THE MONEY MINUTE: Own a retirement account? Get a load of this…

by Jac M. Arbour CFP®, ChFC®
President, J.M. Arbour Wealth Management

Do you own an IRA, 401(k), 403(b), 457, Thrift Savings Plan, or some other qualified or pre-tax retirement account? If so, read on.

On December 20, 2019, President Trump signed the SECURE Act into law. This stands for Setting Every Community up for Retirement Enhancement Act. What follows are some of the changes that will impact many retirement account holders. Some people say there are pros and cons to the Act; like most things, it can easily be viewed that way. More important, however, is to understand the changes in order to plan appropriately around each.

Required Minimum Distributions (RMDs) have been pushed back from age 70.5 to age 72. The age limit for IRA contributions has been removed, automatic enrollments in 401(k) plans have more support, annuities within qualified employer sponsored plans are now more of a focus in order to create guaranteed income for participants, and what has been known as the “stretch IRA” for non-spousal beneficiaries has been eliminated. It is this last change upon which I would like to expand and share a few thoughts for this month’s column.

Before the Act was passed, you could leave your IRA or qualified plan to a child or non-spouse beneficiary and he or she had the right to take Required Minimum Distributions (RMDs) over the course of his or her own lifetime, based on their life expectancy. That is no longer the rule. Now, it is required that the non-spouse beneficiary removes the funds from the account over a period of ten years or less. Why is this potentially so important to know? It could greatly affect your retirement spending policy, your estate plans, and you guessed it, your (and your beneficiaries’) taxes.

Imagine leaving your retirement account to a working, non-spouse beneficiary. Imagine this person has an income of their own, and now, they need to take additional income from the inherited account. Will this RMD place them into a higher tax bracket? Due to the fact that the account must be taken over the course of ten years, it means they may need to take a significant amount each year, which could affect their tax bracket.

If you have sizeable accounts and estimate that you will leave some money at death, part of the planning process is to now consider, even more than before, what this could mean for tax purposes for your beneficiaries.

For some people, this means converting to Roth over the next “X” number of years while relatively speaking, we are still in a favorable tax environment. There are a number of strategies to consider and I suggest you speak with your tax professional, estate planning professional, and/or advisor sooner than later.

Here is what I promise: Proper prior planning will allow you to improve your realized results.

See you all next month.

Jac Arbour CFP®, ChFC®

Jac Arbour is the President of J.M. Arbour Wealth Management and can be reached at 207-248-6767.

Investment advisory services are offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.