Last week’s topic was potential danger to IRAs contained in new legislation lingering in the Senate. Those affected would be most IRA beneficiaries including you or your kids or grand kids. The scenario would affect the lives of more than just the wealthy. Therefore, it makes sense to present a handful of ways to minimize the possible negative consequences. Although, if the SECURE Act legislation is passed in its current form, these strategies will be even harder to come by.
Several current solutions have been discussed in prior editions of TGIF 2 Minutes, namely using the Roth IRA, Roth 401k or 403b, or Roth IRA conversions (see the link below for quick details of various Roth strategies). Most important is to have this issue on your radar – to create a balance by using both traditional and Roth strategies TODAY side by side for diversification.
Most of the urgency of this issue involves taxes and tax revenue. It is widely believed that tax rates will go up by 2025 to raise government revenue in order to pay for retirement benefits for more workers as well as other entitlements like Social Security and Medicare.
The primary party affected in the IRA section of the SECURE Act is the beneficiary of an IRA. The beneficiary is the party who will pay more taxes – and pay them faster – in order to pay for tax cuts in other places. In an ideal world, beneficiaries would not even come into play because everyone would be saving enough for retirement AND we would die the day after we used our last saved dollar in retirement. But of course, that is not reality. In reality, saving and life expectancy are uncertain. Market returns and investor behavior vary widely. The goal in much of financial planning is, amidst all the possibilities, to create a portfolio that outlives the investor, thus possibly passing along a small or large amount of assets to beneficiaries.
The tax code has come to contain a way not to punish the beneficiary, and in fact to give favorable treatment in the form of the “stretch” provision which spreads taxes over the lifetime of the beneficiary. With the Roth IRA and Roth 401k, taxes are paid upfront on contributed monies thus giving long-term tax-free withdrawals both to the owner of the IRA in retirement and to the beneficiaries – of all tax brackets. The use of these Roth strategies may be the only way (outside of annuities) to avoid punitive taxes of the SECURE Act legislation if passed.
Due to prudent planning lots of parents, grandparents, aunts and uncles (and future parents, grandparents, aunts and uncles) save far more money than they may ever need in retirement. This event is mostly unpredictable. The point of putting this issue on your radar is to create every opportunity for you and your beneficiaries not to be punished and to enjoy the fruits of monies you have worked so hard to save for yours and your family’s future.