If you’ve been paying attention to the world of retirement planning, you’re likely aware of the changes to stretch IRAs due to the SECURE Act. While these alterations may seem complex, there are still ways to maximize your tax benefits. Here’s an easy-to-understand guide to help you adapt and make the most of your retirement savings.
What Exactly Changed?
Before diving into solutions, let’s clarify what’s different. In the past, stretch IRAs allowed your heirs to take smaller, tax-deferred distributions over their lifetimes. This was a fantastic way to pass on wealth while minimizing the tax impact. However, the SECURE Act has shaken things up. Most non-spouse beneficiaries are now required to empty the inherited IRA within 10 years. This accelerated timeline can lead to a higher tax bill for your heirs, which is why adapting your strategy is crucial.
Four Practical Ways to Adapt
- Switch to a Roth IRA: One of the most straightforward solutions is converting your traditional IRA to a Roth IRA. Doing so allows your beneficiaries to withdraw funds tax-free, provided the account has been active for at least five years. This strategy can be a game-changer for your heirs, offering them a tax-free income source.
- Consider a Charitable Trust: If philanthropy is close to your heart, setting up a Charitable Remainder Trust (CRT) can be a win-win. Your heirs receive annual payouts from the trust, and a charity of your choice gets the remaining funds when you pass away. It’s a way to leave a legacy while still providing for your family.
- Direct Transfers to Charity: For those aged 70½ and above, another charitable option exists. You can send up to $100,000 per year directly from your IRA to a charity. This move is tax-free and even counts toward your required minimum distribution (RMD), helping you meet your annual withdrawal requirements.
- Think About Life Insurance: If you’re between the ages of 59½ and 73, consider using IRA funds to purchase a cash-value life insurance policy. While you’ll pay taxes on the IRA distribution used to buy the policy, your beneficiaries won’t be taxed on the life insurance payout. It’s an alternative way to pass on wealth without the tax burden.
Who Gets a Pass?
There’s some good news amid these changes. Certain individuals are exempt from the new 10-year rule. These include spouses, minor children, and those who are disabled or chronically ill. If you or your beneficiaries fall into one of these categories, the old stretch IRA rules still apply.
Final Thoughts and Next Steps
The SECURE Act has certainly complicated the retirement planning landscape, but it’s not all doom and gloom. By understanding these changes and adapting your strategy, you can still achieve your financial goals and provide for your heirs in a tax-efficient manner. Consult your financial advisor to tailor these strategies to your specific needs and circumstances.