Mind Dump | 4/24/2020: My Birthday Wish, Stimulus Update, Retirement Plans, & the SECURE Act

“Leaders must determine the highest priority task and execute. When overwhelmed, fall back upon this principle: Prioritize and Execute.”

Jocko Willink and Leif Babin

Reflections and Takeaways

My Birthday Wish

It was my 39th birthday earlier this month.  We had already been practicing social distancing and the executive order from the governor of Michigan had been in effect for a little over a week.  We certainly weren’t going out for dinner to celebrate.  My birthday fell on a Thursday and we didn’t do anything special for dinner that night, but Krista and Lilli, an au pair from Germany that is living with us and helping with the boys, made a darn good chocolate cake.  I normally don’t eat sweets or junk food but I punished that chocolate cake.  That night I received my birthday presents, the best of which is shown above.  Lilli is really good with arts and crafts and “helped” my 3 year old son, Colin, make a super hero plaque dedicated to me.  It reads:

“Daddy you are…

as Smart as Ironman…

as Strong as Hulk…

as Brave as Batman…

as Fast as Superman…

and our favorite SUPERHERO”

The following night we made an awesome dinner.  Luckily in West Michigan we have access to very high quality, sustainably grown / raised food.  I contacted what I think is the best butcher shop in town (shoutout to Matt at Louise Earl Butcher) and ordered a monster bone-in-ribeye, a giant marrow bone, and pork belly.  It was amazing.

I really don’t get very excited about holidays in terms of the celebration but birthdays and the new year are always times that I give significant thought to where I am in my life, where I want to go, and how I am planning to get there.  I also rarely consider the tradition of the birthday wish, but for some reason it was really on my mind this year.  It just feels like a really important time to me – a time that a well thought out birthday wish was worth considering.

I’ve had some pretty big challenges in my life over the last handful of years and it was really easy to get wrapped up in that experience and spend the majority of my time thinking about my problems, my pain, and my potential solutions – a very self-centered perspective that I don’t think fairly represents who I am.  At some point in the last year or so I have finally started to pull out of that myopic focus on myself and shift much of my focus to my boys.  I want to be a good dad…not just a dad that’s around and fun to play with though.  I want to be a dad that views his responsibility to his boys from a perspective of careful stewardship.  Yes, I want to be able to provide for them in terms of the basics of food, clothing, shelter, and safety.  More than that though I want to do my part in helping to fashion them into happy, healthy, strong, loving, caring, generous, brave men that will bring value to the world.  I want them to have uncompromising value systems, integrity, and the courage to always do the right thing no matter the cost.  I want them to care about the future ahead of them as much as I do.  There is a lot to unpack here, but my birthday wish, in a nutshell, is that I will find a way to be a good dad.

I recognize that I can’t control the outcomes in my children’s lives, but I believe that I can influence them through my attitude, thoughts, and actions.  I have high hopes for Colin and Carter but it has to start with me.  In his book, Extreme Ownership, Jocko Willink goes into deep discussion about what a mindset of extreme ownership looks like and why it is effective.  If I expect to see any of the characteristics mentioned above in my boys, I need to take extreme ownership of my role as a dad.  If there is something that I want to see in my boys, it better show up in me.  I better model it for them consistently and persistently over time.  Even when I don’t have the energy or ambition to be a better man than I am, I’m going to keep reminding myself to think of them and dig deeper in service to something greater…my boys…my legacy.

Thoughts, questions, comments on this one? Hit me up on my contact form.

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Wall Street Journal: House Approves $484 Billion Bill to Aid Small Businesses, Hospitals

Here are the highlights:

  • The bill is valued at $488 Billion
  • Aims
    • Replenish business-relief programs
    • Hospital assistance
    • Expand COVID-19 testing
  • Allocation
    • Paycheck Protection Program (PPP) – $310B
      • Of this amount, $60B is set aside for small, midsize, and community lenders
    • Economic Injury Disaster Loan (EIDL) – $60B
    • Hospitals – $75B
    • COVID-19 Testing – $25B

To be clear, we aren’t anywhere near finished with this yet.  This is called an “interim” bill.  Nancy Pelosi almost walked away from negotiating on this because the plan is to roll out a CARES 2 program.  This package is just some kindling that we can burn through while we wait for them to work out CARES 2 in may.  In another article I read from The Power of A Pelosi was quoted saying “We’re ready to go onto the next bill”.  To my knowledge this was on 4/22 and the interim bill had not even passed yet.

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Comments on Qualified Retirement Plans

I recently was helping a client to review the investment options inside of their 403(b) retirement plan and was pretty disappointed when seeing their investment options.  In this case the client is actually a decision maker for the business and retirement plan, so we initiated a conversation surrounding the investigation of the current plan and alternative options.  Properly designing, managing, and analyzing employer sponsored retirement plans is not straightforward.  If it is not your full time focus, when opportunities arise it is probably best to leave it up to the experts in this space to handle it.  In the case of this client I was able to quickly build a basic fact pattern and then reached out to Josh Itzoe of Greenspring Advisors.  I first heard him interviewed by Michael Kitces on episode 30 of the Financial Advisor Success Podcast and was impressed, so when this came up I wanted to reach out to him just to see if I could bend his ear on the scenario for this client.  The conversation was really helpful and I think it should lead to the client getting greater clarity about their current plan and whether or not they should consider other options.  Even if they do not choose to go that route they will be far more informed about their current plan, how it works, and the incentive / compensation structure for the service providers on the plan.

My big takeaways from the call with Josh were related to fee disclosure and 2020 Q1 retirement plan fund flows:

Fee Disclosure

I was advised to have the client request a copy of their 408(b)(2) fee disclosure from their current service provider(s).  This document will help the key decision makers in the business understand how many hands are in the cookie jar and how the incentive structures work.  This is probably something that all individuals responsible for running their company’s retirement plan should be intimately familiar with.

2020 Q1 Retirement Plan Flows

Take a look at this article from Alight on Q1 fund flows…holy smokes.  There were a lot of people trying to get out of equities and something that they perceived to be safe.  In the case of the client scenario mentioned above, the investment lineup doesn’t offer a money market, stable value, or even a short term, high quality bond fund.  From my perspective the investment committee responsible for managing that investment lineup is subject to liability exposure.

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Let’s Not Forget About the SECURE Act?

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law on 12/20/2019 and took effect 1/1/2020.  I just wrapped up a CE presentation provided by Jeff Levine, CFP(R), CPA, CWA from Nerd’s Eye View on this piece of legislation.  The name of the bill is a giveaway to the objective.  There is a lot to unpack here so I’ll just pro vide a brief outline of the key points here and then go into more detail on this in future writings.

  • Rules Related to Inherited IRA Distributions Have Changed Significantly.  Some people refer to this section of the legislation as “The Death of the Stretch IRA”.  This is going to have a significant negative income tax impact on a number of circumstances.   Most of my clients are high income earners between the ages of 30-50.  For this demographic, those that inherit pre-tax retirement accounts from their parents in peak earning years are going to have to be very thoughtful about how they manage this.
  • The Starting Age for Required Minimum Distributions (RMD) has Been Moved to 72.  This is the part of the bill that seems to have gotten the most attention.  Oddly it will have zero impact on the majority of the population at or above the at of 70.  The reality is that this will only help the wealthy and those over the age of 70 1/2 that do not need to take money from their IRA accounts to live on.
  • The Maximum Age for Traditional IRA Contributions was Repealed.  Previously individuals over the age of 70 1/2 were prohibited from making Traditional IRA contributions.  This was a little silly considering the fact that people of this age could contribute to nearly any other type of retirement account if they had earned income (Roth IRA, 401(k), SEP IRA, etc.).  This was a sensible change to make but the impact is not likely to be significant even with over 30% of the population over the age of 70 is still actively working and earning income.  In my next point I will discuss why it may be a bad idea to exercise this option.
  • Qualified Charitable Distribution (QCD) Anti-Abuse Rule.  I am going to want to spend some more time in the near future discussing the concept of the QCD.  Essentially it permits individuals that are 70 1/2 and up to directly donate their RMDs to a charitable organization and take an “above the line” tax deduction.  This is important to understand because with the passing of the Tax Cuts and Jobs Act (TCJA) of 2017, many people will no longer be itemizing their deductions on their tax return.  This means that many individuals and married couples that make charitable contributions will not derive any tax savings as a result.  If, however, they are over the age of 70 1/2, they are able to directly transfer up to $100,000 of their RMD to a charitable organization and reduce their Adjusted Gross Income (AGI), and therefore their taxable income.  This is especially meaningful for those that are using the standard deduction.

    One catch here is based on this anti-abuse rule which will penalize individuals that make Traditional IRA contributions after the age of 70 1/2.  There are many ways around this but anyone that may even consider a QCD in the future should refrain from Traditional IRA contributions if they are over 70 1/2.
  • 10% Penalty Exception for New Parents (childbirth or adoption). For parents that have a child or adopt a child under the age of 18, they have one year from the date of birth or adoption to take up to a $5,000 penalty free withdrawal.  That is for each parent, so assume up to $10,000 per household.  There are some interesting planning opportunities here, especially if you are in agreement with me on the idea that income taxes are likely to be much higher in the future than they are today.
  • Kiddie Tax Rules Have Reverted Back to the pre-TCJA Legislation.  For many families with children that earn significant investment income, the TCJA was punitive, using trust tax rates rather than the tax rates of the parents.  Not only has this has been reversed, but 2018 and 2019 returns can also be amended for a refund if the tax rate of the parents was lower than trust tax rates.
  • Open Multiple Employer Retirement Plans.  I won’t go into detail here, but there is an opportunity to aggregate multiple non-related companies into a single employer sponsored retirement plan.  Without thinking through all of the details of this my knee jerk reaction is that this could revolutionize the qualified plan space.  I will be interested to learn more on this.
  • Annuity Related Changes.  Apparently the insurance industry lobbied pretty hard to make it easier to bring annuity products into qualified retirement plans like 401(k), 403(b), etc.  The legislation allows for a big reduction of fiduciary liability and some good options for portability in the event that an employee separates from service or the annuity contract is later removed from the plan.  These were all big hurdles to making annuity contracts a likely candidate as an option within retirement plans.  With that said, the due diligence requirements are a joke.  The due diligence process basically consists of the retirement plan sponsor getting a letter from the same insurance company that is issuing the contract stating that they are in good financial condition.  What?
  • New Small Business Retirement Plan Credits.  This is a big one.  Previously, employers that set up a retirement plan qualified for up to a $500 credit for the first three years the plan was in existence.  That number was bumped up to a maximum of $5,000.  That is up to $15,000 of cash in hand (not a deduction) over a three year period .  There is also a $500 credit available in the first three years for companies that auto-enroll employees into the plan.  The $5,000 credit is based on the number of employees in the plan.
  • Other Qualified Plan Changes.  There were some other changes made to auto enrollment contribution limits, greater retirement plan access provided to part-time workers, elimination of 401(k) debit/credit cards (who is the genius that thought that was a good idea?), and modifications related to the timing of when plans can be established.
  • New Type of Money Available for Retirement Contributions.  Some forms of income such as non-tuition fellowship and stipend payments can be used for IRA contributions.
  • Expansion of 529 Plan Eligible Expenses.  Fees, books, supplies and equipment for apprentice programs are eligible for 529 plan reimbursement (but must be certified with the DOL).  What I am more excited about is the new ability to use a lifetime amount of $10,000 per beneficiary to repay qualified education loans.

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Published by

Sean Rogers, CFP®

Sean Rogers is a fee-only financial planner in Grand Rapids, MI. He serves individuals and families right in his back yard in West Michigan. He also works virtually with clients all over the country. Sean's firm, Capital Stewardship Partners delivers value-aligned, competent, conflict-free financial advice to Gen X and Millennials. The firm does not have any minimum requirements for net worth, investable assets, or income. This means that you can have affordable access to a fee-only fiduciary regardless of how much money you have available to invest. Sean Rogers is a CERTIFIED FINANCIAL PLANNER™, an XY Planning Network member, a NAPFA-Registered Financial Advisor, and member of the Financial Planning Association and Society of Financial Service Professionals.​