The SECURE Act passed in late 2019 dumped a huge tax burden on families, and the government hoped it would be too complicated for the average investor to sort out. Make no mistake, the SECURE Act was touted as a victory for retirees, but it is anything but that, and their families are set to pay far bigger tax bills in the future. Fortunately, this tax crisis is bringing people together to strategize as a family.
The main “selling points” of the SECURE Act were just as straightforward as the downsides were insidious:
- The Act raised the required minimum distribution age from 70½ to 72…and this meant that people would push out their withdraws as late as possible, their money would compound longer, but be subject to higher income tax rates when larger amounts are eventually withdrawn.
- Children inheriting their parent’s IRAs and 401ks were supposed to celebrate the fact that there were no longer required minimum distributions on those funds which previously could be spread out annually over an average of about 27 years… but now everything has to be withdrawn (and taxed) by year ten, leaving a huge eventual tax burden at the highest income tax rates. Human nature being what it is, most people wouldn’t want to add $50,000 a year to their taxable income for the next ten years if possible, but this would leave them with a more than $500,000 tax bomb in year ten.
- Does anyone really believe that income tax rates, currently at a historically low level, will get any better, or are taxes going to go up? The fact is paying income taxes later will likely result in paying them at a much higher rate.
These problems with the SECURE Act are leaving not just retirees but entire families in jeopardy of paying far too much in taxes if they don’t plan ahead. This is because not only are the parents potentially leaving a tax bomb to the children, the children are creating their own tax bombs by building up their own IRAs and 401ks, and they may end up having to start withdrawing from their own accounts around the same time the SECURE Act Tax Bomb goes off.
You can find more information about the SECURE Act on a previous blog I did here.
The good news is that with crisis there is indeed opportunity. The SECURE Act is actually pushing families to do something most haven’t done since World War II, and that is for families to plan for taxes and inheritances together. I have many clients who bring their children into the estate planning process to review trustee responsibilities and the actual inheritances, many have not addressed the tax implications of the inheritances. And they have certainly discussed coordinating these plans with their own children’s retirement plans.
Imagine parents and their three children getting together a few times a year to review how everyone’s retirement plans are progressing, coordinating contributions and withdrawals, and jointly strategizing a way unnecessary income taxes decades into the future. Don’t you think that would have a much better chance of fending off overall taxes compared to everyone guessing about their own investments on their own?
If you are interested in learning more about this process, then please do the following:
- Review one of my previous blog posts about the SECURE Act by clicking here
- Attend the video workshop referenced at the end or by clicking here
- Get in touch with us and we will get you and your family started on a customized process that suits your particular family needs
While people are rarely thankful for their taxes being raised, at least with the SECURE Act we can be grateful that families are starting to come together to make sure they aren’t paying any more in overall income taxes than they need to.