Bowman Financial Strategies Podcasts Erik Bowman

This episode of Uncommon Cents focuses on Required Minimum Distributions, or RMDs.

Uncommon Cents Podcast 

Erik (00:06):
You're listening to uncommon sense, a podcast by Bowman Financial Strategies. I'm your host, Erik Bowman and thank you for joining me today. Hi everyone. This is Erik Bowman, your host and it's January 22nd, 2020.
Erik (00:27):
One of the highest priorities we have is providing our clients accurate information to allow them to make informed decisions relating to their retirement income. Taxation is probably the biggest expense retirees will face in retirement and bringing actionable information to make confident decisions is a core philosophy of the Bowman Financial Strategies LiveWell Formula. The LiveWell Formula is our process of analyzing our client's current situation, managing their financial investments, coordinating their distributions from various accounts with the goal to minimize taxes and increase net income. It also includes detailed social security, filing, timing and pension planning. Recommendations for some estate planning and legacy planning are a part of the plan. In this episode, I am going to cover some of the highlights of the Secure Act approved by the Senate on December 19th, 2019. The Secure Act addresses many issues relating to retirement savings and distribution. Like everything in this world though there is some good news and some bad news in this new legislation. My goal is to provide you an education of the main components of the law and understand how it may impact you personally and additionally, we want to address how this new law may require changes to our retirement plan to both take advantage of the new provisions and to minimize the pain associated with others.
Erik (01:57):
The setting every community up for retirement enhancement act of 2019, better known as the Secure Act, which originally passed the house in May of 2019, was approved by the Senate on December 19th, 2019 and signed into law by the president on December 20th of 2019. The bill includes significant provisions aimed at increasing access to tax advantaged accounts and preventing older Americans from outliving their assets. There are a few key provisions regarding required minimum distributions and inherited IRAs that should be considered.
Erik (02:39):
In addition to the inherited IRA and required minimum distribution provisions, there are other aspects of the Secure Act. First, IRA contributions can now be made after the age of 70 and a half as long as you're still working. Employees can contribute to their own or their spouse's IRA after they've reached the age of 70 and a half. Long term part time workers are now able to join their company's 401k plan. Employees that work over a thousand hours in one year or over 500 hours in three consecutive years are now able to participate in their employer's 401k. Small business employers, of a hundred employees or less, will receive a maximum tax credit of $5,000. That's $250 per non highly compensated employee. When they establish a retirement plan, account owners are able to withdraw up to $5,000 penalty free from their retirement plan upon the birth or adoption of a child. This will be free from the 10% early withdrawal penalty, but will still be subject to ordinary income tax. Further, 529 Plans can be used to pay down student loan debt and small business owners can now more easily establish Multiple Employer Plans, or MEPs, by allowing unrelated employers to join together in the creation of a plan. The employers no longer have to be related by common ownership or by being in the same industry among other options.
Erik (04:05):
But for today we're going to really focus in on the required minimum distribution aspect and then our next podcast we are going to focus in on the inherited IRA changes. Today I'm going to focus on the required minimum distribution changes. They are pretty exciting and I think that most retirees would look at this as a benefit. I am going to talk about the pros and cons of this change, however. So the age for required minimum dist

Erik: (00:06)
You're listening to uncommon sense, a podcast by Bowman Financial Strategies. I'm your host, Erik Bowman, and thank you for joining me today. Hi everyone and thank you for joining me today. This is Erik Bowman, owner of Bowman Financial Strategies. Our topic today is required minimum distributions or more commonly known as RMDs.

Erik: (00:32)
To some of you, it may come as a shock that you cannot keep your retirement funds in your retirement account indefinitely. Generally speaking, you really must start taking withdrawals from your IRA, your simple IRA or your SEP IRA or even your qualified retirement plans such as a 401k or 403B when you reach 70 and a half. Roth IRAs by contrast do not require withdrawals until after the death of the owner. Your required minimum distribution or RMD is the minimum amount of taxable distribution that you must take out of your retirement account each year. Once you reach 70 and a half.

Erik: (01:16)
The RMD poses all sorts of conundrums for retirees, like how is it calculated? Who calculates it, when is it due? What happens if I don't take it and what if I don't want to take it? And the list goes on. Today I'm going to cover the basics of an RMD. Who does it apply to? Calculations and resources to further educate yourself and of course some potential strategies that may alleviate some of the challenges surrounding RMDs, namely taxes.

Erik: (01:52)
So let's start from the beginning. When you turn 70 and a half, you are required to take an RMD from your retirement account, an IRA, for example, by April 1st of the following year. For all subsequent years, you must take the distribution by December 31st of that year. For example, if you turn 70 and a half in August of 2020 you must make your distribution by April 1st of 2021. If you choose to do that, you would also have to calculate your 2021 RMD and also take that in 2021. So in actuality, in the first year that you decided to take that RMD, you would actually have to take two distributions. Now you don't have to delay until April 1st you can take your RMD in the year that you turn 70 and a half.

Erik: (02:49)
An exception to this rule applies to 401ks, also known as a qualified retirement plan, which is the terminology that's used to describe an employer sponsored 401k, 403B, 401A, just to name a few. For these accounts, you must take an RMD by April 1st of the year following the year you turn 70 and a half or upon retirement, whichever is later. If you're still gainfully employed for example, and you have an act of 401k and you're 72 years old, you don't have to take an RMD from that qualified plan that you have at that current employer, even though you're older than 70 and a half. However, once you retire, those RMDs are due by April 1st following the year that you retire. And one really big caveat and a mistake that you do not want to make that is even if you are working and you're older than 70 and a half, if you have an IRA in addition to your 401k, you still must take your required minimum distribution from that IRA. Don't make that mistake and I'm going to be talking about the penalties the IRS can impose if you fail to take your RMDs.

Erik: (04:07)
here are a few other points that may save you some headaches and money in the future. If you have multiple qualified plans or multiple 401k's, meaning maybe you've worked at previous employers and you have simply left your money behind at those various employers 401ks and you have not moved them into IRAs, you must calculate the RMD for each account individually and then take the distribution from each of those respective 401ks by the deadlines. By contrast though, if you have an IRA or multiple IRAs, you can calculate the required minimum distribution for each IRA individually. Add those together and take the total sum of those as a distribution from one of your IRAs. Now, depending on how you're investing your assets, this may be a beneficial thin

                                            
Erik:                                     00:06                    You're listening to uncommon sense, a podcast by Bowman financial strategies. I'm your host, Erik Bowman, and thank you for joining me today. Hi everyone. My name is Erik Bowman and I am the owner and founder of Bowman financial strategies. Thanks for taking the time to listen to this podcast. Today, I'm going to be discussing the three primary risks in retirement.
Erik:                                     00:34                    At Bowman Financial Strategies, we work every day helping clients who are transitioning from accumulation to distribution to do so wisely and confidently. I've seen the success stories, worked with many challenges facing retirees and helped my clients craft income plans they are confident will meet their needs for the entirety of retirement. Importantly, these plans are built to provide stability and to support your standard of living regardless of market conditions. Getting motivated to take the necessary steps to create an effective retirement plan can be challenging. However, not crafting an effective plan can be catastrophic to your retirement. It's often been said that your retirement outcome is a result of your retirement income and never truer words have been said. You have worked hard, saved during your careers and budgeted wisely, knowing that the day was going to come when you will need to replace your income without working. Now you have an accumulated bucket of money to retire with and the primary goal many times is to maintain your current standard of living you enjoy now plus add in more travel.
Erik:                                     01:43                    Well one method is to invest in the stock market, hope you're diversified and allocated correctly, and hope to get enough of a return, and hope that the market doesn't crash and take your retirement with it. At Bowman Financial Strategies, we don't ever use the word hope in our retirement plans. Our plans are designed to remove anxiety knowing that all three risks in retirement are addressed appropriately. The Bowman Financial Strategies income planning process known as the LiveWell formula focuses on three primary risks in retirement, and every recommendation in our plans directly addresses these primary risks. The risks in order are sequence of return risk, inflation risk, and longevity risk. To further break these down, let's look at them one at a time.
Erik:                                     02:37                    The first risk: sequence of return risk. I also call this early retirement market timing risk. This risk is represented by the risk of significant negative market returns in the early years of retirement. You only have to go back to 2007 through 2009 to witness over a 50% drop in the U.S. Stock market. It's been over 10 years since that low and the markets have marched steadily upwards since then with very few exceptions. And with markets routinely setting new highs, some would say that the potential for continued growth for the next 10 years is less likely than a significant drop during that same period. If you are just starting retirement and you're fully exposed to potential market losses like 2009, and many seniors were and are, your future retirement plans may change dramatically requiring an unpleasant adjustment in your standard of living to make ends meet. We seek ways to limit early retirement market timing risk by using fixed or guaranteed rate of return solutions to reduce the exposure to pure stock market.
Erik:                                     03:50            

Erik:                                     00:00                    You're listening to Uncommon Cents, a podcast by Bowman Financial Strategies. I'm your host, Erik Bowman and thank you for joining me today. Hi everyone. Today we're going to be discussing common beneficiary mistakes and how to prevent them. It is June 20th, 2019. Thanks for joining me today.
Erik:                                     00:32                    Before I get into the common beneficiary mistakes, I thought I might take a moment to briefly give you an overview of some of the principles that we adhere to at Bowman financial strategies when it comes to beneficiary designations. The first thing is that we always want to name at least a primary beneficiary and whenever possible or when it makes sense. We also want to name a contingent beneficiary. The rationale for this really revolves around ensuring that your assets are going to whom you want them to go to after you've passed away without interference from the probate courts in the government and potentially contested wills and things like that where what you want to have happen may not actually work out smoothly if you don't designate it in the original contract or by making an additional beneficiary designation after a contract has already been opened up. This would apply to investment accounts, qualified and non-qualified example of a qualified account would be an IRA or an individual retirement account. And then there's non-qualified taxable brokerage accounts. Then of course, life insurance policies. All of these, you want to make sure that you have appropriate beneficiary designations.
Erik:                                     01:51                    So the first primary issue is not naming a beneficiary on a life insurance policy or an investment account. Most of our custodians, fidelity and Schwab, for example, when we open up an IRA or a Roth IRA, they actually mandate that you list a primary beneficiary at a minimum before they'll even open the account. However, for non-qualified accounts, also known as transfer on death accounts, they actually do not require a beneficiary to be named if there is no beneficiary, the investment company or the custodian typically has their method of how they're going to dispose of those funds upon the death of the account owner. And usually it means it's going to go to the estate and then you're going to have the state get involved through probate with probate courts and lawyers cost, time and aggravation. So if you want to ensure that your assets flow through to who you want them to flow to after you're gone, you want to ensure that you are listing at least a primary beneficiary on all of your accounts.
Erik:                                     02:57                    As an extension of this, first of not naming a beneficiary, as we've just discussed, you should always name it primary, but it's also problematic if you don't name a contingent beneficiary, a contingent beneficiary as the person who's going to receive the assets. If the account owner dies and if the primary beneficiary is also no longer alive, then the cash or the assets will flow directly to that contingent beneficiary. Once again, if a husband and wife die in an auto accident to be morbid for a quick moment and the surviving or the spouse, the wife was listed as the beneficiary and they both died in that car accident and if there's no contingent beneficiary, then once again those assets are going to be subject to probate.
Erik:                                     03:47                    Another issue can run into sometimes, is that with an individual retirement account, what we find is that some people wa