Is the SECURE Act Really a Backdoor Tax Increase?
When President Trump signed the SECURE Act into law on Dec. 20, 2019, it put into motion some big changes for retirement. For one, the act changed the age at which you’re required to start taking minimum distributions, or RMDs. It was age 70 1/2, but with the SECURE Act, the new age is 72. As a part of that, you can continue to contribute to your IRA at any age as long as you have earned income. Before the act was signed, you were unable to contribute past 70 1/2. Another major change impacts new parents. You can now withdraw up to $5,000 from a 401(k) without triggering penalties. It’s designed to help with new birth or adoption expenses. There is also good news for small businesses. There are provisions that make small businesses eligible for certain tax credits for opening new retirement plans for employees. It’s easier and more cost-effective for small businesses to get together to open 401(k) plans for their employees as a Multiple Employer Plan (MEP) rather than a single business taking on the burden for themselves.
For more coverage on these points and other SECURE Act and retirement issues, be sure to visit our YouTube page. You can find links to our videos at BridgeriverLLC.com or search us on the web. I recently appeared on WWJ Radio and FOX 2 News to talk about the SECURE Act, and we’ve posted those videos online for your reference. In the meantime, there’s one more big change I’d like to discuss: IRA inheritance. Before the SECURE Act, most families could pass on IRAs to their heirs, and their heirs had many options. They could continue the IRA and receive tax-deferred money for as long as they wanted. Going into 2020, this is no longer the case. The IRA must be depleted within 10 years after inheritance (spouses, minors, and disabled beneficiaries are exempt). Odds are, when you inherit a parent’s IRA, you are in your peak earning years. As a result, withdrawing from an IRA may put you in a higher tax bracket. That’s likely what the federal government is counting on. Over the next 10 years, it’s expected this move will generate $15.7 billion in taxes. Families may also have to restrategize IRAs that have been placed into trusts. The language of the SECURE Act may disrupt your intentions. Maybe you are single or have minor children or grandchildren and want to set up a trust so IRA money is dispersed in a very specific way. You may need to restructure the trust to take the 10- year limit into account. One thing to keep in mind is that when heirs take control of the IRA, they don’t have RMDs anymore with this new law. This means money sitting in trusts could now be taxed at trust rates, which are the highest in the land.
While the SECURE Act has disrupted the inheritance plans for many families, there are still strategies you can implement to reduce your tax burden. For instance, you can convert your traditional IRA into a Roth IRA — thus taking on the tax burden now. Then, later, when your heir inherits the Roth IRA, they don’t have to worry about “more taxes.” While they outright withdraw or leave it in the trust, because there is no taxation of most Roth withdrawals, all tax issues are gone. Keep in mind that it still must be depleted in 10 years, however. There are other strategies you can implement as well. If you have concerns or questions about your IRA or how the SECURE Act impacts your retirement or your heirs, please give me a call. I can walk you through everything, answer your questions, and help you determine a possible next step, if necessary. UPCOMING SEMINARS Join us for one of our upcoming seminars discussing the SECURE Act and how to maximize your life savings. Tuesday, Feb. 25 and Thursday, Feb. 27 from 6–8 p.m. at Filippa's. Visit our website for more information and to register at BridgeriverLLC.com.
248.785.3734 1 -Dan Casey
Dan Casey on Fox 2 News discussing the SECURE Act, Jan. 12, 2020.www.bridgeriverllc.com
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