Your Financial Future: CARES, SECURE acts explained
Today, we are going to discuss the SECURE Act which took place on Jan. 1 and the CARES Act, which was enacted to help with the pandemic.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed near unanimously, which almost never happens in today蘑菇视频 divided Washington, D.C. The reason it had so much overwhelming support was many Americans have not saved enough for retirement.
While there are a number of sections to the law, one the more significant provisions increases the age to start required minimum distributions from 70陆 to age 72. This is a provision that hurts no one and will be beneficial to many. You can always take more than required if you need income. By allowing the extra year and a half, deferred income can grow to be available for a widow or widower. When one spouse dies, income goes down. Often a pension is reduced, if there is one, and one Social Security will disappear.
One of the bad elements of the SECURE Act is that it eliminated most non-spousal stretch IRAs. This was a strategy where people could leave qualified money to future generations who could withdraw the money and pay taxes based on their younger age. This could allow the inheritance to grow substantially.
The act requires all of the money to non-spouses to be withdrawn before the end of 10 years. This could mean that successful children are receiving this taxable income during their prime earning years. This could increase their tax bill significantly. This means that tax planning is even more important.
If the parent is in a much lower tax bracket than their beneficiary, it might make sense to do a Roth conversion so taxes are paid at a lower rate. While the 10-year rule also applies to Roth IRAs, beneficiaries may be able to let the balance grow tax free during this time. The accounts must be liquidated by the end of 10 years, but there is no requirement for RMDs during this time. Check with a tax professional.
We are going to discuss two provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed once the pandemic started. First, RMDs are not required to be taken in 2020. This was kind of the opposite of trying to pump more money into the economy, but it allowed time for stock market recovery. You are not allowed to do Roth conversion of RMDS, but since they are not necessary this year you might consider this an extra opportunity.
The other provision we are going to discuss is the ability to borrow up to $100,000 from a 401(k). You have to pay this money back within three years. I recommended against this back when the law was passed in the spring. You had to be affected directly by CVID-19 to have this option. However, if you pulled the money out after the crash, you lost all of the recovery. Also many people will not pay it back and it will become taxable and you will not have as good of retirement as possible.
You need to look at the balance as what does it provide per month when you are retired. If you had $300,000 at age 65 this would produce about one thousand dollars per month if you use the 4% rule. When you combine this with Social Security, you have a better idea of what retirement would look like. This amount, while important, does not look quite as big. This is more how we consider Social Security and pensions.
Make sure your financial plans account for all of the new laws to provide the best possible outcome for your family.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, 鈥淵our Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.鈥� If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.