By Paul Ohanian, CFP®
The new Setting Every Community Up for Retirement Enhancement Act of 2019, also known as the SECURE Act, has many twists and turns… Among the major changes caused by the SECURE Act is the elimination of the Stretch IRA for non-spouse beneficiaries (which allowed non-spouse beneficiaries to take required minimum distributions over their lifetimes) and the establishment of a 10-year rule whereby non-spouse beneficiaries (with some exceptions) must withdraw their accumulated value over a 10-year period. Traditional IRAs to non-spouse beneficiaries must now be entirely withdrawn within 10 calendar years – taxes paid – all at once or gradually over the period. Likewise, for Roth IRAs and the tax-free growth enjoyed by non-spouse beneficiaries. This will allow the IRS to collect these taxes over a shorter time period. Unfortunately for the taxpayer, the shorter time-period may cause an adverse tax impact.
Scottsdale Wealth Planning was created after 25 years of financial expertise, starting with my career in accounting. Our astute tax planning for clients is a top priority. Often, your children receive these funds when they are in their highest tax bracket. For instance, under current laws, an individual with a base taxable income of $85,000 (not including the Inherited IRA) would pay 24% plus state taxes on the inherited funds received. At $163,000, you would pay 32% plus state taxes. The numbers add up. Our sphere of experts include insurance and legal expertise, with whom we collaborate to offer our clients the most up to date information and solutions.
In a recent conversation with insurance advisor Dwight Spence, CFP®, CLTC, he shared other potential changes that could result in a bigger tax bite including, “an increase in Medicare premiums for retirees, rising capital gain rates (as much as a 20% change), loss of deductions and credits and the 3.8% net investment income tax.”
A further conversation with Scottsdale-based estate planning attorney David Colby drove home the real tax trap created under the SECURE Act for non-spouse beneficiaries of traditional IRAs. According to David Colby, “The SECURE Act took away the Stretch IRA for non-spouse beneficiaries, and taxed 100% of such traditional IRAs within 10 years of the owner’s death. The law change made all such large IRAs to non-spouse beneficiaries an estate planning nightmare and tax disaster. And, the bigger the IRA, the bigger the problem”.
Our team at Scottsdale Wealth Planning has been exploring an answer to this dilemma we term, “The 1% Solution”, with appropriate high net worth client portfolios. While the IRA owner is still alive and over 59½, they withdraw 1% per year to fund a cash value policy payable to the spouse or other family members. At the owner’s death, the beneficiary receives the insurance, converts the IRA to a Roth, and can use the insurance proceeds to pay the taxes on the Roth conversion. The Roth IRA is likely to grow and distribute funds tax free for the spouse’s lifetime or over a 10-year period for a non-spouse. Employing a combination of insurance solutions and investment tools to address potential tax problems.
Scottsdale Wealth Planning, Inc. (“SWP”) is a registered investment adviser. Advisory services are only offered to clients or prospective clients where SWP and its representatives are properly licensed or exempt from licensure.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The statements and opinions expressed in this article are those of the author and disclosed professionals. Scottsdale Wealth Planning, Inc. cannot guarantee the accuracy or completeness of any statements or data. For current Scottsdale Wealth Planning, Inc. information, please visit the Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov by searching with Scottsdale Wealth Planning, Inc.’s CRD #169248.
Originally published June 9, 2021 in The Town of Paradise Valley Independent.