Houston Medical Times
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Financial Forecast Could the SECURE Act Make Your Retirement Savings More Vulnerable to Taxes? By Grace S. Yung, CFP Managing Director Midtown Financial Group, LLC
W
ith the passage of the SECURE Act (Setting Every Community Up for Retirement Enhancement), investors and business owners now have some additional incentives that pertain to saving for the future. But even with a long list of advantages, one of the key “tradeoffs” with this legislation could result in a significant amount of your savings and investments going to taxes. There are, however, some actions you can take now to help. Pros and Cons of the SECURE Act In an effort to boost retirement savings in the U.S. and to help avoid a potential retirement crisis, the SECURE Act went into effect on January 1, 2020. Some of the highlights of this new legislation include:
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• Continued contributions to traditional IRAs and retirement plans, even after age 70 ½ • Increased age for taking required minimum distributions (RMDs) from traditional plans from 70 ½ to 72 (but because the year you turn age 70 ½ can make a difference, it’s important to know when RMDs are required for you) • Allowance of qualified part-time employees to participate in employer-sponsored retirement plans • Penalty-free withdrawals from retirement plans for the birth or adoption of a child, and from 529 plans for paying off student loans • Deduction of unreimbursed healthcare costs that exceed 7.5% of adjusted gross income (in 2019 and 2020), and withdrawing funds from IRAs and qualified retirement plans to cover costs that exceed this threshold • More attractive provisions for small business owners to set up “safe harbor” retirement plans like 401(k)s
Even with all of the plusses that the SECURE Act provides, there is another provision that could benefit Uncle Sam far more than it does investors and their survivors. This is the elimination of the “stretch” IRA. Previously, when traditional IRA funds were inherited by a non-spouse beneficiary, the recipient was allowed to take withdrawals over a long period of time. This helped to ease the tax burden, and was especially beneficial to younger beneficiaries, because withdrawals could be based on the beneficiary’s life expectancy. This was referred to as a “stretch IRA”. Now with the passage of the SECURE Act, other than just a few exceptions, non-spouse beneficiaries must liquidate the account within just ten years of the account holder’s passing. Because of this, non-married couples who are each other’s
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beneficiaries may want to reconsider tying the knot or update their estate plan to account for this new law. Ideas to Help Ease the Tax Burden One possible solution is to reconsider the structure of your estate plan. In some cases, it could make sense to enact changes to your beneficiary designation. Another option is to convert traditional IRA funds to a Roth IRA for tax-free inheritance. While taxes may be incurred on the conversion, this could result in significant tax savings later. Conversions do not always carry a heavy tax bill. One can make a Traditional IRA contribution and then immediately convert it to a Roth before there is any gain. That is one way to potentially reduce taxes. Another tax-advantaged strategy is life insurance. Proceeds of a life see Financial Forecast...page 14
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