A single stroke of President Trump’s pen could sabotage years of your carefully crafted retirement savings and estate planning. And it’s especially true if you’re hoping to pass along part of your nest-egg to your children and grandchildren.
We’re talking about the SECURE Act (Setting Every Community Up for Retirement Enhancement Act) now working its way through Congress. And there are some very favorable provisions in the legislation, it would:
- Increase the age for Required Minimum Distributions (RMDs) from your IRA, avoiding the need to take forced withdrawals from your retirement account even if you don’t need the money.
- Eliminate the age limit for your IRA contributions, which enhances your tax-advantaged saving and investment options well into your golden years.
- Gives small business owners and their employees easier access to tax-deferred savings options like workplace 401(k) plans and other types of IRAs.
But the Secure Act legislation also contains a big drawback for wealthy investors hoping to pass along their hard-earned assets to their own heirs: The end of the so-called “stretch IRA.”
For wealthy individuals who don’t need to tap their IRA savings to fund their retirement lifestyle, the stretch IRA has been a reliable, tax-advantaged way to pass that money along to their kids or grandkids, while keeping the money growing tax deferred for many years to come. That’s because RMDs withdrawn from your IRA are based on IRS life expectancy tables.
If you are in your 60s or 70s already, you must take larger distributions, even if you don’t need the money, as governed by your average life expectancy according to actuarial guidelines.
But when IRA assets are to be inherited by a younger beneficiary, the distributions can be drastically reduced, which allows your money to grow, thanks to the magic of tax-deferred compounding, for a much longer time period.
In other words, your children can benefit from the inheritance you pass on to them for perhaps 30-40 years or more. Better yet, your grandchildren can benefit for the tax-free growth of your generous inheritance for perhaps 50-60 years or more. But that’s all about to change
But that’s all about to change with the Secure Act. As it’s now written the Act that would force beneficiaries to withdraw ALL IRA assets within 10 years after the inheritance. This threatens to undermine your carefully crafted estate planning, resulting in a much higher tax burden on your children or grandchildren, and drastically reducing the value of your inheritance.
The Secure Act would complicate IRA assets held in trust for beneficiaries even more so. Many wealthy individuals set up trusts, especially in the case of IRA assets passed on to very young children or grandchildren. That way you can put certain guidelines in place for how and when the money can be used. But years of prudent planning could be ruined because of the new 10-year withdrawal mandate dictated by the Secure Act.
Bottom line: The Senate has yet to vote on the Secure Act, but pressure has been building among Beltway politicians to reduce or eliminate stretch IRAs for many years. And the new Secure Act could rob your hard-earned retirement savings, but there are steps you can take to prevent it.
One solution might be to convert your traditional IRA to a tax-free Roth IRA. You’ll take an upfront tax hit, but Roth’s have NO RMDs, so your money can compound tax-free indefinitely until you really need it. Better yet, your beneficiaries can inherit your Roth IRA assets completely tax-free.
Another possible solution is to withdraw some of your IRA assets and use the money to fund a life insurance policy that is held in trust for your beneficiaries. That way your children or grandchildren pay no taxes on the policy’s value.
You do have options to prevent Congress from sabotaging your retirement savings, but you should consider taking action right away before the Secure Act becomes law. If you have any questions about the changes to the Secure Act or how it may affect you, please contact us at (772) 257-7888.