How safe is your retirement money after enactment of the SECURE Act?
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How safe is your retirement money after enactment of the SECURE Act?

by Susan Wright | Contributor
March 20, 2020


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The Setting Every Community Up for Retirement Enhancement Act – which is better known as the SECURE Act – was signed into law in December 2019 and took effect on Jan. 1, 2020. While there are a number of provisions in this new legislation, one of the key aspects centers around how long investors can continue making contributions into traditional IRAs and retirement plans, and when they must begin taking money out.

Unfortunately, even though some of the provisions of the SECURE Act might at first glance seem beneficial to investors and retirees, the truth is that – depending on how you have structured your retirement savings – it could actually result in an even higher windfall for Uncle Sam.

Does it make sense to delay your retirement?

For many years, investors who had funds in traditional IRAs and tax-advantaged accounts like 401(k)s were required to stop making contributions at age 70½. At that same time, investors were also required to begin withdrawing at least a minimum amount from these accounts – a provision known as the required minimum distribution, or RMD.

The amount of an individual’s required minimum distribution each year is determined by dividing the account value on Dec. 31 of the previous year by a life expectancy factor from Table lll of the IRS Uniform Lifetime chart. (An updated version of this chart can be found in IRS Publication 590-B, Distributions from Individual Retirement Arrangements.)

Table lll Uniform Lifetime

Age Distribution Period Age DistributionPeriod Age Distribution Period Age Distribution Period
70 27.4 82 17.1 94 9.1 106 4.2
71 26.5 83 16.3 95 8.6 107 3.9
72 25.6 84 15.5 96 8.1 108 3.7
73 24.7 85 14.8 97 7.6 109 3.4
74 23.8 86 14.1 98 7.1 110 3.1
75 22.9 87 13.4 99 6.7 111 2.9
76 22 88 12.7 100 6.3 112 2.6
77 21.2 89 12.0 101 5.9 113 2.4
78 20.3 90 11.4 102 5.5 114 2.1
79 19.5 91 10.8 103 5.2 115+ 1.9
80 18.7 92 10.2 104 4.9
81 17.9 93 9.6 105 4.5

Source: irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf

As an example, prior to the passage of the SECURE Act, if an investor was age 71 at year-end, and he had $1 million in a traditional IRA account, the account balance would be divided by the Uniform Lifetime factor (in this case, by 26.5). So, the required minimum distribution for that investor for that particular year would be $37,735.85.

$1,000,000 (year-end IRA account balance) / 26.5 (uniform lifetime factor) = $37,735.85

Those who did not abide by these RMD rules were hit with a 50% “penalty tax” for every dollar that was not withdrawn, but should have been. The good news is that the SECURE Act has implemented some changes in this area.

First, beginning on Jan. 1, 2020, the age to begin taking required minimum distributions has been pushed back from 70½ to 72. This, in turn, allows investors to leave money in their traditional IRAs and employer-sponsored retirement accounts for a longer period of time and continue to receive tax-deferred growth on these funds.

In addition, the SECURE Act has done away with the requirement to stop making contributions at any age. In this case, then, even though investors must start taking money out at age 72, they can continue putting money in, as well, for an indefinite period of time.

Likewise, a qualifying non-working spouse may also be able to continue making IRA contributions past the age of 70½ following the passage of the SECURE Act. So, provided that the non-working spouse meets the qualification criteria, a married couple could essentially contribute up to $6,000 per year each if they are under the age of 50, or $7,000 per year each if they are both age 50 or older.

For some investors, this could mean that it makes sense to delay retirement – even if for just a short period of time – allowing for more traditional IRA contributions, and more tax-deferred growth.

However, while this postpones the taxes that are due, it does not eliminate them. In fact, because most contributions into traditional plans go in pre-tax, 100% of your distributions will be taxable. Plus, for most investors, the tax on the distribution can net Uncle Sam much more than the amount he allowed to you defer on the contributions.

Because no one knows what the future will bring in terms of income taxes, we do know that over the past decade or so, the federal income tax rates have been historically low. In fact, between the year 1913 and 2020, the top federal income tax rate has been in excess of 70% in 47 of those years!

So, it makes sense to consider methods of taking tax-free distributions from retirement accounts so that you don’t end up handing over the bulk of your withdrawals to the government.

How can you do that?

One way is to take advantage of the Roth IRA. With a Roth IRA, investors can contribute up to a certain maximum amount each year. (In 2020, those who are age 49 and younger may contribute up to $6,000 and those who are age 50 and over may contribute up to $7,000).

What is the big difference between tax-deferred versus tax-free?

But tax-deferred and tax-free are two entirely different things. For instance, with a traditional retirement account, growth takes place on a tax-deferred basis. This means that there is no tax due on the gain until the time of withdrawal.

The key benefits of a Roth IRA include:

  • Tax free growth in the account
  • No required minimum distribution (at any age)
  • No requirement to stop making contributions (at any age)
  • Tax free receipt of distributions

Not everyone qualifies for a Roth IRA, though. Those who earn “too much” money may only contribute a portion of the annual maximum or may not be eligible to make any amount of contribution at all.

Roth IRA Income Limits (2020)


Tax Filing Status

2020
Modified Adjusted Gross Income

Maximum Annual Roth IRA Contribution

Single, head of household, or married
filing separately (if you don’t life with a spouse during the year)

· Less than $124,000
· $124,000 to $139,000
· $139,000 or more

· Full contribution
· Reduced contribution
· No contribution allowed

Married filing jointly or qualifying
widow(er)

· Less than $196,000
· $196,000 to $206,000
· $206,000 or more

· Full contribution
· Reduced contribution
· No contribution allowed

Even if you earn too much money to contribute to a Roth IRA, there may be a strategy that allows you to still take advantage of the tax-free distributions from this type of account. That is by converting a traditional IRA or 401(k) to a Roth using the “backdoor” Roth IRA strategy.

By going this route, you will still be required to pay the taxes on the funds that are converted over from the traditional to the Roth – but, going forward, the money in the Roth will accumulate, and can be accessed, tax free. This is the case regardless of how high income tax rates rise in the future. And, with tax rates in the U.S. being at all-time lows, converting a traditional IRA or retirement account to a Roth can make sense right now.

Alliance America can help

Alliance America is an insurance and financial services company. Our financial planners and retirement income certified professionals can assist you in maximizing your retirement resources and help you to achieve your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling 888-864-2542 today.

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