Rules: The rules we live by are fascinating, especially when you think about how and why they are created. Take for instance the 124 page SECURE Act passed in December 2019, created for the purpose of “Setting Every Community Up for Retirement Enhancement.” This bill was introduced in the House of Representatives in Spring 2019, bounced back and forth between the Senate, passed both houses, and was signed into law in late December 2019. Pooof! Rules related to the popular “stretch IRAs” and when required distributions from an IRA must begin have now been changed (see here for more on those changes).
The following two stories are a launching pad for a series of articles about exceptions to the rule, and they make me think of a quote attributed to Mark Twain, “History doesn’t repeat itself but it often rhymes.” Despite over a 100 year separation in time, the anecdotes below are uniquely linked:
Bomb Lances, Story #1: The bomb lance first exploded onto the whaling scene in the early 19th century. This tool allowed whalers to finally hunt the finback whale, or “greyhound of the sea.” In the spring, 1880, a whale breached (or, broke the plane of) the choppy waters off Cape Cod. A shot followed and the whale was lanced by our first-finder, a fisherman named Ghen. After the bomb lance exploded, the finback whale sunk, and was found days later on the shores of Massachusetts. Our second-finder, having physical possession, auctioned the whale to a proprietor named Rich who processed the blubber into valuable oil for sale. Fisherman Ghen sued proprietor Rich for the oil. In this possession controversy, will the judge see this as a case of “finders, keepers?”
Bronx Bombers, Story #2: Over 100 years later on September 21, 2008, the last home run ever hit at the original Yankee Stadium will link together to a story about a finback whale. Journeyman catcher, Jose Molina hit a shot – a Bronx-bomb – into a sea of fans. Old Yankee stadium roared in celebration as the ball sunk into the netting above this particular fan-filled section in left field. A fan, our first-finder, named Steve breached his hand through the netting and grabbed the historic, valuable ball. A security officer told Steve, like other fans before him, to let go so they don’t rip the netting. Steve obeyed, and the ball rolled down the netting to our very excited, second-finder Paul, igniting controversy. Who should possess the ball, the Steinbrenner family, Jose Molina, first-finder Steve, or second-finder Paul? (Obviously not Orioles pitcher, Chris Waters, who gave up the home run.)
Outcome: Enter our exception to the rule. The common rule of thumb “possession is nine-tenths of the law” gives a pretty good indication of who normally wins controversies of possession. Here, fisherman Ghen and Steve both ultimately reaped the rewards because Yankee Stadium and the whaling industry had customs to protect their respective “first-finders.” In the 1700s, the custom to protect fisherman incentivized them to find more whales and penalize beach combers looking to auction whales they did not catch. The facts rhymed in the baseball story, where Yankee stadium incentivized people in Steve’s position to let go of the ball and prevent rips in their netting. These uncommon examples go against the grain of the general rule, but make sense with the big picture in mind.
Learnings: Again and again, we learn rules of thumb for the purpose that they will hopefully save us energy and time. Our team respects rules of thumb for the practical shortcuts they are, and think they can be helpful during the decision making process. There are, however, many instances where these “rules” have unintended effects. This article, and those to follow, will focus on rules of thumb from different aspects of life ranging from finance, law, taxes, information security, and nutrition.
Our first Rule of Thumb: The rules the U.S. Government (e.g. IRS) has in place regarding my retirement accounts (401(k) or IRA) are consistent enough to rely on for financial planning purposes.
Exception #1: It’s true that major retirement rules do not frequently change, and such steadiness is important to executing a detailed financial plan. Recently, there have been at least three major changes that impact past and future planning decisions.
First, the Tax Cuts and Jobs Act (TCJA) of 2017 was major legislation altering the income tax brackets and changing the landscape of taking itemized deductions. Many of us still remember how these changes impacted our paychecks in 2018. However, it is also important to understand the estate tax implications of this rule change, which can be rather complex. Rather than write extensively about these matters, we suggest you review your estate plans with your attorney. If you would like to get the conversation started, we can help organize your thoughts as your prepare to set a meeting. Are you aware that many components of the law will sunset (or revert back) in 2025?
Second, the SECURE Act of 2019 made some powerful changes. This rule eliminated the “stretch IRA” for non-spouse IRA beneficiaries, and now requires the IRA to be distributed within 10 years following the death of the account owner. This change has significant long-term planning implications. Further, individuals who are age 70, or younger, used to have required distributions (RMD) beginning at age 70 ½. Now, these persons can wait until the new mandatory age of 72. More details on this rule can be found in this article. Did you know that 529s may now be able to pay down part of your student loans?
Finally, the CARES Act of 2020 is a monumental program attempting to help people cope with this extraordinary time. The changes it made to retirement accounts are important, but are more temporary than the previous two. The key changes to your retirement accounts have to do with the suspension of required minimum distributions and relief for access to the funds during the emergency. Here is an article for more.
During difficult times like now, it is very important to keep the big picture in mind. One great way to do this is to stay in communication with your key advisors and update your plans (financial, estate, and tax plan). Rule changes can affect everyone differently, and it’s important to know with relative ease how your plans could be altered. Not every rule change is negative and certain rule changes can bring opportunity; doing a series of Roth IRA conversion would be one example.
Next: Future posts will likely include helpful interviews with internal and outside experts, stay tuned. If you have any questions or suggestions, please reach out to me here.
We have recently hosted webinars on the SECURE Act. If you are interested in participating in the future, please email us so we can provide the information.
More on the Whaling story: Ghen v Rich case: 8 F. 159 (1881);
More on the Baseball Story: Homerun Video
