'Secure Act' could make your future anything but

Friday, August 02, 2019

Last month, I wrote that you should considering converting your 401(k) or IRA into a Roth IRA.

But if you have responsibly saved for retirement and accumulated a large nest egg of 401(k) or IRA savings ... AND you expect Trump to lose in 2020 ... you need to seriously, seriously consider converting your 401(k) or IRA into a Roth IRA before tax rates shot higher.

Some of you decided to follow my recommendation. But for those of you who haven't yet, I’m going to give you another compelling reason to consider a Roth conversion:

The "Setting Every Community Up for Retirement Enhancement" — aka, "SECURE" — Act.

The U.S. House of Representatives by a vote of 417-to-3, passed the Secure Act, which is now in the Senate. According to Paul Richman, the head political affairs officer at the Insured Retirement Institute, “because it has been fast-tracked, there is a good chance the Secure Act will soon be put on the Senate floor and, just like it did in the House, pass with a significant bipartisan vote.”

What does the Secure Act mean for you? How will it affect you? Well, it won’t. It will affect your children, though.

Currently, if your children inherit your retirement account monies, they can stretch the tax on those retirement dollars over their lifetime. That could be 10, 20, 30 years or longer.

With the Secure Act, the "stretch" option will disappear. In the House bill, the tax may be stretched over a maximum of 10 years and the Senate version reduces that to only five years.

The tax implications are huge. Under the Senate version, let’s say you die on Sept. 1, 2019, and leave $1 million of IRA dollars to your two children.

On Dec. 31, 2019, both of your children will have an additional $100,000 added to income and will be required to pay tax on the inherited sum and get pushed into a higher tax bracket and resulting in a higher tax on their own wage income. Ouch!

ALL distributions from “qualified” withdrawals are taxed as ordinary income and that tax must be paid on April 15th of the year following the distribution.

This increased tax burden will continue for the next four years, all because you let them inherit "regular" IRA or 401(k) dollars instead of a Roth IRA.

The Secure Act is all bad. One positive proposal is increasing the age for required mandatory distributions or RMDs from 70½ to 72 years of age.

But the abolishment of the stretch option for our children is a serious hidden tax increase. The new non-stretch rules are making it dramatically more expensive to leave money tucked away in our retirement plans for our children.

It takes painstaking discipline to save money, and I want those dollars to go to my children ... NOT the IRS.

That is why I urge you to consult a tax professional and see if a conversion to a Roth IRA makes sense for you.

When you convert a traditional IRA to a Roth IRA, you pay income taxes on your money at the time of the conversion. But this ensures that neither you nor your children will be taxed when that money in received.

Yes, the Roth conversion is treated as a taxable distribution so a conversion will create a larger federal income tax bill in the year that you convert it. However, you can spread out that conversion tax over a couple years, which may prevent the income from the conversion from bumping you into a higher tax bracket.

And the IRS won’t pickpocket the inheritance that you leave for them.

Best wishes,

Tony Sagami

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