The SECURE act is a Tax bomb in disguise. Many people saved large retirement accounts where they thought a big chunk of it would be left over for their beneficiaries. The beneficiaries used to be able to take withdrawals from the inherited funds over their lifetimes. Taking the money over their lifetime was known as the stretch IRA.
Under the SECURE act, all of the inherited IRAs, 401(k), etc., money will have to be withdrawn and taxed within ten years after death. This change is known as the ten-year rule.
This new ten-year rule allowed beneficiaries, or so they thought, that the money could be left to compound for those ten years. However, the IRS had different ideas. They did not want to wait ten years to get their significant share. The IRS ruled that the money would be subjected to required distributions each year during the ten years, and the inherited accounts and those forced required distributions would take big chunks out of the growth.
People tend to get involved in the fine print for workarounds-there are none. The IRS needs money badly to fund the US’s spending. In case you didn’t know, the government spends more each year than it takes in. Therefore what better place to get big tax dollars than from someone who is not around to complain?
While it may seem that this tax-grab situation looks dismal, tax-saving moves can be used to make the most of a challenging situation.
There are a few options that may have some significant tax breaks. Suppose you want to create a source of tax-free income for retirement or family. In that case, you need to consider a Roth IRA. Although subject to limits and rules, the Roth should be reviewed. Another option widely gaining popularity is a new “special” type of life insurance. This new product comes with much higher limits, fewer restrictions, and greater flexibility. A more practical option is to use a combination of both to maximize all the benefits.
Converting to these options while the market is down minimizes the tax liability and allows for more significant tax-free growth when the markets rebound.
The tax time bomb does have a ticking clock, so you must take advantage of the 2017 tax reform legislation because those lower tax rates are temporary and set to expire after 2025.
There are many additional considerations when determining to make changes.
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