On Tuesday, December 17th, the Secure Act of 2019 was attached to a spending bill. This piggyback effect meant that the Secure Act would be passed or the government would be shut down. While the dust is still settling on some of the finer points, we know enough to get you up to date and provide you with what you need to do in response to this sweeping retirement legislation.
The Death of the Stretch IRA
In the past, when you inherited a non-spousal Traditional IRA you could take a small, required minimum distribution over your lifetime. The goal was to have your investment returns outpace your distributions and create multi-generational wealth. For many middle class Americans, the IRA was the largest part of their estate plan. Well that’s dead and gone. Now you have ten years to take that all the money out. You are likely to inherit your parent's IRA at a time when you are in your peak earning years. You'll be forced to empty the Traditional IRA out before the clock strikes ten, creating the biggest possible tax revenue for the IRS. Furthermore, many people have set up estate plan strategies using trust language that will no longer be valid. Consult your attorney as soon as possible.
So what should you do? If you plan to leave behind an IRA to non-spouse beneficiaries, there are a few things to consider. First, converting some or all of your Traditional IRA to a Roth IRA might be an option. But that only works if your current tax situation is more favorable than your beneficiaries will be. It's hard to know the future. Second, life insurance can be used to help pay the taxes. For pennies on the dollar, you can set your heirs up to inherit more, after tax. There a lot of considerations, such as your health, insurability and family situation.
RMD’s are now 72 years old
If you aren't already taking or required to take your Required Minimum Distribution, then you have until you are 72 to begin your RMDs. These extra 18 months are a chance for your to get in more Roth conversions. Why would you do that? Each person's situation varies, but converting your Traditional IRA to a Roth IRA now can be beneficial in the current tax code. But how do you know? That requires coordination between your CPA and your financial advisor. We recommend a Tax Map to see if you are in the Roth IRA conversion sweet spot.
Contribute to your Traditional IRA Forever
In the past, you could contribute to your Traditional IRA until you were 70.5. If you were working and had a 401k or Roth IRA you could always contribute to those. Now if you have earned income, you can contribute to a Traditional IRA forever. The trend of longer lifespans and stronger health spans means retirees can find meaningful work well past 70. This change gives those people an option to continue to save in a tax-deductible, tax-deferred manner. Furthermore, it opens the opportunity for so-called Back Door Roth IRA well into your sunset years.
The Secure Act of 2019 is a big enough deal that you need to take action. If you don't have a written financial plan, there's never been a better time. Make sure that your plan includes a Tax Map and Bucket Plan that you can understand. If you have a written financial, plan let's get it updated to reflect this sweeping legislative change. When you're ready to continue the conversation, click here.