By: Reid Mathews
The Setting Every Community Up for Retirement Enhancement “SECURE” Act of 2019 was passed at the final hour of 2019, and you need to know about it. Because of the deficits the country is facing financially and the amount of money that is being printed daily, we are going to revisit these changes. There are a few VERY important details that will impact many people’s plans, and it is our goal to get you the information and walk you through the potential changes. The strategies we will discuss will help you keep your money in YOUR pocket and NOT in the pocket of the IRS.
1. The ELIMINATION of the Stretch IRA = This one change alone will bring in another $16 BILLION DOLLARS of REVENUE to the IRS! Who do you think will pay that $16 billion dollars? The many baby boomers that have the majority of their money in IRA’s and PRE-TAX accounts. In the past, a child or grandchild or nephew or niece could inherit your IRA and put it into their name and stretch it out over their life expectancy meaning they could take out 3-6% per year and just continue to get the tax deferral growth and income for 20-40 years! Now, that same person that inherits your Pre-Tax account will have to have it ALL OUT within 10 years! They must pay taxes on your entire life savings within 10 years, probably pushing them into a HIGHER tax bracket and REDUCING what they get and INCREASING what the IRS gets. Roth IRA’s and Life Insurance planning will be the key to deliver TAX-FREE money to your family.
2. Increasing the RMD Age to 72 = In the past, you would have to take out a Required Minimum Distribution in the year you turn 70.5 years of age. Now, you can defer your RMD until the age you turn 72. This allows an extra year for Tax-Deferral or an extra year to pull money out and reposition it before being FORCED to take money out.
3. Contributions to an IRA past age 70.5 = You can now contribute to an IRA as long as you are showing EARNED INCOME even if you are older than 70.5! This is a big change and will allow people to continue saving for their future into their 70’s and 80’s as long as they are earning income. With the life expectancy increasing and lifestyle/health costs continuing to rise, the IRS is allowing IRA contributions as long as you are working. Even though they are making you take it out via RMD at age 72 and beyond, if you are continuing to work, they will allow you to put a portion of if back via the contribution, if you choose.
These are huge changes and will have an impact on your retirement and also your legacy to your family. Are you wanting to give the majority of your money to your FAMILY or to the IRS? Depending on what your goals and aspirations are, this is a great time to do some planning to increase the WEALTH passed to your family and NOT the IRS. At Berry Financial Group, we are here to serve you and to keep you educated on the changes going on so that you can make educated changes to help accomplish your financial dreams. Please give us a call if you are interested in leaving your money in the most Tax-Efficient way to your family. Tax rates are HISTORICALLY LOW. How would it be to pay taxes now at LOW RATES and generate TAX-FREE money for your family?
*The following examples show how to maximize the standard deduction with taxable money and reposition it to create a huge pool of TAX-FREE money. These examples do NOT include state tax. You can pull money out and take advantage of low tax rates and do Roth Conversions or Life Insurance and Long-Term Care planning and truly leverage your hard earned money for you and your family to keep up with inflation and the rising costs of health care
Tax Example:
Married Couple Over Age 65 (Assumes $32,000 of Annual Social Security: This is the Average Social Security)
1. Social Security: $32,000
Standard Deduction in 2022: $28,700
Total Income: $60,700
How Much is Taxable of the $60,700? = $6,350
A married couple could withdraw $28,700 of fully taxable money in addition to their $32,000 of Social Security and only pay taxes on $6,350, which would be $635.
Standard Deduction: $28,700 = $0
This is the Taxable Social Security: $6,350 = $635
Total Tax Paid: $635
This couple could withdraw $60,700 of Social Security and fully taxable money every year for 20 years for a total of $1,214,000 and only pay $12,700 in federal income taxes over 20 years. That is about a 1 percent effective tax rate!
Tax Example Maxing Out 10% Bracket
1. Social Security: $32,000
Standard Deduction: $28,700
Max Out 10% Bracket: $20,550
Total Income: $81,250
How Much is Taxable of the $81,250? = $73,313
A married couple could withdraw $49,250 of fully taxable money in addition to their $32,000 of Social Security and only pay taxes on $73,313, which would be $4,943.
Standard Deduction: $28,700 = $0
10% Tax Bracket: $20,550 = $2,055
This is the Taxable Social Security: $24,063 = $2,888
Total Tax Paid: $4,943
This couple could withdraw $81,250 of Social Security and fully taxable money every year for 20 years for a total of $1,625,000 and only pay $98,860 ($4,594 x 20 years) in federal income taxes over 20 years. That is a 6.1% effective tax rate!
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