Color of Money Live with guest Aron Szapiro: Answering your Secure Act questions and getting ready for tax season

Jan 16, 2020

Welcome to a weekly discussion about your money hosted by Michelle Singletary, nationally syndicated personal finance columnist for The Washington Post.

This week, Michelle was joined by Aron Szapiro, director of policy research for Morningstar, a global financial services firm.

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So glad you could join me today. 

If you've got questions about the new Secure Act, I have a terrific guest from Morningstar. 

And as always love to get your Thursday testimonies. 

Let's get started. 

If I inherit an IRA and don't live 10 years after inheriting, can I leave it to beneficiaries, and if yes, how long do they have to withdraw?

As you would might expect with the tax code, there isn't a simply answer. This depends a little on your circumstances. But, in general, the beneficiary of a beneficiary continue to take required distrbutions that the original beneficiary took. In the context of the SECURE act, which changed some of the rules around stretch IRAs, we may need to wait for more guidance from the IRS to confirm what is and is not covered.

Hello. I am fortunate to have worked for a company for nearly 40 years that still provides a pension to their retirees. Within the last month, a new company took over my division and so I now have a new employer. As an active employee with the new company, I am now technically considered "retired" from the old one. As a result I have been offered several personalized pension payout options from the former. The highest payout would be at what they considered to be "normal" retirement age of 65. However, earlier payouts to qualified individuals can also be taken at reduced incremental rates starting at age 55. I recently turned 59. I had always assumed that waiting until 65 to start receiving the pension at its highest rate was the way to go. However, I projected the numbers that they provided and over the course of time it seems to make more sense to start receiving the payments now. The total accumulated amounts would appear to be significantly higher if I start sooner than later. It isn't until after age 85 that the pendulum starts to shift in the other direction. Waiting until 65 would mean 6 years of lost potential accumulation. I would rather get something during these 6 years, even at a lower rate, than nothing. I should probably add that I do not expect to live solely off of this pension and future social security checks. I will be dipping into other retirement savings as well. With all that said, what do you think of my plan to start collecting now? Am I missing something? Thank you very much.

Generally speaking, waiting increases traditional pension benefits, but it does depend on the plan terms. In this case, it may make sense if there is not a substantial reduction in the benefit to start collecting earlier.

Anyone else facing a similar situation? 

I've been thinking about this a lot myself. I can start taking my pension benefits in a monthly annuity or lump sum.

Still evaluating for now. 

This debate of now or later is a tough one. Now means you can use the money to elevate your lifestyle -- assuming you don't just bank all the money. And now may be mean you are healthy and able to say travel. 

Later means more money but by then you may not be able to do the things you want.

Later also means more money to help with perhaps increasing out-of-pocket health care costs such as long term care. 

My head hurts!

Hi Michelle, Long-time reader submitting early. I wrote you in 2017 after paying off $41,000 in undergrad student loans. In 2018, I maxed out a credit card with an $8K limit during a period of underemployment. In 2019, a new job let me start aggressively paying down the balance. Last week, with $1,200 left to pay, I logged into my account to discover the bank nearly doubled my card limit to $15,000 (great news for my credit score). And on today (Wednesday), I paid off the credit card! ZERO BALANCE! I am officially debt free and it feels GREAT! Also, I started a master's program in September and committed to paying for it in CASH -- I will not take out any more student loans ever! My employer reimburses us up to $5,250 per calendar year for tuition and will ultimately reimburse 35% of my tuition costs. I'm paying the rest in cash and am looking for scholarships. I am committed to no more debt, except perhaps a mortgage this year, as I hope to buy a home. My Life Happens fund is full ($1,500), I'm getting my employer match in my 401K, and I'm building my Emergency Savings back up to 6 months worth of living expenses (currently at 2 months). To your readers who have debt: Keep reading Michelle's advice and work it one step at a time. You can do it!! Thank you so much, Michelle.

Wow! What a wonderful testimony. And so glad I was there for you back in 2017. This is what this forum is all about -- accountability and encouragement. 

Good for you. 

I would give you a hug so for now here's a text one ( ).

And for others struggling with debt or at times feeling you can't do it -- YOU CAN!

I have to say I am still very skeptical of money, saving tracking, etc. apps (Mint, Acorn, Robin Hood, bank apps). I'm not sure I feel comfortable having all of that information on something can be easily lost. They also raise other privacy concerns, access to accounts, the possibility of selling of data... But they do seem like they could be helpful, and it does seem like a lot of people use them. Do you have any thoughts on them? Thanks! (She/Arlington)

Fintech is an area that it is still something of the wild west, but these apps can be very useful. My hope is that we will get a regulatory infrastructure around some of these apps so that people can safely aggregate all their retirement plans, bank accounts, and liabilities in one place, since that can really help people sort through their financial lives. No matter what, it's very important to have good password hygiene (do not use the same passwords multiple times) and use two-factor authentication where you can. 

Hi Michelle. For 20 years, I did the family taxes. It was easy - two incomes, one child, one mortgage. I did it by hand on paper forms. Now the child is 18 and in college. She earned $5,000+ in 2019 at her part-time job. Should I use turbo tax or some such to guide me through the new issues? I don't want to make mistakes. Thanks.

My husband does all our kids' taxes using commercial do-it-yourself software. Sounds like you can do this easily. 

If you use software it helps catch errors. 

Don't be fearful. You can do this. 

Also, your kid qualifies for free tax preparation through the IRS Free File, MyFreeTaxes through United Way, VITA at IRS.gov.

So if you still don't feel you want the responsibility send your kid to one of those free services. 

Michelle, My wife is 73 and I am 60. I have 7 years left of work to go. Right now, we have about $50,000 in non-mortgage debt. We are trying to determine if we should pull the money out of her 401(k) over and above her RMD in order to deal with the debt. This would allow me to make the max contributions over the last 7 years of my work life while erasing the Sword of Damacles that we keep slowly chipping away at. Right now we believe it will take about 3 years to pay off this remaining debt. Your thoughts?

The thing about paying mortgage debt off is that it is a certain return at whatever the interest rate is, less the tax adjustment. (After the TCJA, the tax consequences may not apply to as many people.) That may be attractive. On the other hand, the money in the 401(k) can continue to compound tax free as well. Some of this comes down to how well you sleep at night with the debt paid off. The other thing you could think about would be a mortgage recasting that would allow you to make a lump sum to the mortage, and reset the payments to a lower level going forward over the current term. Many lenders allows this.

I agree with Aron. The market is doing well right now so might be good to keep the money growing. 

But, I do HATE debt, so I might just be done with it and sleep better. Also, keep in mind right now you are mostly paying principal on the loan so maybe you can have the best of both worlds. Take any extra money and aggressively get that mortgage debt down while keeping the 401(k) money in the account. You could knock that three years to 2 or less. 

I recently learned that you can now use a 529 to pay off up to $10,000 in student loans due to changes with the Secure Act. Is there a trusted source where I can find more information? I have $11,000 left on two private student loans and would like to knock them out this year. Thanks! (MN, She/Her/Hers)

Since 529 plans are administered by the states, I would expect them to start putting out guidance and information for how to use this newly-available option. This has only been law for 16 days, so it may take a little time for administrators to implement.

To Aron: I thought I understood this, but now I am thinking I really don't have all the information. What is the difference between a stretch IRA and a regular IRA? Are you saying that if you have a regular IRA then the 10 year rule doesn't apply? Also, how does this effect 401(k) and 401b plans? Do they have the same beneficiary rules.

A stretch IRA was always a bit of misnomer. In short, it was a way to leave money from a traditional IRA (or 401(k)) to a younger beneficiary. For example, a parent leaving an IRA to grown child would be using a strech IRA. That beneficiary would then look at the distribution table (based on his age), and, in his or her inherited IRA, take distributions over his or her remaining life expectancy, determined at that point of inheriting the IRA. That strategy is gone now for beneficiaries that are more than 10 years younger than the IRA account holder, or don't fall into a few other categories.

Husband and I are both in our early 30s and expecting a baby next month. We've been good at having a well stocked emergency fund and have added childcare needs to our prospective budget. Looking forward - while we currently own our condo in DC now, I imagine that we will probably look to move to a bigger space within the next year or two. We each contribute about $15,000 of our salaries to 401K programs (separate from employer match). Should we be cutting back to save a bit more for downpayment of a future house or just further modifying our budget to cut out more spending. If we both cut back, what's a fair amount to target?

Sounds like you are doing really well. Obviously, having a child makes for a lot of life changes. But I think the longer you can delay upgrading your lifestyle, while you save, probably the better. Still, without knowing how much income you want to replace or when you want to retire, it sure sounds like you are in a good spot now.

I agree with Aron about upgrading to another home too soon. See if the space can work now while you get adjusted to the new baby and the extra cost of a kid. 

You may find you can't do $15,000 a piece per year with the added expenses. Also keep in mind, the baby is small who much more room does the kid need really? 

Having said that, I think you stay the course and see if you can find cuts to start a home downpayment fund. It's hard once you pull back from saving for retirement to get back to that level. 

Um....I read they have $50K debt in NON-mortgage debt. Get that monkey off your back!

You are so right. I read right over the "non-mortgage" debt part. For now, without knowing more, I would still suggest you try to get that monkey off your back with cutting back. Because to get $50,000 you have to take about more to cover taxes. And you may put yourself in a higher tax bracket when you don't need to right now. 

I guess I just don't get all the concern. Heirs will likely pay more tax having to withdraw all in 10 years (although some might pay less - like a young person who has a much lower tax bracket than they would later in life). but the people saying that the value will be decimated or that the new rule will take all the value - that simply isn't true. It isn't like the government is putting a 90% tax on these things. People need to stop clutching their pearls. Have you done any work to show examples of just how much difference it makes?

I actually did some analysis on this, and it depends of course on a beneficiary's other income, what the marginal rate will be, returns over the 10-year period and the like. But, for all but the luckiest beneficiaries, it's not a huge difference with reasonable assumptions. I agree!

Is there a possiblity that the new company will cancel the pension benefits in the future? How does that affect the choice to wait for the money or get it while you can? I would consider nothing guaranteed. Pensions run out of money. Will waiting mean you get stuck with even less?

There are a couple of parts of this, and I am going to stick to single-employer pensions, not collectively-bargained multiemployer plans. Companies can do a "hard freeze" on pensions, so workers would not accrue additional benefits. They would still be entitled to their earned benefits, but those could be eroded with inflation. Corporate pensions are also insured by the PBGC, but not for the full amount. Further, the PBGC is in financial trouble, which is also a concern. So the short answer is that they can't cancel the pension you've earned, but there are risks.

where do i find good, specific-to-me tax advice? i want to withdraw some money from an IRA and then donate to a worthy cause. i need to know about tax implications, charitable deductions, etc. Calling the IRS directly just seems like i would be asking a call center for a generic answer. H&R Block? same concern . . . .

The IRS actually has pretty good publications on a variety of tax topics on their website. I know that's not the answer you are looking to hear, but they do try to help people make sense of the Internal Revenue Code in fairly plain language.

Ask around for friends, coworkers etc. about how they use to do their taxes. What you are asking isn't very complicated. There is a tax provision that allows you to use IRS money to give to a charity. 

Read the following:

These seniors can still get a tax break for charitable contributions even if they don’t itemize

Here’s a tax break that is only available to people over 70

I think you misread my question. We have about $50K in NON-mortgage debt. I was wondering if it was worth using my wife's 401(k) to eliminate that. Our mortgage is still going strong and will be paid off in 2029. Thanks.

Ahh, my mistake. To the extent that you expect to earn less return than the interest rate on that debt, then it may make sense to pay it off. However, taking out more money from a traditional 401(k) can bump you into a higher tax bracket, so you will have to do some analysis on whether it's worth it.

So I think your advice would change greatly....

Again, I generally don't recommend people take money out of retirement for non-mortgage debt to say pay off credit cards, car loans, etc. 

For the person who posted what is the non-mortgage debt?

Also, the person noted that the debt would be paid off at the current pace in three years anyway. However, as Aron pointed out if the debt is high interest it may make sense. Do the math to see how much more in interest you would pay keeping the non-mortgage debt keeping in mind that right now market returns year to date have been double digit depending on how you are invested. 

I'm mid-50s, have always done my own taxes (single, no kids). Due to a complicated inheritance last year, I would like to find a professional to do my taxes this year. But I don't know where to start. I don't want to just walk in to a commercial tax preparation office and hope for the best. I always do research where my finances are concerned (hence why I'm here today and follow Michelle religiously) and don't want to mess this up. Thanks.

Again, ask around. This is how we found our tax person before my husband took over doing our taxes.

It's not uncommon for companies to close down pension plans and offer retirees a lump sum. What is considered a fair buyout offer? How many multiples of the monthly payment should the lump sum be? Should the lump sum be enough to invest and get the same monthly income?

The rules around the lump sum equivalents are governed by law, and they change over time depending on interest rates. In my obvservation, companies generally make lump sum offers when they have very favorable terms for themselves. I think the better point of comparison is to a single-premium annuity that would recreate the pension stream of income.

Mint (possibly the others too, but I haven't used those) allows you to manually enter transactions, so you don't have to link your accounts. If you're looking to just an overall picture of finances, rather than just budgeting, I found that an excel worksheet works just fine when updated monthly/ quarterly.

Also Quicken allows you to manually input information as well. We also use Excel to do our net worth statement.

Hi Michelle, I worked very hard in 2019 to pay off my debt. I began 2017 newly divorced and with over $20k in credit card debt. That balance is now 100% paid off! Yay! So now what do I do now with that $20k credit limit? Is it better for my FICO score to leave as is, or should I ask for it to be reduced? I'm not worried about being tempted to use it, and I check regularly for fraudulent activity. But I've heard different things about the impact of a high unused credit limit and I'm not sure what to do. FWIW - my 2020 goals are to pay off my student loans (one more payment left!!), build up the life happens fund, the emergency savings fund, the kids 529 plans, and the home downpayment savings, prioritized in that order. My retirement savings are OK - I save enough to get the full match, and my balance is more than twice my salary right before I turn 40. It's going to be a good year. :) Thank you for all your work helping people like me get on the right track! (she/her, 39)

You need not worry about that credit line. The credit scoring models look at how much debt you use compared to the available limit. At zero percent that's a good thing for your score. 

I would suggest before the home to see if you can push yourself to boost your retirement savings beyond the match, which I'm guessing is what 6% or less? Fidelity Investments recommends saving 15% of your annual income, including any company match. 

I always intended my retirement income to be a 3 legged stool: Social Security, my federal pension and my TSP. I thought I would try to take minimum TSP once per year and use that as my travel budget, living off the rest. I reach 70.5 later this year. Now the SECURE Act has thrown me for a loop. How should I think about this?

Well, having a little more time before you need to take out money is a good problem to have, since it lets you defer taxes a little bit longer. But, you could always take what you would have needed to take out had it not passed!

I don't understand all the griping. I make money, I pay income tax on it. IRAs let me escape that tax for RETIREMENT purposes, not for purposes of leaving a big chunk of change to my kids. Besides, if the closed loophole means my kids pay a lot more tax then that means either I left them a huge amount, or they have a high marginal rate because they earn a lot already. So spare me the self-pity!

I agree with you. But I also understand why folks are upset. They had a plan and now that's been upended. However, with new planning beneficiaries will be just fine. Because this is EXTRA money. The law allows exceptions for spouses, minor children and disabled. 

If I inherit an IRA from a sibling who is 4 years older than me, does that mean I have to deplete the IRA in 4 years rather than 10?

No, in fact you would be able to deplete the inherited IRA based on your life-expectancy when you inherit it. The reason is that you are less than 10-years younger than the original IRA owner. The SECURE Act does not change the rules for people in your situation. I know it's confusing.

I'm retired 10 years, at this point have approx. $260 in TSP, plan to leave to kids. Should I take money out of TSP and invest in IRA with life insurance plan. i'm going to get hit with Fed & state taxes and increase Medicare payment for year funds are withdrawn.

Based on your plan, because you don't need the money, keep it in TSP. The fees are super low and depending on how you are investing it is just fine where it is. I will add this. The big unknown is health care costs. You may find you actually need that money down the road to pay for long term care. 

Leave it be right there in TSP. 

Hi. Wife and I are 62. Hopefully have several decades left. Currently at 70% equities. We don’t mind risk so what is your thought at staying around 70-75% equities? Based on the old rule of subtracting your age from 100 and that should be equity %. Way too low IMO. Thanks.

Advice about this is all over the plan as you might expect. So much depends on so many things. But in your case trust your instinct. Some experts right point out that if you're going to live another 30 years you'll need growth and that means equities. What percentage in part rest with how much risk you can stomach. Just make sure you have enough money that isn't so risky for about 5 years of expenses, etc. 

We are about to payoff our house. What do we need to do? Yep we will be debt free. Crazy thing is that our monthly health insurance cost if we retire without Medicare would be a few hundred dollars more than our mortgage. So off to work we go......

Wow. Let me know when you get that monkey off your back. 

What do to? Celebrate first thing.

Then make sure you have all the paperwork indicating you are free of the mortgage. Set up a savings plan to take care of the property taxers and insurance. 

And, as you point out, direct some of that money for health care and maybe long term care if you don't have a long term care insurance policy. 

Oh, and LIVE. Travel, have fun. 

I am 54 and neither my spouse nor I have ever contributed to an IRA. In part this is because our employers have provided generous retirement plans, and in part because our AGI now exceeds the threshold for deductibility. Did the Secure Act change this calculus? Is an IRA more meaningful choice?

The only thing I can think of is that the SECURE Act did lift the limits on contributing to an IRA after age 70.5, so that might eventually be useful. But, I don't think it changes anything for you given your AGI.

My husband inherited a regular IRA when his mother passed. Last year, right before the IRA distribution rules changed, his accountant put him on a distribution program based on his life expectancy. (I think I have that right--it was not the program where he had to take required distributions over the course of 10 years.) Does the law change mean that he is grandfathered into the life-long distribution or that the distributions have to be changed to close the account within 10 years?

He should be grandfathered in to the old distribution system.

At one point, I signed up to get e-mails from one of the (presumably) many places that send out informal financial information. It seems to be aimed at a much younger, less well paid and less stable demographic than I inhabit. I kind of like having a "there, but for the Grace of God, go I" reminder each day since I was once deeply in student debt and at other times out of work. But I wonder if it is wise to keep up with it because of the risk that it makes me complacent, perhaps smug, about my situation now. I still need to save aggressively for retirement (see student loans and time out of work above), but I am doing that. I don't need to know about an app that I can download to have my debit card transactions rounded up and the change sent to savings. I wouldn't give up my privacy for that. I'm asking about the psychology of it. If you spend band width with information made to help people with much less money than you, do you tend to think that you are doing well, even when maybe you aren't maximizing your potential given your situation and income?

I get you. But I'll say this. I read a lot of stuff. I sign up for all kinds of personal finance blogs, newsletters, etc. 

And not just because it's part of my job. Reading all this keeps me on track too. I'm cheap, many of you know this. I'm a great saver (hubby and I sent/sending all three kids to college debt free) but even we fall down. We eat out too much sometimes. We overspend. Reading about what others are doing or not doing keeps me humble and mindful that any of us can fall or have life happen. 

So keep reading -- all of it, including coming to this chat, reading my columns and Monday retirement newsletter. Even if you know it all you can pass it along to others who don't. 

Seconded - That's how I got my tax guy. I've been with him for about 15 years. He was amazing sorting out a knotty problem where mum had ignored the IRS for .... years after my father died. Yes, mum could go for Olympic gold at ignoring unpleasantness and just assuming it will go away.

Thanks for sharing.

The writer specifically asked about how to approach his NON mortgage debt. You answered about mortgages.

We got it and addressed this in follow up answers. Both Aron and I missed the "non-mortgage" part. Reading too fast, trying to get to all your questions. Human. 

Changes like this are reasons I don't include potential inheritance in my retirement planning. I could inherit a lot, or my parents could spend it, the estate tax rules could change, other rules could change. I try to plan based on my savings - anything else (SS, pension, inheritance) is just gravy.

Exactly! I once had a woman tell me that most of her retirement plan consisted of money she expected her father to leave her. I asked: What if he lives a long, long time?

Her: "Hadn't thought of that?'

is for IRAs received after 1/1/2020, not those received before? (btw, siblings and I inherited late parents' IRA. We see it as found money which, if nothing else comes in front of us, we use for the current year's regular IRA).

If you are referring to the 1o-year spend down window, it applies to an inherited IRA where the account holder passed away after Jan. 1 2020. 

Right, if you were a beneficiary last year, the calculation does not change for you.

What a robust conversation. And love Aron. Have to have him back. So sorry if we didn't get to your question or comment. But Aron has agreed to answer any leftover questions. Look for possible answers in a future column or newsletter.

Thanks for joining me today. See you next week. 

In This Chat
Michelle Singletary
Michelle Singletary writes the nationally syndicated personal finance column, "The Color of Money," which appears in The Post on Wednesday and Sunday and is carried in more than 120 newspapers.

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Aron Szapiro
Aron Szapiro is director of policy research for Morningstar. Szapiro is responsible for developing research reports on policy matters, coordinating official responses to regulatory proposals, and providing investor-focused comments on policy issues to clients and the press. He also chairs Morningstar’s Public Policy Council. His research has been covered in The New York Times, The Wall Street Journal, The Washington Post, The Journal of Retirement, and on National Public Radio.
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