinkAdvisor, Jan. 8, 2020. 
The New American Retirement Plan,” by John Rekenthaler, Morningstar.com, Jan. 14, 2020. 
Replacing 401(k) Plans: Further Thoughts,” by John Rekenthaler, Morningstar.com, Jan. 21, 2020. 

SECURE Act: Annuities in Company Retirement Plans
"What the SECURE Act Means for Annuities," by Jamie Hopkins, InvestmentNews, Dec. 17, 2019.

Security Act’s 401(k) Annuity Options: The Pros and Cons,” by William H. Byrnes and Robert Bloink, ThinkAdvisor, Jan. 14, 2020.  

Transcript

Christine Benz: Hi and welcome to The Long View. I'm Christine Benz, director of personal finance for Morningstar, Inc.

Jeff Ptak: And I'm Jeff Ptak, global director of manager research for Morningstar Research Services.

Benz: Our guest on the podcast today is tax and retirement-planning expert, Jeffrey Levine. Jeff is the lead financial planning nerd and yes, that's his official title, at Kitces.com, home of the popular Nerd's Eye View blog. He's also the CEO and director of financial planning for BluePrint Wealth Alliance. Previously, Jeff served as chief retirement strategist at Ed Slott and Company. He has authored several books including, "The Baby Boomer's Guide to Savvy IRA Planning," "The Financial Advisor's Guide to Savvy IRA Planning," and "The Definitive Guide to Required Minimum Distributions for Baby Boomers." Jeff is a frequent public speaker and media commentator, and he maintains a high profile on social media and on the Nerd's Eye View blog where he readily shares tax and retirement-planning insights. We're thrilled to have him join us on the podcast today.

Jeff, welcome to The Long View.

Jeffrey Levine: Thanks. Thanks so much for having me.

Benz: So, we have lots of nitty-gritty questions about retirement and tax planning and the SECURE Act that just passed through Congress. But before we get into them, let's talk about how you occupy your time. So, let's start with what you're doing for Kitces.com.

Levine: Sure. So, I basically spend my time nerding out, and that's kind of how we arrived at my title, which is lead financial planning nerd. It is literally my job to dive through any matters, whether it be financial-planning issues, tax issues, estate-planning issues, and to really dive into them as deep as can be, so that we can give readers a solid breakdown of a topic. Our typical blog will run anywhere from 2,500 to sometimes 5,000 words on a fairly narrow topic. And so, we really try to go deep into the area and provide full context and background so that people can make educated decisions.

Benz: OK. And then, you also do a fair amount of educating advisors as well?

Levine: Yeah, I love teaching. That's a…you know, teaching--I think in another life, I probably would have been a teacher. It's just a lot of fun. And it really helps you connect to the end users and by speaking to those advisors, who then can go out and impact hundreds of lives or thousands of lives, depending upon how many you're speaking to at once, that's a good sense of satisfaction out of that.

Benz: Right. So, at BluePrint Wealth Alliance, you're actually involved in engaging with clients, correct, your own clients?

Levine: Correct. Yes, the end user.

Benz: OK. So, what's your demographic there at BluePrint? Do you have a typical sort of client profile?

Levine: Yeah, I'd say our typical client is kind of like the millionaire next door--a very humble individual who has done a really good job saving, and they're now in this final stretch of their life where they're trying to figure out not only how do I protect and preserve the assets that I have, how do I minimize taxation, how do I make sure that I not only can enjoy my lifetime because most of them have done such a good job saving that they know they'll be OK. But it's, how do I transition to this effectively and how do I educate my children or grandchildren or whatnot so that we can preserve this family legacy. Because as you know, most families' wealth is kind of squandered within a few generations. And they know that. So, they're really mindful of how do we encourage our children, or our heirs, to have the same types of good habits that we did and that got us to this point to begin with.

Ptak: Many advisors seem to have chosen a single business model, maybe they are hourly or AUM based, but your firm actually offers both as well as a per-project fee. How do you help clients figure out the right business model for them?

Levine: It's really just sitting down with them and understanding a little bit about what they're looking for and what their goals are. For a lot of people, they're looking for that ongoing consistent presence in their lives of a--kind of cliché at this point, but like the personal CFO, if you will--and other people are just really looking for a quick answer to a situation like, hey, I've heard all about these conversions, does that make sense for me? Or I have this one-time question, how do I go about answering that? And so, I don't believe that there's any one-size-fits-all solution. And so, we want to be able to help people regardless of the way they come to us.

Benz: So, this podcast is a little bit of a departure for us in that we're trying to be timely and we want to talk specifically about the SECURE Act. You've really put yourself out there as an expert on all things SECURE Act since its passage. So, let's start with, I think, what is one of the most notable aspects of the Act, which is the death of the stretch IRA. So, before we get into what's changing, let's just talk about when the stretch IRA was alive and well. Let's talk about how that worked and then get into what has changed for many beneficiaries who inherit IRAs from here on out.

Levine: Sure. So, prior to the SECURE Act, and also going forward for a select group of beneficiaries, which as you mentioned, we can get into in just a bit, the default when you had a named living, breathing person on your beneficiary form like a child, a grandchild--really anybody--was that they could take out the inherited IRA or inherited 401(k), kind of using inherited IRA here as kind of an umbrella term for all retirement assets. But those retirement assets were able to be distributed by those heirs over their lifetime in kind of small installments, if you will. So, for argument's sake, a 40-year-old beneficiary would have to start taking out only about 2.5% of the account balance each year. And what that did was it accomplished two goals for those beneficiaries. First is that it kept their income lower from year to-year so that they wouldn't push themselves into a higher tax bracket or faze themselves out of credits or deductions or push themselves into an area where they'd be subject to surtaxes, etcetera, right--all the bad things that can happen when we add more income to a tax return.

The second thing it did was it allowed as much money as possible to remain in those inherited IRAs growing tax deferred. So, avoiding the taxation on the interest, the dividends, the capital gains that would accrue each year, and basically extend that for what would be their life expectancy. Now, an IRS-determined life expectancy. So, one that was the same regardless of a 40-year-old who was sadly terminally ill, or a 40-year-old who was running marathons each month. But it was a standard time where we would often be able to preserve the tax benefits of an account for literally decades.

Benz: So, from a practical standpoint, have you seen any data on what percentage of people inheriting IRAs were actually taking advantage of this stretch IRA provision? Was it sort of concentrated among generally wealthy people? That's sort of what I would expect.

Levine: That's exactly right. It's simply if you can't afford to stretch, then, there are really three individuals who decided not to stretch: those who could not afford to stretch, right, which is the overwhelming majority of people; those who simply did not know any better. Maybe they could have afforded to, but they didn't have the right guidance. They were never told of the benefits of the stretch IRA, or even perhaps that it existed--just lack of education. And then, the last group, which was the group that perhaps could have afforded to stretch and knew enough, but still decided for whatever reason not to do so. So, maybe they decided to accelerate distributions from the account to pay for a child's education as opposed to having the child take loans, or maybe they've decided to finally build that extension on to the house that they've been waiting decades to do or something like that. So, when you put all that together, no, the overwhelming majority of people didn't stretch. And it was really a key benefit for that high-income or high-net-worth beneficiary who could afford and also knew enough to benefit from that stretch to do so. It was an option, right? It's the required minimum distribution that had to come out each year, not a maximum. And so, that optionality gave people the ability to either decide to accelerate distributions from the account and potentially pay tax at a higher rate but gather those assets out of the account sooner or to potentially defer them for future use at a lower rate.

Ptak: So, can you talk about what's changed for many beneficiaries with the passage of the SECURE Act?

Levine: Sure. So, before the passage of the SECURE Act, broadly speaking, you might think of it as having two groups of beneficiaries. There were nondesignated beneficiaries and designated beneficiary, so two broad categories. And the first one, we've already talked about--designated beneficiaries, that was that category of living, breathing people who would be able to stretch over a life expectancy as we just mentioned. Then there was that second category of nondesignated beneficiaries, which had even more strict and severe rules in terms of taking out the money from the account, oftentimes in just as little as five years depending upon when death occurred. Going forward, that group of designated beneficiaries who were potentially able to stretch distributions for 10, 20, 30, 40, 50 years or even more in some cases, you know, some grandchildren were able to stretch for literally 70 years potentially or more. That is going to be reduced to a 10-year window. And instead of working like the traditional inherited IRA distributions where the minimum would be a specific amount each and every year, instead that 10-year window functions as kind of an endpoint. But during the 10 years, you can do whatever you want.

So, if for argument's sake, an individual passed away today and left money to an adult child, let's say, 30 years of age, that adult child, beginning in 2021, a 10-year window would start, so 2021 would be your 1, 2022 would be your 2, etcetera. And from years one through nine, there's no required minimum, you can take whatever you want--voluntary distributions are just that, voluntary. But in year 10, whatever would be left in that account has to be entirely distributed by the end of the year in order to avoid a penalty. And so, what we end up with is a situation where for most people, it will make sense to spread those distributions out over the 10 years or at least a larger portion of it. But for some individuals, maybe they don't use the full 10 years. For argument's sake, if we think about when the typical boomer is going to pass away. Let's say, late 70s, 80s, or early 90s, somewhere in that range. You know, their children might be late 50s 60s, maybe they're kind of on the brink of retirement, if you will. And if we imagine that a 62-year-old inherits an IRA from a parent, and now they're in a situation where they have to take out everything in 10 years. Maybe that 62-year-old is going to retire at 65. That individual might decide, in essence, to take small distributions or maybe no distributions at all in the year that they're 62, 63, 64, 65 while they're retired, and then to spread out the distributions in the remaining six years of that 10-year window. That would be one option. And frankly, that's going to be a real planning consideration for those beneficiaries going forward is when do I want to take the money out of this account, balancing not only the money that's coming out of the IRA, but also with the other tax attributes they have--how much other income they have from other sources, whether it be work or interest, dividends and what their other deductions and credits look like, etcetera. Not so much different than the Roth IRA conversion decision as to when people should take that income. But for the fact that the Roth is always an option, where here by the end of the 10th year, it's coming out one way or another where you're paying a steep penalty.

Benz: So, let's talk about for whom it's kind of businesses as usual, if they inherit IRAs. So, it sounds like spouses, basically, it's the same as it was before. But let's talk about that group of people for whom there's really no change.

Levine: Sure, that's the third group of individuals that are created, again, kind of going back and recapping--in the old rules, we had nondesignated beneficiaries and designated beneficiaries. Going forward, we have nondesignated beneficiaries, designated beneficiaries who go from that old lifetime distribution down to the 10-year rule we just discussed. And then, we go to a new category that's brand new, created by the SECURE Act, called eligible designated beneficiaries. And the way to just think about that is, they're eligible to continue stretching distributions as if the SECURE Act had never occurred in the first place. So that group consists of five different subcategories, if you will. The first one you already mentioned which is surviving spouses.

The second would be disabled individuals. The third would be chronically ill persons, and both disability and chronically ill are definitions where are defined in the tax code and fairly rigidly, particularly with respect to disability. For argument's sake, disability is not in the tax code or for purposes of this rule, is not like a surgeon who cut his finger and now he can't do surgery anymore. The disability definition is one that requires somebody be unable to engage in any substantially gainful activity, and that impairment should be expected to be indefinite or result in their deaths.

So, fairly, rigid rules…

Benz: Right.

Levine: That's that second and third group. Then we get to the fourth category, which is, beneficiaries who are not more than 10 years younger than the IRA decedent themselves. And that could be anyone. It could be a friend, it could be a brother or a sister or a cousin, etcetera. But anyone who's within 10 years of the decedent's age, they get to continue stretching. And then, the final one is the decedent's minor children. And I just want to emphasize real quick that one word there, the decedent's minor children. And the reason why I want to really hit that hard is because since the SECURE Act has been passed, I've seen a lot of inaccurate information being presented to people that it's an exception for minor children. The reality is, it's not any minor child; it has to be the owner's minor child. So, for instance, if a grandparent decided, I'm going to leave my IRA or my Roth IRA to my grandkids, they would have the 10-year window because they're not the decedent's minor child. They're just a minor child. And what's also different about that last group of beneficiaries, that decedent's minor children category, is that unlike the first four groups we just mentioned--the spouses, the disabled persons, the chronically ill persons, and the individuals within that 10-year age window--they have a permanent exemption, if you will, from the SECURE Act's new rules. They can stretch as if the SECURE Act didn't take place essentially for the balance of their lives. Whereas the decedent's minor children, they only have a temporary reprieve. They only get the stretch rules that existed prior until they hit the age of majority, which is anywhere from as young as 18 in some states to as high as 26 in some places if that individual is still, like in school, for instance. And then, once they hit that age of majority, it switches over from the old stretch rules to the new 10-year window. So, they get a temporary break. Everybody else gets a permanent break.

Ptak: And this doesn't affect anyone who had already inherited an IRA and was using the stretch, is that correct?

Levine: That's right. And more specifically, to decedents who passed away prior to the start of 2020. So, one of the questions that's come in here now is, as the year has kind of started with relatively high frequency is like, Hey, I had – I knew somebody who passed away in December of last year, but you know, the kids didn't get a chance to set up the inherited IRA before the end of the year, because it happened late in the year where they were busy with holidays or for whatever reason, that's fine. It's not based on when the inherited IRA was set up. It's based on when death occurred. And actually, there's a few exceptions to the start date of January 1st of 2020 for certain investors. For instance, there's a specific exception that ties to annuities that were already annuitized over life expectancy. The new SECURE Act rules don't apply there. And also, for collectively bargained and governmental plans, things like a thrift savings plan or a 403(b) or a 457 plan established by a state or local government, for instance, like for teachers, those plans don't kill the stretch, if you will, until January 1st of 2022, as a default. So, individuals there have a few more years potentially. And the good news is that they've got two extra years of potential for their heirs to stretch, whereas it might be lost otherwise. The bad news is, in order to kind of take advantage of that they have to die. So, not a particularly wonderful planning strategy.

Benz: So, Jeff, you referenced a planning strategy or sort of a set of planning thoughts that inheritors should think about in terms of kind of harmonizing that 10-year window with their own tax situation. But let's think about it from the standpoint of the account owner, because it seems that there are planning considerations here, if you were, say, set to leave your IRAs to your children, there are some new dimensions to this with the stretch off the table. So, let's talk about that for people who are earmarking beneficiaries of their IRAs. What are the planning considerations for them?

Levine: Sure. I think you hit it on the head, is people who are earmarking some of this money for their heirs, because I think you've got kind of two categories of people that you're going to run across. And I've kind of started to see this over the last few weeks. And the first category is that group that says, you know what, if I live to my life expectancy, or pretty good lifetime, I'm going to enjoy most of my retirement assets. If I die early, my kids will get something, potentially a lot of money, but I'm planning on enjoying my retirement during my retirement and if I happen to die early, and my kids step into a ton of money, and they have to pay a higher tax on it than they otherwise would have before this law, you know, so be it, no one left me anything, right, and so they'll have something. And you have some people in that camp.

But then, you get others who say, you know, I've worked my whole life. I sacrificed all to save these dollars, and I'll be darned if the government is going to see one more dollar of tax than they have to, not only over my lifetime, but over my kids' lifetime too. And, so I'm interested in making sure that collectively we pay as little as tax even if it means I pay a little more during my lifetime. And so, there is a number of potential options that individuals can look at.

One of the first things would be, does this accelerate Roth conversions during lifetime? And to some degree, it probably should. I don't think it means that everybody should convert everything to a Roth IRA right away. But if we're looking at when it makes sense to convert to a Roth, it's essentially, when you believe you'll be paying the lowest tax rate. At what point in your life do you have the lowest possible tax rate? And if we're looking at leaving this money to children or to other heirs down the line, it's not just your tax rate, it's your kids' tax rate. And so, kind of going back to the issue that we spoke about before, if you've got a parent who is going to pass away and leave a IRA to an individual who's kind of at their peak earning years, well, that's the last time you want to be paying tax on all that money, especially at an accelerated rate. So, we could see situations where mom or dad decided to convert more because it's more cost-effective. Or maybe it's a situation where the kids, if they're successful enough, can even gift mom or dad money to convert at their lower rates, especially if they are older and they have maybe substantial medical deductions in some cases that can offset these. There's a lot of planning that can be done there. And there are certainly options that, there's other options to consider too. It's just all the balancing game.

For instance, there's a lot of chatter right now about potentially replacing the stretch with a charitable trust. That's one option that's being floated about rather consistently. And there's some merit to that. A charitable remainder trust, for instance, can replicate a lot of the benefits of a stretch IRA creating a stream of income that would come out from this trust over an individual's life expectancy, etcetera. The challenge, though, is that there are downsides to that. There is no silver bullet. There's no one-size-fits-all strategy. And while that charitable trust… You know, let's say, you left your IRA to this charitable trust to replicate the stretch because that's really what you wanted for your children. Well, the downside to that first off is that they lose optionality. With the stretch IRA, you could take whatever you want, whenever you want. As we talked about, most people don't stretch. With the charitable trust, it's basically locked in stone--very difficult to break into a charitable trust and to get more than the income that otherwise you would be entitled to each year.

And the second issue is, like, what happens when that income beneficiary dies? With a charitable trust, the balance goes to a charity. That's the whole point. That's why you get the great tax breaks. But what if dad dies and the beneficiary is a charitable trust for the benefit of the dad's son, and on the way to the funeral, dad's son gets into a car accident and dies. And now dad's son's daughter, right--the grandchild of the original decedent--doesn't have anything potentially, because the remainder of the account, which was basically the whole thing, got sent to charity.

Benz: Right.

Levine: Can you mitigate this with life insurance or other things? Sure, there's always options. But every upside carries a downside. It's just a matter of weighing which option is best for individuals, kind of, laying them all out on the table and saying, of these, which of these benefits are most important to you and which of these drawbacks are most important to you to avoid?

Benz: Do you have a thought on, say, a parent has children who are adults, but maybe young adults, say, early 20s or something like that, and they're a little concerned about them coming into a large sum of money and they liked the sort of RMD aspect of the inherited IRA. What's your thought on kind of troubleshooting that risk of a young person really blowing through the money more quickly than would be ideal?

Levine: You know, it's a really, really good question. And it's a tremendous challenge in the current system. There's like no really good answer. Because on one hand, you could just leave it to them outright, and you're subjecting them to potential risk of being a spendthrift or even other things. So, God forbid, they have a car accident or something like that, or they get divorced, there's other issues where some of those dollars could be lost, if you will. But the only way to truly and to really protect those dollars is to leave them to a trust. And that creates all sorts of other complications and potential added costs, not just the drafting of the trust itself. But, for instance, any money that stays inside a trust, that's not passed out to the trust beneficiaries, gets taxed at trust tax rates. And for 2020 that starts--the highest rate of 37% for a trust starts at $12,950. You or I don't get to the highest rate until we have more than $500,000 or $600,000 of taxable income depending upon our filing status. So, even a modest IRA, especially if everything is coming out in just 10 years, can probably spit out more than $10,000 or $12,950 per year, making most of that distribution potentially subject at that highest 37% tax rate, if it stays in the trust.

Now, someone could certainly argue, well, Jeff, if I have a spendthrift child and I pass it out to them, they might just spend it all. And so, having half of it lost in taxes if it stays in the trust and that's preserved, is better for me. And then, other people will look at it and say, I don't want to see half my money eroded in taxes; maybe I'll make sure the trustee passes it out to the beneficiary each year. You know, this way they pay it at their own rate, or so forth. So, it goes back unfortunately, you know, I wish I could just say everybody should do this. That would make life so much easier for all of us, right? But it really is one of those things where you might spend hours talking about this with your financial advisor, your CPA, your estate planning attorney, to really get to what is ultimately the best solution. And in some cases, it may be a combination thereof. Maybe some money is left to the trust for more preservation, but perhaps with more Draconian tax consequences, right. But you leave some money outright to the kids--this way if they want to spend some money sooner, they can. It doesn't have to be an all-or-nothing type of situation.

Ptak: Another big change is that the new start date for required minimum distributions from IRAs and company retirement plan assets is moving out to 72. So, first, let's talk about what RMDs are and why people have to take them.

Levine: Sure. So, RMDs, short for required minimum distribution, it's a stated amount that essentially the tax code says you must remove from your retirement account. And the whole point of that is, at a certain point, the government wants its tax dollars, right? You've gotten a tax break for X number of years, but at some point, the chickens come to roost, and you have to pay that bill. And so, required minimum distribution is simply the amount that the Congress has decided needs to come out of your account so that we can either pay taxes on that money, or in the case of a Roth, end the special tax treatment that you have otherwise received.

In terms of why it needs to happen, very simply put, that's the rule. That's what Congress put in the law. And it is part of every single retirement account with the exception of the Roth IRA. So, every other retirement account out there has required minimum distributions, even Roth 401(k)s and Roth 403(b)s have required minimum distributions. The Roth IRA is the lone exception to that rule. And once those assets get passed on to like a non-spouse heir or whatnot, they typically do have required minimum distributions that must start even for inherited Roth IRAs. So, it's like kind of a basic framework of the rules. And as you mentioned, the SECURE Act kind of pushes that starting point out for RMDs out to 72 from its previous point of 70.5 for most individuals.

Benz: So, what drove that change? I know retirees, affluent retirees love to hate their RMDs. But what were sort of the considerations that Congress looked at when pushing that number out?

Levine: Simply that more people are working later, life expectancies are getting longer, so maybe we should delay having these required minimum distributions come out. Frankly, it's another one of those provisions that's in the SECURE Act that really benefits a very small percentage of the American population. Last year, Congress actually put out proposed regulations to change the life expectancy tables for required minimum distributions. And when they did that, they said, we really don't think this is going to be a big deal in terms of lowering our revenue where we're seeing people take out a lot less from their IRAs simply because the overwhelming majority of people are not taking distributions based on their required minimum distributions. In other words, they're taking distributions based on how much they need to live. And the fact that they have an RMD that might be less, doesn't mean anything if they need to live on that money.

And so, pushing back required minimum distributions from 70.5 to 72, again, is nice if you can afford to wait. It will certainly give high income and high-net-worth investors another year or two potentially to do Roth conversions, perhaps at what would otherwise be low-income years since there's no required minimum distributions that have started yet. But at the same point, it's not going to be a big deal for the vast majority of Americans who are already taking out money anyway. If you tell somebody they don't have to take 5% out of their IRA at 71, but they need 5% to live on, you know, telling you that you don't have to take it out doesn't really change anything.

Benz: So, Jeff, there's been some talk--and you referenced this about tweaking those life expectancy tables that RMDs are calculated off of--what's the status of that? And could that still go forward? It's not necessarily either or, but it seems like pushing the date out to 72 semi-corrects for longer life expectancies.

Levine: So, it actually doesn't change the--pushing the age out to 72--so it doesn't necessarily change the percentage that has to be withdrawn at each age. So, we didn't actually push the old tables back. In other words, like the old 70 age factor doesn't push back to 72.

Benz: Got it.

Levine: It's just that we don't start until 72. Whereas those proposed regulations would actually change the percentage that's required at each of those ages. And as we stand here today, as we record, that's still in a proposed regulation status. However, I strongly suspect that will be finalized before the end of this year in the same or a substantially similar format. It's a regulation. So, it's entirely at the IRS' discretion. It's not like we need congressional action, which would potentially make me change my mind, especially in an election year. Who knows what's going to happen this year. But from a regulatory perspective, IRS at this point, you know, to put it out as a proposed regulation, is asking for commentary. At some point, it's just going to be able to go and say, yes, we're finalizing it. And the proposed effective date of those changes--even though they put it out in 2019--the proposed effective date, even when they put it out then, wasn't until 2021. So, while I would never bet my life upon anything with Congress or the IRS or any other government entity, just because you never know, I'd be willing to place a large bet that we will see those regulations finalized sometime this year in 2020. That do get put into place for 2021.

And interestingly enough, the way that they would change that, especially--like for most IRA owners who use that uniform lifetime table, the old one that I think started like 27.4, then went to 26.5, etcetera--the change in that table would actually make the old age 70 factor almost identical to the new age 72 factor. So, even though I just said that they didn't push back the RMDs and they just said, we'll start at the age 72 factor, if this gets passed before next year, that's effectively what will end up happening, is we will have pushed back the old table. It comes out to be like a point, you know, a fractional difference in the amount that someone at 72 going forward would be taking compared to what in the past somebody at 70 would have taken.

Ptak: So, this does put a pause on new RMD takers, right? The group of people 70.5 and older that were poised to take RMDs in 2020 will no longer have to do so?

Levine: That's right. Only IRA owners who would have had, let's say, a 71st birthday this year but who turned 70.5 after the start of this year, don't have to take anything until 2022 potentially, like, whether they would push it back--or 2021, I'm sorry--for those individuals. Simply put, if you turned 70.5 on or after January 1, 2020, you get to benefit from the SECURE Act's new pushing back of the RMDs. Whereas if you turned 70.5 prior to the start of 2020, you don't. And so, some people, for instance, will only be 71 this year, but still have to take a required minimum distribution because they were 70.5 last year. A good example of this would be, you know, take a February 2019 birthday where someone turned 70 years old. Well, they would have turned 70.5--if they turned 70 in February, they would have been 70.5 in August of 2019. And that means they had a first required minimum distribution for 2019. In 2020, that person is only turning 71. And even though RMDs now don't start until 72 and that person is only 71, they must continue taking distributions because their 70.5 birthday was prior to the start of this year.

Benz: Let's talk about the qualified charitable distribution. First, if you can tell people what it is, and then get into how the SECURE Act affects it.

Levine: Sure. Well, let's start with what it is. A qualified charitable distribution is frankly one of if not the best way for certain older retirement savers to give to charity. What it is, is it's a provision that allows an IRA owner or an IRA beneficiary only, so no plan participants are allowed to do this, just IRA owners and IRA beneficiaries, who are themselves 70.5 or older, and that 70.5 interestingly enough is not the year of; it is actual age 70.5. So, an individual must have their 70.5 birthday, if you will, and then they can make these QCDs or qualified charitable distributions, which are distributions that go right from the IRA or inherited IRA directly to charity, or distributions where the check from the IRA is made out to the charity. And the benefit, if you will, of a qualified charitable distribution is that the distribution is never included in income.

It is not a deduction on the return and that sometimes trips people up. And they say, why would I do that if I don't get a deduction, because isn’t that the whole point? But it's actually way better than a deduction for two reasons. First off, not everybody can deduct charitable contributions, especially after the Tax Cut and Jobs Act. If we think about a married couple, for instance, who reached 65 or older in 2020, they have a standard deduction this year of $27,400. So, even if we give them the maximum amount of state and local taxes that they could possibly have, $10,000, where are they coming up with another $17,400 of itemized deductions? I mean, that's a lot of money. And even some people who are significantly charitably inclined each year, you give $10,000 more away to charity on top of your state and local taxes of $10,000, that's still only "$20,000"--still significantly less than the $24,400 standard deduction. If you don't itemize, you get no tax benefit for giving to charity.

So, when you take money out of your IRA, even if you later write a check to charity, all you're doing is adding money to your taxable income. And for those out there who do itemize, they say, Well, I guess, it doesn't really impact me because I do itemize my tax return. Well, probably does impact you as well. Because if you think about the way a tax return works, there's kind of a first half of the tax return and a second half of the tax return. And half time is the AGI, like, the halftime score on a tax return.

Benz: Right.

Levine: And unlike the halftime score of like most football games or any football game, really any sporting event, it matters, right? Like, the halftime score is actually really important on a tax return. You think about AGI and everything that's tied to AGI, things like almost every credit that gets phased out is tied to AGI. All the deductions that get phased out, save for that qualified business income tax deduction, you know, they're all tied to AGI, even things that aren't part of the tax code, but are key to income like Medicare Part B premiums, for instance, or Part D premiums and the IRMAA adjustments, those income-related monthly adjustment amounts that apply to high-income individuals who are on Medicare. Those are all key to AGI. So, you could actually end up giving a billion dollars away to charity. And does that make you a wonderful person? Of course it does. But it doesn't help you reduce any of the costs that are related to AGI like Medicare, etcetera. Bill Gates could give $1 billion to charity. His IRMAA will still be high. He'll still have an impact on his Medicare because the charitable contribution, even as an itemized deduction, is a like third or fourth quarter, if you will, expense. It happens after halftime. And so, it does nothing to change the halftime score and nothing to change the things that are key to that halftime score on the tax return.

Ptak: Prior to the Secure Act's passage, you couldn't contribute to a traditional IRA after age 70.5, but now you can do so at any age. So, the question is, why was the stricture removed? It made a certain amount of sense that contributions would have to stop once RMDs begin, and that people in that situation would want to favor Roth later in life.

Levine: You know, interestingly enough… Well, first off, why they did it is simply to, I think, harmonize it with the other rules. It was the only account that did not allow traditional--or any contributions, rather--after 70.5. If we think about all the other types of retirement accounts that are out there, whether it be Roth IRAs or 401(k)s, 403(b)s, or even, frankly, SEP and SIMPLE IRAs, which largely follow the IRA rules in many instances--they all allowed for contributions after age 70.5 and even those that had required minimum distributions.

So, for argument's sake, you mentioned this kind of an oddity of, yeah, I'm going to contribute to my retirement account, but I also have to take a distribution. That's exactly what has always been the case and continues to be the case for things like SEP IRAs. If you're a 73-year-old self-employed business owner, and you want to contribute to your SEP IRA for the year, no problem, you can do that. But at the same time, you also have to take a required minimum distribution, and it makes no difference whether you're working, not working, a 5% owner, etcetera. Like for a SEP IRA, you have a required minimum distribution. So, it almost becomes a little bit like a revolving door of IRA money, so to speak. Nevertheless, by eliminating that age 70.5 restriction, it allows individuals who continue to work past 70 to potentially make those contributions to a traditional IRA, or if they have a spouse who's working, because that's another thing that you can do. You have to have a so-called compensation to be able to make an IRA contribution, which is generally earned income. For most people, it's going to be either W-2 wages or self-employment income. And that's the typical source, if you will, of compensation, but that compensation then can be used to make those IRA contributions. But if you have a spouse who's working and you're not, you can essentially borrow the compensation of your spouse to make a contribution. And that's just considered a spousal IRA contribution. That's the name it's given, or it actually has a more formal name. Now, it's called the Kay Bailey Hutchison IRA contribution. But no one actually calls it that. They still call it the old spousal IRA contribution. And so, that's a nice added benefit, especially for the roughly 30% of 70-year-olds who continue to work after that point. So, it's not the majority of individuals, but it's still a pretty good section, a cross section of the American populace that does continue to work after age 70. And of course, anytime Congress giveth, usually Congress taketh, and so, along with that elimination of the age at which you can make traditional IRA contributions, Congress also introduced a new anti-abuse rule to kind of prevent people from using those deductions after 70.5 and then making qualified charitable distributions that that tax benefit we just talked about for charity with the same dollars, if you will.

Benz: So, Jeff, let's switch gears a little bit away from IRAs. And I want to quickly hit on the implications of the SECURE Act for company retirement plans, starting with what are called open MEPs or multiple employer plans. First, let's talk about what a MEP is, what a multiple employer plan is, and how the SECURE Act could increase the uptake of these things.

Levine: Sure. So, in short, a MEP is a multiple employer retirement plan, not to be confused with a multi-employer retirement plan. I know that's like, so close. But multi-employer plans are completely different. They're organized under a separate section of the code. They're typically like union plans. A multiple employer plan, a MEP, is a single retirement plan where two or more unrelated businesses participate in; they essentially like plug themselves in, if you will, to the MEP. And the potential benefits of the MEP are the same benefits that you get when you go to like Costco, for instance. You know, we have three young children under the age of 5 and under, and we got a lot of diapers right now in the house. And whenever we need diapers, I get the: hey, we need to go to Costco or BJ's--or whatever it is--run. And the reason why, of course, is it’s much cheaper, right? We buy in bulk. We get like 7,000 diapers for the price of $5,000 or something like that.

And kind of in a similar fashion, like if you have a lot of participants participating in a plan, you should be able to streamline things, you should be able to have pricing and bulk powers. And while certainly investment costs are not as…you can get low-cost investments a lot easier today even for small plans. There's always the power of negotiation when you bring in a large group. So, even from a recordkeeping perspective, if a plan was able to bring, let's say, instead of a two-person group, they were able to bring 100, you know, three- or four-person employee companies together to a single record keeper, they might be able to use their collective purchasing power to say, your normal price is, for argument's sake, $1,000. We want you to do it for us for $800, because we're bringing you this bulk offering, so give it to us at a discounted rate.

The other thing from an advisor perspective is it allows a streamline of operations, right? So, today, where an advisor may have 40 or 50 plans that they service potentially, and each plan might have its own provisions, and each plan might have its own funds that have to get reviewed, etcetera, that can all be streamlined down into a single fund lineup with potentially a single provision of plan offerings, such as whether it offers traditional accounts, Roth accounts, after-tax monies, etcetera. The options of the plan can be streamlined across multiple businesses, whereas perhaps that wasn't the case before. And if this sounds like, gee, that sounds like a good idea. Why didn't I see that before? Why didn't they do this ever in the past? The reason why is not because the SECURE Act created MEPs; they've actually been around for many years. The reason is that the SECURE Act removed barriers that prevented their adoption. And in particular, there were two primary barriers that existed prior to the SECURE Act.

The first one is commonly known as the one bad apple rule. And that was an IRS rule, which in short said--let's go back to our imaginary MEP, and say we have 100 businesses that participate inside this MEP and one of them decides, you know what, we're not going to follow the rules; we're going to do something wrong. That one business could have disqualified the entire plan, like all 100 companies would have seen their qualified-plan monies evaporate, simply because one company did not follow the rule. And obviously, that is ridiculous, right? What employer would potentially want to subject themselves to some other unknown employer's risk of not following the rules. And so, that prevented a lot of people from adopting these. The SECURE Act resolves that by essentially providing for cure provisions. If that one company doesn't do something right, the plan can--for simplicity’s sake--they can boot that company out and go through some procedures to allow the remaining 99 companies to preserve their tax-preferenced assets.

The second barrier to MEPs was a requirement that existed in ERISA for there to be a nexus for the companies. And for many, many years, that common nexus requirement was interpreted by the Department of Labor as essentially being companies in the same line of business, like, multiple contractors participating as part of a single-contractor MEP or so forth. Then in the middle of 2019, the Department of Labor, actually by regulation, changed its interpretation. Now, it can't change the law. The law can only be changed by Congress. But the administration can change its interpretation of the law. And that's what they did. The Department of Labor said, instead of just a common business, we can go to--if you're in like the same state as another business, that will be the nexus or the same municipal area, that will be the nexus. The SECURE Act takes that one step further and creates what are truly "open MEPs" by eliminating the nexus requirement altogether. So, today, an employer in, let's say, Alaska--whatever--there are farmers in Alaska. The farmer in Alaska can participate in the same MEP, if you will, as an accountant in Florida, as a contractor in New York, and so on and so forth. So, that's the real benefit of these things. And I think we will certainly see a greater uptick in them going forward now that these barriers have been removed.

Ptak: So, who will sponsor these? How will eligibility for these be determined? And is it possible that we'll see some small employers who are using sort of a typical small-company plan, so to speak, convert into an open MEP?

Levine: Yeah, I think that's entirely likely, particularly depending upon the type of savings and streamline features that can be offered. And the MEP can be established by any number of groups, but I think you're going to see potentially a push from advisors. I mean, if you're looking at this from an advisory perspective, instead of, again, having to like service all these different plans with different investment lineups, etcetera, I can go out there now and I can say, you know what, I'm going to create the Jeff Levine MEP and I'm going to pick out the 20 best investment options that I believe are out there and I'm going to do due diligence on just these every quarter, instead of doing it on 30 different fund lineups for different companies, etcetera. And then I will go out and market to the companies that I work with, its clients and say, hey, why don't you participate in the Jeff Levine MEP, if you will. And there's a couple of ways you can run these. You can run these via like a board of directors or whatnot. But I think it will start at the advisory level. I think that's going to be a common place to do that. And I think a lot of this is also going to be based on the recordkeepers, because the recordkeepers out there don't necessarily benefit from the same streamlining as on the investment side, because plan testing still needs to be done at the company level, not at the MEP level. So, you still have a lot of work on the part of the administrator.

And so, it's going to depend upon how… There's going to be two sides to this equation, if you will. But sure, I think given the fact that the barriers have been reduced and there are some benefits for the creation, we are going to see a greater uptick. You certainly could have small business plans kind of converge onto these. That's really the pure target of this, if you will. If you're--just to throw out a company name, I feel like Home Depot, for argument's sake--you don't need a MEP in order to get pricing power. You're big enough as it is, right? You can go to any recordkeeper or plan and they want your business simply because of your size and scale by yourself. So, I do think those small businesses are probably the likely target.

Benz: So, this presumably will have benefits for people working for smaller employers who either weren't covered by a plan before, maybe it wasn't such a great plan. But I guess I can't help but wonder, isn't this a tremendously inefficient way to go about getting those people coverage? I mean, it always seemed like maybe just unifying the 401(k) IRA contribution limit where if my 401(k) plan wasn't so good, I could put it all in an IRA. Wouldn't that sort of solve the problem, but maybe do it in a simpler way?

Levine: Yeah, I don't think any of this really simplifies the law. We've been kind of pushed, if you will, that a lot of these changes are being made for simplicity’s sake, and I certainly don't see that. I mean, even going back to things like the changes in the stretch distributions, that doesn't change anything. All the same rules that existed before still exist today; plus, now we have a new category of beneficiaries to spread those rules out across. So, none of this really simplifies things. I don't really… The argument in favor of MEPs is that if we can make plans cheaper, etcetera, then more companies will adopt them. And to me, at this point, plans are so inexpensive that if you were an employer and you wanted to adopt one, I think you probably would have done it already. I don't really see this moving the needle that much. I think it's a great opportunity to streamline things for those who want to have plans, but I don't think this really moves the needle on a company saying, you know what, we weren't going to have one before but now that we can participate in this MEP, yeah, we're definitely going to do it.

I think you need things more either--like you said, streamline things and make that kind of a more unified plan. In fact, I was reading a couple of articles on the Morningstar platform recently about the universal American retirement plan or something along those lines.

Benz: Right. John Rekenthaler.

Levine: Yes, yeah. Which was a great article. And really interesting idea about going about that, essentially from the ground up, and I can see some benefits of that. Where this, if you want to get employers to adopt plans, you got to make it less expensive and less operationally burdensome for them. So, the fact that they increased credits for small businesses, I think is a bigger deal, and potentially moves the needle more than these MEPs do. The credits will help more and potentially, we could see those increase further in future years.

Also, the new rules for 401(k)s on mandatory requirement for participation for the long-term, part-time employee. Again, if that helps move the needle, that's going to get more people into the system. It doesn't help more businesses establish plans. But there's that separate provision of the SECURE Act, which basically says, where in the past, if you didn't work 1,000 hours in any year, you didn't have to be part of the 401(k) plan. The company could have had more lax rules, but they didn't have to include you. Going forward, there's a new requirement that says, if you work 500 hours in any three consecutive years--so if you have kind of some long time, part-time workers, they now too will be required to be able to participate in those 401(k) plans. I think it's things like that, that will further move the needle for the retirement-savings issue that we see today.

Ptak: The SECURE Act will also make it easier for company retirement plans to offer annuities. Can you explain how that's so?

Levine: Sure, there's a couple of ways in which it does that. The first is a lot of 401(k) plans don't want to do that because they don't want the liability. And while they've long been an option, there's nothing that has prevented people from prior to 2020, let's say, having an annuity inside a 401(k) as an investment option. Chances are your listeners haven't seen that in their plan. And that's because less than about 10% of plans actually incorporate them. And a large issue related to that was, hey, what if we have an annuity inside our plan, but in 20 years… After, let's say 20 years after we've even stopped the plan, we've terminated the plan, and there's no more business even. But 20 years down the road, the annuity carrier goes belly up or something like that. What happens? Are we still liable for it as the fiduciary of the plan? I'm sure listeners are aware--there's a very high bar when it comes to the ERISA fiduciary and what those fiduciary obligations require of the individuals who accept those roles, like plan trustees, etcetera. And so, a lot of individuals didn't want to take on that liability. What if something happens down the road, how can we protect ourselves? Well, let's just not put it as an option in the plan.

The SECURE Act attempts to go about addressing this by providing a procedure, a new safe harbor, if you will, for ERISA that if the plan trustees follow, and they follow a certain set of steps, they will receive a fair degree of liability insulation by following those steps via the safe harbor. And frankly, the steps are not that complicated. The first step is to do some level of due diligence on making sure that the insurer that you're looking at can meet their financial obligations and is in a good status with the state as properly licensed, those types of things. And while all of that sounds really great, and it's certainly something that we would applaud and say, oh, good, they have to do some legwork to verify the insurer's capacity to actually pay what they promised to pay--in what I think is probably one of the more egregious provisions of the SECURE Act.

The way that can actually be done is by the plan trustees, asking the insurance companies if they can meet their obligations. Like, all you have to do is get a warranty from the insurance companies themselves--written statements. And while--again, this is not to be anti-annuity, it's just the process itself is kind of backwards. It's kind of like asking, you know, having the fox guard the henhouse, so to speak. Why would you ask the company who obviously has a clear benefit, if you will, from saying yes to come on to your plan, if they can meet like… It's a little backwards. It really is. But nevertheless, that's the rule. The second aspect of that safe harbor is that the plan fiduciaries need to do a due diligence on the fees in respect to value. The SECURE Act goes out of its way to make sure and make abundantly clear that plan trustees have no obligation to select the lowest-cost option, but they do have to make sure that the fees that are being charged by the annuity carrier are reasonable. And so, for argument's sake, if there's a higher-rated company, that charges a slightly higher fee, maybe the plan trustee can justify that higher expense by simply saying they were a higher-rated company, and we felt that expense was worth it. So, that's the first way in which the SECURE Act reduces barriers for annuities inside 401(k)s.

The second way, the second primary way it does so, is kind of the opposite. Let's say that in the past, or even going forward, a trustee was comfortable enough to include an annuity in the plan. But at some point down the road, they changed their mind. Let's say, today we decided we want to have ABC insurance company offer an annuity in the plan, but in five years, we decide that we no longer feel ABC is a good enough company to have in that plan, and that there are either better options or we simply don't want an annuity option in the plan anymore, for whatever reason. Well, in the past, that kind of created a real problem, like what do we do with this annuity? We can't like force a surrender because the participant may have surrender charges or there may be other issues. So, it was a real dilemma. Going forward, the SECURE Act resolves that by essentially creating a distributable event for just that annuity, when the plan decides that it no longer wants that annuity as an investment option in the plan.

In short, and kind of to make that a little bit clear, your company decides, you know what, we had this annuity option in the plan, you invested in it, but we don't really want to keep it as part of our fund lineup anymore. We're just going to end it and instead of having this annuity distribute its assets, we will just carve out the annuity from your 401(k). It'll be rolled over directly to an IRA annuity, and kind of held intact. And so, that's kind of how the SECURE Act resolves that issue of what if a plan decides to change its mind. And together, those two changes should reduce the barriers to annuities inside 401(k) plans. To the point, you know, the reason this bill was probably passed was, in all likelihood, due to its incredibly strong lobbying from the insurance industry. You can pretty well sense that those provisions were important to get those investments into a plan by virtue of just that.

Benz: Well, Jeff, you are an encyclopedia on retirement and tax-planning matters. We've really loved the chance to sit down with you and to talk about this latest legislation. Thank you so much for taking time out of your schedule to be with us today.

Levine: Of course. Again, thanks for having me and look forward to coming back sometime in the future.

Benz: Thank you, Jeff.

Ptak: Thanks again.

Levine: Bye-bye.

Ptak: Thanks for joining us on The Long View. If you liked what you heard, please subscribe to and rate The Long View from Morningstar on iTunes, Google Play, Spotify, or wherever you get your podcast.

Benz: You can follow us on Twitter @Christine_Benz.

Ptak: And at @Syouth1, which is, S-Y-O-U-T-H and the number 1. Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. Morningstar and its affiliates are not affiliated with this guest or his or her business affiliates unless otherwise stated. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with and governed by the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis or opinions or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)