Planning Opportunities Coming for Retirees and Inheritors?
Transcript:
Hi guys Mike Frontera here back with another Retirement Theory video. Are you retired or have you inherited retirement money? If so, there may be some major changes coming your way, the most major of which revolve around your required minimum distributions or RMDs.
What Is the Secure Act?
The Secure Act1 which stands for setting every community up for retirement enhancement recently flew through the House of Representatives with an astonishing 417 to 3 vote, and in it are a number of provisions that would affect retirement plans across the spectrum including 401k investment eligibility changes and even different uses for 529 plans. But what I want to highlight today are two changes regarding IRA and inherited IRA minimum required distributions. First is a change in the minimum required distribution age from 70 and a half to 72.
Many people are aware that the age which which you must begin your RMDs or 70 and a half and if you've watched my previous videos you might have saw the age 70 tax cliff. In it I go over some of these tax issues with allowing your IRAs and Social Security to go untapped until age 70. The major takeaway being that many people risk paying higher taxes in the long run by having a massive influx of income at age 70. some end up paying more on their property taxes, state income taxes, and of course federal taxes. I also went through some ways to plan ahead of time to avoid this issue. that is reviewing your income in advance of age 70 and possibly taking withdrawals while in a lower tax bracket or completing strategic Roth IRA conversions.
One of the issues with this is by the time that people retire often between ages 62 and 67 and age seventy and a half when RMDS begin, there aren't a lot of years to make these strategic moves. Well, the Secure Act proposes to push the RMD beginning age to 72 and while that might not seem like much if basically means an extra year (or two for folks born in the first half of the year) to make these strategic Roth conversions or withdrawals.
So, if you started making $20,000 with Roth conversions at age 65 and had plan to do them for five years you might not have now have seven years. so instead of getting a hundred thousand dollars converted it might be more like a hundred and forty thousand. ultimately many of us may not spend down our retirement accounts fully at all and perhaps we had parents that didn't either which brings us to our second change with RMDs, which is that under current law a non spouse who inherits an IRA can use their own life expectancy to calculate their RMDS each year. this allows for a longer deferral of taxes and is colloquially known as a stretch IRA because your withdrawals stretch over your beneficiary's lifetime.
So, for example a forty year old who inherits an IRA must look at his life expectancy provided by the IRS table seen here. the RMD is calculated based on the beneficiary's age in the year after the IRA owner dies so we see it's 42.7. now assuming the inherited IRA was worth $500,000 at the end of the previous year the beneficiary would need to take out eleven thousand seven hundred nine dollars and sixty cents which represents 2.3 percent of the total balance. each subsequent year the life expectancy factor would go down by one and the withdrawal would tend to get slightly larger. but should the secured act become law this stretch out of tax deferral could end and in its place would be a rule stating that with few exceptions any IRA inherited by a non spouse would have to be fully withdrawn over just ten years.
Think about that tax impact for beneficiaries imagine going from having to pull $12,000 per year roughly to five hundred thousand dollars over ten years. that can have an enormous impact of wealth. so what kind of planning opportunities might this bring to mind? let's say you have two children that you want to benefit equally and you have some IRA money in some Roth IRA money. one of your children is a very high income earner in the other much lower. might it make more sense to leave an outsize portion of that tax-free or Roth money to the higher income earning child and more of the money that needs to be taxed to the lower income child? while this beneficiary strategy has been around for a while, under this law it would likely become much more important.
Roth Conversions
Now how about Roth conversions in general? Might it just makes sense to keep making these Roth conversions during your lifetime in order to lessen the impact of these forced withdrawals that have now been compressed to just ten years? There is such a potential for beneficiaries to be pushed into higher tax rates by this possible law change that Roth conversions may very well gain tremendous popularity as a result. a lot to see what ultimately gets passed into law to be sure. I mean even with such bipartisan support of 417 the three house vote, the secured act still needs to go through the Senate and to Trump's desk ultimately for signing. But, its potential impact is huge and I'm very interested to see how it develops.
Okay, so do you have questions for me? let me know. give me a call at 518-469-8152 or just visit me at www.retirementheory.com. Do you follow me on Facebook? I think that you should. you'll see videos like these and get blog and article shares on everything retirement planning. once again thank you for joining me see you next time.
1. https://money.usnews.com/money/retirement/iras/articles/what-is-the-secure-act