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How the Secure Act Can Be Beaten

Congress wants to force your heirs to take out your IRA within 10 years.

I want to give you at least 30 years. . . maybe even more.

Hi everyone, my name is Rick Pendykoski. For over 20 years I’ve been helping people learn the best ways to manage their retirement money. That is why when I read the latest tax law changes in the SECURE ACT. I was mad. Really mad.

Once again Congress has created a new law that forces people to overpay their taxes. Instead of incentivizing people to save money and build for their future, Congress wants to make sure they can tax your retirement plan within 5 or 10 years of your death.

That means those of you who planned on your family being able to stretch out the distribution of your retirement assets over their lifetimes, they are going to have to take much larger distributions each year. Because the distributions are going to be larger, the tax brackets are going to be higher as well. No one wins here except our do-nothing Congress!

Well, I have a secret for you. There is a way that you can use a trust to stretch out the payments for another 20 years at least. Now instead of your retirement money coming out in large clumps, just to be decimated by taxes, your kids can take over 30 years to spend down your earnings.

What is the Secure Act?

The Secure Act, which stands for Setting Every Community Up for Retirement Enhancement Act of 2019, was approved by the Senate on December 19, 2019, and was signed into law on December 20 by President Donald Trump.

The Secure Act came into effect since January 1, 2020, and it includes significant provisions that will prevent older Americans from outliving their assets.

How Will Secure Act Affect Your Retirement?

The Secure Act will inevitably affect many retirement account holders; the most immediate impact will be felt by those who have retired or nearing it. If you’re a saver or investor in your 50s or 60s, here are a few of the most significant provisions that you should be aware of:

1. Required Minimum Distribution Age Increased

Previously, 401(k) or IRA account holders had to withdraw required minimum distributions (RMD), when they turn age 70½.

With the implementation of the Secure Act, the RMD age has increased to age 72. However, this rule is only applicable to people who have not yet reached the age of 70½ by the end of 2019. People who already are 70½ years by the end of 2019 must withdraw their required minimum distributions this year; otherwise, they’ll attract a 50% penalty of their RMD.

2. Age limit for making Traditional IRA contributions eliminated

As life expectancies have increased, and more and more people continue employment beyond traditional retirement age, the Secure Act eliminates the maximum age for traditional IRA contributions. It also allows people of any age to continue contributing for as long as they are working (which previously prohibited people from contributing after they’ve reached age 70½, even if they were still working), thus enhancing their long-term retirement financial security.

3. Additional Roth IRA Planning Opportunities

With the increase in RMD age, the account holders have an additional two years to carry out Roth IRA conversions without worrying about the impact of required distributions. Converting to Roth allows the account holder to convert taxable money in an IRA into a Roth IRA by paying lower taxes than what they would be paying in the future.

4. “Stretch IRA” technique is eliminated

The term “Stretch IRA” describes a technique that a beneficiary uses to extend distributions from an inherited IRA over his or her lifetime. While stretch IRA allowed young beneficiaries to extend the payout over the decades, it also enabled them to spread out the payment of income taxes over a long period of time.

The Secure Act effectively eliminated stretch IRAs. For any deaths occurring after December 31, 2019, the beneficiaries must fully withdraw the funds from inherited IRAs within ten years of the account owner’s death.

However, the Act exempts certain kinds of beneficiaries from this rule: a surviving spouse, minor children, beneficiaries who are not more than ten years younger than the account owner, and those who are chronically ill and disabled. However, grandchildren of the account holder are not included among these exemptions.

5. Annuities as investment options in 401(k) plans

Considering the fact that Americans now live longer lives in retirement, annuities provide a guaranteed income over the course of a retiree’s lifetime.

The Secure Act allows more employers to provide annuities as investment options within 401(k) plans. Previously, the employer held the fiduciary responsibility to ensure the investment products are appropriate for employees’ portfolios, but under Secure Act, the responsibility of providing proper investment choices is now on the insurance companies, which sell annuities.

6. Encourages auto-enrollment

Auto-enrollment is effective in making people save more for their future. The Secure Act offers a tax credit to small employers (on top of the start-up credit they already receive) to offset the costs of auto-enrolling their workers into a 401(k) plan or SIMPLE IRA plan.

7. Easier for small businesses to form Multiple Employer Plans (MEPs)

Many small businesses are hesitant to offer a retirement plan to their employees because of compliance issues and high administrative costs. Multiple Employer Plan (MEP) allows small firms to collaborate and offer a retirement plan by sharing a plan administrator and administrative duties and reducing the costs. However, for businesses to join together, it requires them to have a common connection — for example, being in the same industry. So, many small businesses cannot collaborate with other businesses because of the lack of connection or similarity. With the Secure Act in effect, these rules are relaxed, making it easier for unrelated businesses to form an MEP.

8. Part-time workers can participate in 401(k) plans

Previously, employers excluded part-time employees from participating in 401(k) plans. But now, under the new rule, people who have been working for the employer for three consecutive years investing at least 500 hours or worked for at least 1,000 hours in one year is eligible to participate in retirement plans.

Secure Act and RMDs

Value of Inherited Account  $1,00,000.00
Beneficiary Age50
Est Rate of Reurn6%
YearBefore Secure ActAfter Secure Act
One$2,923.98 RMD Amount$10,000.00
$1,02,900.58 Remaining Value$95,400.00
Two$3,099.42 RMD Amount$10,600.00
$1,05,789.23 Remaining Value$89,888.00
Three$3,285.38 RMD Amount$11,236.12
$1,08,654.08 Remaining Value$83,371.12
Four$3,482.50 RMD Amount$11,910.16
$1,11,481.87 Remaining Value$75,748.62
Five$3,691.45 RMD Amount$12,624.77
$1,14,257.85 Remaining Value$66,911.28
Six $3,912.94 RMD Amount$13,382.26
$1,16,695.60 Remaining Value$56,740.76
Seven$4,147.72 RMD Amount$14,185.19
$1,19,586.95 Remaining Value$45,108.90
Eight$4,396.58 RMD Amount$15,036.30
$1,22,101.79 Remaining Value$31,876.96
Nine $4,660.37 RMD Amount$15,938.48
$1,24,487.91 Remaining Value$16,894.79
Ten$4,940.00 RMD Amount $16,894.79
$1,26,720.78 Remaining Value$16,894.79
$38,540.34 Total RMD's $1,31,807.95
RMD Difference to the Feds$93,267.62