Something many financial professionals agree on is the SECURE Act is one of the worst pieces of tax legislation in recent memory. While income taxes on seniors withdrawing money from their retirement accounts represents an ever-increasing revenue base for the government, the problem escalates as seniors get even older because more and more money must be withdrawn at potentially higher tax rates each and every year. So when the government allowed seniors to defer a mandatory age to start withdrawing from 70.5 to 72, it’s likely to bring in more money for the government at higher tax rates. The SECURE Act also set up tax bombs when the next generation inherits their parents’ retirement accounts because it yanked away the potential for beneficiaries to spread taxes out over decades down to ten years… and not evenly.

The SECURE Act is causing huge problems for a lot of our clients for three big reasons.

  • First, it is actually compounding future income tax problems for current older workers.
  • Second, it is generating a tax bomb for younger workers both in their own retirement plans as well as upon inheritance when the older generation passes on.
  • Third, the combination of the first two problems may become a lethal blow to building generational wealth and security.

Unfortunately, all of these problems stem from some specific myths and misconceptions that many financial and tax professionals are failing to address with their clients. Even though the focus for our office is primarily legal and benefits planning, we feel an obligation to help our clients understand these financial issues. After all, what good is building the structure of a good estate plan if defective asset and income strategies leave financial and tax problems for the next generation?

One of the biggest myths in the financial world is that IRAs and 401ks are meant to give you tax deductions in your pre-retirement years, allow for RIP IRAtax-deferred growth, and then you can withdraw funds during retirement when your income will be much lower. This means you would avoid paying taxes at the highest federal income tax rates. Just a few weeks ago, I was on a call with some clients and a financial professional who told us that in the 24 years he has been working with his clients, not one of them had fallen into a lower tax bracket during retirement, mainly because of mandatory distributions.

The reality is that large accumulations of money in tax-deferred accounts meant that by the time the government is forcing withdrawals from these tax-deferred accounts through Required Minimum Distributions (RMDs), pensions, social security, and other types of investments are pushing clients into the same or higher tax brackets they were paying before retirement. With the new SECURE Act, the tax issues only become worse when clients have until age 72 rather than age 70½ when they are forced to take distributions. Compounding the problem is that we have some of the lowest federal income tax rates since World War II, and with recent government spending, tax rates are likely to go up. So if you are avoiding taking money from retirement accounts now because you don’t want to currently pay income taxes, the problem is only likely to get worse.

The second issue is that our clients in their prime working years have been dealt a serious blow to their income taxes if they inherit IRAs and other tax-deferred accounts from older generations. It used to be that people inheriting retirement accounts were subject to required minimum distributions on “inherited IRAs” that spread the minimum withdrawals and accompanying taxes out over a few decades. That has now been relegated to a flat ten year period after inheritance with NO required distributions until the last year. Human nature and the urge to pay as little in current taxes as possible means a nightmare scenario is more likely than not to happen. I can imagine someone inheriting a $300,000 IRA from a parent. The SECURE Act says they will not have to take any distributions for the first nine years, so they take nothing or very little out because they are in their “working years” right now. By the time year ten comes around, the account has grown to $500,000, their own income is $175,000, and in the year 2030 the income taxes would be $232,526. And that is if the tax rates haven’t increased.

Does anyone really want to pay an effective tax rate of 31.14%? If there were ways to plan ahead to avoid these issues, wouldn’t you want to?

Third, all of these issues are providing financial and tax complications for the next generation. The truth is there are some solutions, depending on your particular family and financial situation, that can compound growth without the problems of risk, taxes, inflation, government regulation, and depreciation of the dollar.

To help explore the problems in a little more depth and then move on to some possible solutions, we have created a webinar that is available on demand. If you would like to look a little further into how these issues affect you and your family, please go to our webinar at https://youtu.be/bVlATBxwrZI, and afterward, our office can call to set up an individual meeting to discuss your situation and some possible strategies.