What actually matters from the Secure Act
On January 1, 2020 the latest revision of the Secure Act was passed at the federal level. There were many changes in this Act but there is only one that really matters and it should cause all of us to re-evaluate our retirement strategy.
This change is the removal of the “stretch provision,” which historically has allowed heirs (think, your children) to stretch the inherited IRA distributions over their lifetime. Under the new law they are required to withdraw the money within ten years. Bottom line: you heirs will likely pay much more in taxes than they used to. This change is expected to generate $300 Billion in new taxes. Those taxes are coming from your retirement savings.
Every investment strategy should start with your taxes and this is the perfect example why. If you’ve got over $500K in pre-tax retirement savings and are 50-70 years old, nearing or in retirement your advisor and/or tax planner should be talking to you about managing future taxable income as you look to take distributions. One example of this could be shifting funds to post-tax accounts like a ROTH IRA. If you’re not creating a plan that tackles how and when taxable income occurs then you may end up paying much more in taxes.
This change is essentially a tax hike on middle to upper class savers. If you’ve been maxing out your employer provided retirement accounts like a 401K or 403B and you’re in your 60s (or your parents are) this change impacts you the most.
The current tax code expires in 2025 so you’ve got 5 years to take advantage of the historically low tax rates. By unwinding funds over the next five years you mitigate the risk of what the next tax code may dictate. Your savings will be at risk should the tax code default to the previous code or a new tax code be implemented.
For many clients, we’ve been strongly recommending Roth Conversions to lock in the lower tax rates and hedge these substantial risks to a higher concentration in pre-tax investment accounts.
We offer a first time client analysis of tax and investments to determine whether or not this approach makes sense. Most commonly CPA’s are filing tax returns for the previous year and most investment advisors don’t have the tax expertise to focus on this. Our integrated approach to taxes and investments makes us unique.
For example, if you receive an inheritance and you’re at the height of your earning potential, you would be paying on that inheritance at your current income tax rate which is likely much higher than if your parents would have paid tax at the rates they were at based on their lower income in their retirement years.
The bottom line is that most people want to pay the least amount of taxes possible and want their heirs to pay the least amount on the money they inherit. This law should make you reevaluate your strategy for unwinding your retirement savings and protecting it from extra tax payments.
If taxes are not part of your investment strategy then you will likely pay more to the government than needed.
Start the process with an initial analysis of your tax and investments by scheduling a 30 minute intro call.