Update #4 on the new tax law, the SECURE act.
The change that will require the most immediate attention to protect your assets from taxation is the elimination of your ability to inherit an IRA and then stretch required minimum distributions over the course of your life expectancy. That would have allowed you to spread out smaller distributions, thereby having little effect on your annual tax rate.
However, if you inherited an IRA from your spouse or if you are less than ten years younger than the individual you inherited the IRA from, generally, this new facet of the new tax law will not affect you. If you are disabled or a critically ill individual or a minor child, you will generally be exempt from this new change. If you are not any of the above, though, the SECURE act will mandate that you withdraw, as taxable income all of the IRA account you inherited within ten years. This forced distribution of taxable assets could have a significant effect on the net assets you receive, resulting in unanticipated tax bills, especially for those inheriting high-value traditional IRAs. Additional taxation in retirement can increase your marginal tax bracket, it can increase the amount of Social Security that is taxed, and it can increase your Medicare premiums.
These IRA distribution rules will also be true for IRA trust beneficiaries, which may affect the estate plans that intended to use a trust to manage inherited IRA assets.
Several things now should be top-of-mind; we need to start by re-evaluating beneficiary choices. We also need to ask ourselves how much of our assets should be IRA dollars. Does our current asset mix have a top-heavy traditional IRA/401k allocation? Are we maximizing our opportunities to minimize our taxation? May it make sense to spread out Roth conversions over a series of years so more of your estate assets can be inherited tax-free? Although the Roth conversion creates taxable income, by spreading them out now, we can take advantage of the lower income tax rates that at this time are currently set to expire in 2026.
It is imperative to plan now to protect your assets from unnecessary taxation if one of your goals is to have a specific amount of income in retirement. Remember, net income (after-tax) is what matters.
For a limited time, we are offering a complimentary review of how the SECURE act affects your current retirement and estate strategy.
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