One of the biggest regulatory changes of late was the Retirement Enhancement (Secure) Act. Yet most advisors have ignored it..
The good, the required minimum distribution — moved from 70 1/2 to 72.
You have to calculate how much needs to come out of every retirement account you own. It can get complicated. If you don’t keep up, they could cost a fortune in needless and excessive taxes.
The bad, The Secure Act also eliminated the so-called “stretch IRA,” which allowed an IRA to be passed on to a non-spouse beneficiary — that is, from generation to generation — while maintaining the tax advantages. But now, many non-spouse heirs will have to empty inherited retirement accounts within 10 years. Why does that matter?
It upends a planning tool that most people have counted on for years. It’s a broken promise. Congress pulled the rug out from under us. But there are a few solutions.
For many people, permanent cash-value life insurance is a great replacement for the stretch IRA. It’s actually a better long-term planning vehicle and gives you a larger inheritance, more control, and less of a tax burden.
Even if you’re single or have no dependents, it can be a great vehicle because you can be your own beneficiary, without dying.
The cash value that builds up can be accessed tax-free during your lifetime. This is unbiased advice.
In fact, life insurance the “single biggest benefit of the tax code.” Why?
Because the money comes in tax-free, and all of the return is income-tax-free. In addition, unlike IRAs and Roth IRAs, the payout can also be estate-tax-free.
You can leave it to a trust — life insurance is the most flexible vehicle to fund a trust with.
You can use an IRA to fund a trust, but it’s complicated and many people run afoul of the rules, causing excessive trust taxes. Life insurance removes all of those complications and risks.
But life insurance can be expensive, and not everyone qualifies.
Right. Life insurance isn’t for everybody. None of these solutions are one-size-fits-all. You have to customize.
So what’s another good choice?
I’m a big fan of the Roth IRA. A Roth IRA is completely tax free, where a traditional IRA just defers taxes until you withdraw the money. And with a Roth, there is no RMD at age 72. The money can stay there as long as you like.
You can convert your IRAs to Roth’s. When you do, you’ll have to pay the tax upfront, but you get a better result later on, especially if the Republicans lose the Senate, then we are going to have a whole new set of tax rules.
People shouldn’t be overly concerned about the immediate costs. Rather, look at the lifespan of the decision, the long-term implications. With a Roth IRA, you end up with much more at the end of the game.
Plus, you don’t have to convert all your IRAs at once. It’s a permanent conversion, and for some people, it makes more sense to do a series of small conversions every year or so.
What is the “backdoor Roth for high-income earners”?
A: It’s a way to get money into a Roth IRA even if, technically, you make too much money. [To contribute to a Roth IRA, an individual's Modified Adjusted Gross Income must be less than $139,000 in 2020, or less than $203,000 for married couples who file jointly.]
You start with a traditional IRA — and the SECURE Act allows contributions to traditional IRAs even after age 70 1/2, which you couldn’t do before. You then convert the IRA to a Roth. It may sound devious, but it’s a completely legal workaround.
Now is the time to act and review your planning, call or email me at 1800-313-PLAN(7526) firstname.lastname@example.org