This week, I’m talking about the SECURE Act. It’s a massive, 1,773 page piece of bi-partisan legislation that was just signed into law in December 2019, and it brings sweeping changes to the rules around your retirement.

Today is a continuation from yesterday’s tip, where I introduced you to the massive tax law change to inherited IRAs. if you inherit an IRA from your parents, you only have 10 years to fully cash out the IRA. That’s a problem if you inherit a large IRA balance, because you’ll likely be forced to cash out that IRA in your peak earning years, report every dollar you pull out of the IRA as income, and pay the taxes. 

If you inherit a large IRA worth $1 million or more, you could be looking at a 6-figure bump to your income every year for 10 years and a lot bigger tax bill than you expected as a result. 

Now, there are a few things you can do about this to try to reduce the tax bite, but they need to be done by the account owner and not the beneficiary, because by the time beneficiaries inherit the IRA, it’s already too late to do much about it. So if you have parents with large IRA or 401k balances, be sure that you talk with them about this. And if you have a large IRA or 401k balance, here’s what you can do to minimize the impact of taxes on inherited IRAs for your children.

Adjustments to beneficiaries like leaving taxable accounts to higher income earning children and assign IRA assets to children in lower tax brackets is one strategy. Taking advantage of Roth conversions is another option. In fact, this rule change just made Roth IRAs and 401ks  much more attractive, since those distributions won’t be taxed for beneficiaries of inherited IRAs. So consider not just conversions, but contributing more to your Roth IRA or Roth 401k if you have access to one or both of those. 

The change to the rules with inherited IRAs also changes the conventional advice on the order in which you may want to spend down your assets in retirement. Maybe you want to spend more from your IRAs while living so your beneficiaries receive more of the taxable assets that will receive a step-up in cost basis and will likely not be subject to such harsh taxation.

The bottom line here is not that you fully understand which strategy to employ, but that you do understand that if you have a large IRA or 401k balance, you better be talking to your attorney, financial advisor, and tax advisor about how this change impacts you and if it makes sense for you to make any changes to your estate or beneficiaries, or whether or not you should look at converting more IRA dollars to Roth or changing how you pull money out of your investments for income in retirement. 

That’s it for today. Thanks for listening. My name is Ashley Micciche and this is the One Minute Retirement Tip. 

----------

>>> Subscribe on iTunes: https://apple.co/2DI2LSP

>>> Subscribe on Amazon Alexa: https://amzn.to/2xRKrCs

>>> Check out our blog: https://truenorthretirementadvisors.com/blog/

----------

Tags: retirement, investing, money, finance, finances, financial planning, retirement planning, saving money, personal finance, wealth management, money tips, fee only financial advisor, financial planner, financial podcast, retirement podcast, financial independence podcast, SECURE Act, 401k limits 2020, Roth 401k, Roth IRA, Roth IRA conversion, IRA conversion, RMD rules, new RMD age, rmd age 72, rmd rules 2020, inherited IRA, stretch IRA, inherited 401k