Big changes may be coming to your 401(k)s, IRAs and other retirement savings. Here’s why, and how to best prepare for them.
2021 IS THE YEAR to get your taxes done early. With the impending tax season disrupted by a slew of new and revised retirement, income tax, and estate laws – including the SECURE Act, the Tax Cuts and Jobs Act, and a hot off the press stimulus relief plan – there’s never been a better time to review and update your current retirement plan with a financial professional, and prep for April.
Ed Slott, a nationally recognized IRA expert and author of the soon-to-be-released book, “The New Retirement Savings Time Bomb,” breaks down five of the key changes tax preparers and taxpayers alike need to know ahead of this turbulent tax season, along with tips on how to best weather them.
- The elimination of the stretch IRA: Stretch IRAs historically allowed family members who inherited large traditional or Roth IRAs to spread the distributions—and their income tax liabilities—over the remainder of their lives. Now, most non-spouse beneficiaries must empty the assets—and pay income tax on the distributions—within a 10-year period. “They call the law the ‘SECURE Act,’ but it does the exact opposite when it comes to the retirement funds you leave to your children and grandchildren,” Slott says. Taxpayers may want to consider other options simulating the tax benefits of the stretch IRAs through other means, such annuity products, which can utilize various approaches to achieve similar goals.
- Roth conversions are now permanent: The Tax Cuts and Jobs Act prohibits recharacterization of Roth conversions, meaning that all conversions made after 2017 are permanent. “There are no do-overs,” Slott emphasizes. “You have to know what you are doing the first time to avoid costly mistakes and take advantage of Congress’s single biggest gift.” You should strongly consider consulting with a financial professional and/or tax accountant to evaluate your specific circumstances.
- Naming trusts as IRA beneficiaries may no longer work: The recently adopted SECURE Act changes the treatment of disbursements from inherited IRAs based on the classification of the beneficiaries, as well as the age of the owner at the time of passing. It is not always clear which required minimum distribution rule applies, and there are aspects of the SECURE Act that require clarification through IRS regulations. “Most estate plans will need to be updated or even overhauled,” Slott says. For these reasons, among others, it is important to involve a financial professional to assist in determining whether to name a trust as an IRA beneficiary.
- Gifting strategies may look a lot different: With more people taking the standard deduction, there may be more beneficial gifting strategies to consider, including charitable lead trusts.
- You may want to consider a backdoor Roth: A backdoor Roth is a traditional IRA or 401(k) account that has been converted to a Roth IRA. Slott argues they have “new significance” for taxpayers, particularly high-income earners age 70 and older.
For more on this topic, see the Your Money Map conversation with Jean Chatzky featuring Ed Slott on the Alliance for Lifetime Income Facebook page.