secure act

In the SECURE Act Era, You’ll Need a New Retirement Strategy. Roth Conversions Could Be It.

Share Post: facebook Created with Sketch. twitter Created with Sketch. linkedin Created with Sketch. mail Created with Sketch. print Created with Sketch.

By Jamie Hopkins, Director of Retirement Research

Get ready for a new normal.

With the SECURE Act comes the demise of the stretch strategy – and that could cost your loved ones if you don’t revisit your retirement income plan.

It’s long been common practice to stretch IRA and 401(k) distributions over the life of the beneficiary. A smart strategy for two reasons:

  • It allows the tax-advantaged nature of retirement accounts to continue for years, even decades. Investments continue to grow tax-deferred inside of the IRA or 401(k). 
  • Spreading out the taxable distributions can help reduce the tax burden.

Under the SECURE Act, beneficiaries will have to fully distribute taxable accounts within 10 years of the account holder’s death. That could push your loved ones into a higher tax bracket.

The stretch strategy’s undoing is no surprise: It’s been proposed for years in government, because it would generate generous tax revenue. The SECURE Act is expected to raise roughly $16.4 billion in revenue over the next 10 years. Almost all of it – $15.7 billion of the $16.4 billion – will come from the elimination of the stretch option.

Is there a viable alternative to the soon-defunct stretch strategy?

We can’t fully replicate the tax-deferred nature of the IRA or 401(k) on inherited accounts. But charitable remainder trusts and insurance products could provide similar benefits. People should focus on more tax-efficient strategies as part of their retirement and estate planning. 

Bracket-bumping Roth conversions is the strategy primed to give beneficiaries a boost in the SECURE Act era.

Reach out to one of our advisors for more information on the Roth conversion strategy.

Roth IRAs will still be subject to the 10-year distribution period under the SECURE Act, but distributions from the Roth won’t impact the beneficiary’s taxable income.

Roth conversions require the account owners to plan in advance. If done correctly, they can cancel out the taxes that come with a shortened distribution period. 

Let’s look at a quick example. You leave $1,000,000 in an IRA to your child – a 40-year-old, single professional who earns $120,000 a year. Under previous rules, they could stretch out distributions over 44 years. The first-year distribution would be about $22,727.27. This wouldn’t push them into a higher tax bracket.

Under the SECURE Act, your child will have to distribute the account over 10 years. They decide to spread it out evenly, taking out $100,000 in the first year. This pushes them up to $220,000 of income with roughly $40,000 of the distribution into the 32% tax bracket and roughly $16,000 of the distribution into the 35% tax bracket. This significantly increases the taxes they’d pay on the IRA.

Instead of leaving the money in an IRA, you can start doing strategic Roth conversions to alleviate that tax burden before you die.

Let’s say one parent was in the 24% tax bracket with $100,000 of income. They could start doing Roth conversions early in retirement to take advantage of their full tax bracket, up to roughly $160,000, without going to the next tax rate.  

The Roth conversation strategy has a lot of value today. It will be even more valuable when distributions are stacked into 10 years under the SECURE Act.

Clients should work with their advisors to adjust their plan to accommodate the SECURE Act rules.

Contact us to start the conversation.

Share:
facebook Created with Sketch. twitter Created with Sketch. linkedin Created with Sketch. mail Created with Sketch. print Created with Sketch.
Share Post: facebook Created with Sketch. twitter Created with Sketch. linkedin Created with Sketch. mail Created with Sketch. print Created with Sketch.

RECENT POSTS

Five Reasons Your IRA is Deflating, and What to Do About It

By Craig Lemoine, Director of Consumer Investment Research Stocks, bonds and mutual funds have had a rocky start to the year. The S&P 500, a broad measure of the United States stock market, was down 4.6% over the first quarter. Mutual funds holding stocks and bonds have also lost value. …

What You Need to Do 10, 5 and 1 Year Before Retirement

by Jamie P. Hopkins, ESQ., CFP®, LLM, CLU®, ChFC®, RICP®  Regardless of how far off you are from retirement, there’s one main goal your planning should be working toward: saving enough so that you don’t outlive your money. 
1 2 3 83 84 85
secure act

Get in Touch

In just 15 minutes we can get to know your situation, then connect you with an advisor committed to helping you pursue true wealth.

Schedule a Consultation