Important tips for your IRA under the Secure Act

An Unkind Act by Adam M. Grossman  |  December 29, 2019

AS IF ON CUE, Ebenezer Scrooge recently showed up in Washington, DC. The result wasn’t pretty. A bill known as the SECURE Act, a favorite of the insurance industry, had been stuck in Congress all year.

But suddenly, on Dec. 20, it got tacked onto another bill and signed into law. As far as I can tell, the primary beneficiaries of this new law, which heavily impacts retirement plans, will be the IRS and the insurance industry—but probably not you. It’s the holiday season, though, so I’ll start with the few positive aspects of the law.

The biggest benefit is a change to the rule governing required minimum distributions (RMDs) from retirement accounts. Under current law, if you have an IRA, 401(k) or other tax-deferred retirement account, you must begin making withdrawals in the year that you turn age 70½—or the year after, at the very latest.

Because these withdrawals are subject to income tax, and because they increase as you get older, RMDs are loathed by many retirees. Fortunately, the new rules provide some relief: 70½ has become 72. This new RMD rule is paired with another potential benefit for those in their 70s: Under 2019’s rules, even if you’re still working beyond 70½, you’re no longer permitted to make IRA contributions. This restriction has deprived many workers of a convenient savings vehicle and the associated tax deduction. The SECURE Act removes this age cap, allowing workers of any age to continue making IRA contributions.

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Source: An Unkind Act – HumbleDollar

One comment

  1. The rest of the Humble Dollar article is worth reading CAREFULLY as well – along with the comments to the article. Of particular interest is the author’s (Adam M. Grossman) recommendations for “adapting” to this new 10-year rule.

    My favorite is listed in the emboldened section titled: “2. Asset Allocation.”, where Adam states:

    “Ideally, under the new rules, you’ll want your IRA to be the slowest-growing portion of your overall assets.”

    Imagine that! A professional wealth manager recommending “SLOW GROWTH” investments in a tax-deferred Individual Retirement Account!!! And that, SOLELY to preclude sticking your non-spouse heirs with a big fat SHORT-TERM TAX BILL when they inherit!
    Actually, I agree with him on that score, given this new 10-year rule for inherited IRA’s.

    The point here being, under prior law, the greatest BENEFIT to the Retiree (AND Government, AND heirs) WAS the tax-deferred INVESTMENT GROWTH in an IRA account. That was something to be MAXIMIZED under prior law! Now we’re getting advice from wealth managers to MINIMIZE investment growth in Traditional IRA accounts? SWEET!

    Still think this is “much ado about nothing, or little”?

    His next recommendation is to start doing ROTH Conversions from your Traditional IRA – which I also heartily endorse for most people and under most circumstances. I’ve been doing that for several years and will continue to do it. But, then again, I’ve also been working to MAXIMIZE the INVESTMENT GROWTH in BOTH IRA accounts too – so, silly me!

    But I would add the recommendation that folks strongly consider making ALL of your future IRA contributions be made DIRECTLY TO YOUR ROTH IRA account, and NOT to your Traditional IRA at all! You won’t get the immediate tax-deferred benefit of the contribution to a Traditional IRA. BUT, you (AND your heirs) also won’t be paying taxes on the investment growth either. So you can go ahead and MAXIMIZE your ROTH IRA investment growth, while MINIMIZING the investment growth in your Traditional IRA.

    My Second Favorite part of the Humble Dollar article is actually in the comments.

    Commenter David Baese asks, “Would it make sense for the beneficiary of a large IRA to take a 1 year unpaid sabbatical for education, travel, or some other purpose and take a much larger distribution in that year?” A response comes from commenter Jonathan Clements: “It could make sense — if that’s how you want to use the money and if your employer will accommodate you.”

    Actually, for someone inheriting a large enough IRA balance under this new law, it would make sense to quit work entirely – possibly over the full 10-year period – to avoid the grossly elevated short-term tax burden this law creates. THAT should be just great for the economy at large – incentivizing heirs to quit being productive AT ALL in order to escape the short-term tax burden.
    And I can assure you there will be those who elect to do just that.

    STILL think this 10-year rule is “much ado about nothing, or little”???

    Like

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