New Strategies for Your IRA

Last week I discussed how Congress is potentially stealing hundreds of thousands of dollars from your IRA by enacting the SECURE Act which eliminates the long-held ‘Stretch IRA’ by forcing non-spousal IRA beneficiaries to withdraw all funds within 10 years.

In my example, a 10-year-old inheritor of a grandparent’s IRA, under current ‘Stretch’ rules, could take required minimum distributions (RMDs) over his life expectancy (60 years+).  A $100,000 initial inherited IRA earning 6% could result in $650,000 RMDs plus a remaining balance of $600,000 at the grandchild’s age 68.  The SECURE Act forces all money be distributed within 10 years including payment of ordinary income taxes and, in many cases, pushing inheritors into higher income tax brackets.  The Wall Street Journal estimates that 25% of IRA beneficiaries are potentially affected by the new law.

What You Should Do If the SECURE Act Passes

The SECURE Act passed the House with less than 20 ‘no’ votes and looks like it will sail through the Senate.  It’s meeting no resistance because it’s a stealth tax…very few people understand the ramifications of eliminating the Stretch IRA.  Assuming it passes, you need to rethink your long-term retirement strategy.

  • If you are still working: If you are still working, PIVOT. In the past, we would recommend taking every opportunity to fund qualified retirement plans including 401k’s, IRAs, ROTH IRAs, etc.  Now, you’ll want to be much more strategic.  First, you’ll still contribute enough to your company 401k to capture the full matching contribution, if your company offers one.  Beyond that, consider investing any additional available money into personal accounts where you remain in full control.  Your goal now is at retirement, to have at least as much money in a personal investment account as in your total retirement accounts.  Understand, Congress has reneged on a decades-long promise and I’m concerned this might not be the last time.
  • If you are retired: If you are already retired, you have a couple of strategies to consider:
  1. Donate your IRA to charity. If you have any charitable inclination upon your death, the best choice is to make your favorite charity(s) the beneficiary of your retirement account (or a portion of it).  Often people will designate a charity under their will (called a specific bequest) and it is paid from cash in their estate.  By giving your IRA instead, your children can receive the cash tax free.
  2. Consider withdrawing IRA money before you’re required to do so (age 72 under the SECURE Act). Your income tax bracket could be lower than children who will inherit your IRA.  You can spend it or you can use it to make annual gifts to children or grandchildren (up to $15,000 per year to as many people as you choose).

By the way, guess who’s lobbying hard for the new law?  The insurance companies.  Why?  The act allows 401k plans to sell annuities for the first time…a huge windfall for them…and a terrible idea for you!

I strongly recommend you get with your financial advisor and map out a retirement strategy that is tailored to you and your family.

FOX6 Talking Points

“New Strategies for Your IRA”

  • SECURE Act eliminates the Stretch IRA
  • Beyond ‘matching’ 401k contributions, invest personally
  • Consider ‘early’ withdrawals during retirement
    • Spend it or…
    • Gift it
  • Meet with your financial advisor

 

Stewart H. Welch, III, CFP®, AEP, is the founder of THE WELCH GROUP, LLC, which specialize in providing fee-only investment management and financial advice to families throughout the United States.  He is the author or co-author of six books including  J.K. Lasser’s New Rules for Estate, Retirement and Tax Planning- 6th Edition (John Wiley & Sons, Inc.); THINK Like a Self-Made Millionaire; and 100 Tips for Creating a Champagne Retirement on a Shoestring Budget. For more information, visit The Welch Group .Consult your financial advisor before acting on comments in this article.