5 of the Biggest Retirement Planning Changes in the Last 5 Years

Ed Slott

Photo: Deposit Photos

By Ed Slott

If you are saving for retirement, your current plan may no longer work!

From the SECURE Act to the CARES Act to the Tax Cuts and Jobs Act, a lot has changed in the last five years regarding retirement, income tax, and estate law changes and provisions enacted. As if retirement planning wasn’t already difficult enough for Americans to navigate, but with Congress constantly overhauling the tax system, it’s vital to be on top of the latest retirement and tax planning strategies.

Lucky for you, I’m providing an overview of the five most significant changes under these new laws and policies that impact your retirement savings. Use this information as a starting point to update your financial plans with confidence.

1. The elimination of the stretch IRA will likely upend many existing retirement strategies.

This devious provision inserted into the SECURE Act will be a big blow to even the best-laid plans. The so-called “Stretch IRA” was a name given to the ability to extend the life of your retirement savings well beyond your life.

For example, suppose you had named your children or grandchildren as your IRA beneficiary. In that case, they could “stretch” or extend distributions over their lifetimes, allowing the tax-deferred (or tax-free, with a Roth IRA) buildup to compound for decades for your beneficiaries.

In late 2019 Congress decided to undo the stretch IRA and included the elimination of this tax strategy in the massive “SECURE Act.” They replaced it with a 10-year payout rule for most non-spouse beneficiaries (spouses are exempt).

Now, your non-spouse beneficiaries (your children and grandchildren) will have to withdraw those funds within ten years after your death. For taxable accounts like IRAs and 401(k)s, that means an acceleration of taxes for them at possibly higher future tax rates, leaving your beneficiaries with less and Uncle Sam gobbling up more.

2. Roth conversions were made permanent, meaning there are no do-overs!

You must know what you are doing the first time to avoid costly mistakes and take advantage of Congress’s single biggest gift.

Yes, Congress did not like you outfoxing them with tax planning, and they made Roth conversions permanent. Roth conversions are still one of the best and simplest ways to move your retirement funds into tax-free territory for life and even carryover tax-free to your children and grandchildren, even if only for ten years after death.
You’ll just need to be more careful when converting. You’ll need to have a good projection of the tax you will owe on the conversion and make sure you will have the funds to pay those taxes.

3. Naming trusts as IRA beneficiaries may no longer work.

Most estate plans will need to be updated or even overhauled. This is also a result of the SECURE Act’s elimination of the stretch IRA. Many of those with larger IRAs named trusts as IRA beneficiaries to protect those funds for their beneficiaries (and from them, too!).

These strategies worked well in the past (before 2020), but now, many of these trusts will no longer work as you intended. In short, the IRA estate plan needs to be revised by leaving less of your IRA to these trusts and exchanging them now for tax-free vehicles using Roth conversions, life insurance or even charitable trusts for those who are charitably inclined.

4. Gifting strategies may need to look different now that more people are taking the standard deduction.

The Tax Cuts and Jobs Act increased the standard deduction, which sounds good and makes your taxes simpler to prepare, but it also left many without being able to gain tax benefits for gifts made to charity.

One solution here is to use Qualified Charitable Distributions (QCDs) to do your charitable giving if you qualify. It’s only available to IRA owners and IRA beneficiaries who are age 70 ½ years old or older, so you can’t do this from 401(k) plans.

The QCD allows you to transfer the funds you wish to give to charity directly from your IRA to the charity. The funds withdrawn will not count as income as normal IRA distributions would, and the QCDs can offset the income from your required minimum distributions (RMDs).

5. The backdoor Roth for high-income earners, including those over age 70½, to be able to contribute to Roth IRAs has a new significance.

While contributing to a Roth IRA is one of the best ways to keep building up tax-free retirement savings, not everyone can. There are income limits for making Roth IRA contributions, but there are no income limits for Roth conversions.

There are also no income limits for contributing to a non-deductible traditional IRA. So, if you qualify by having earned income, you can contribute to a traditional non-deductible IRA regardless of your income and then convert those funds to a Roth IRA.

The funds go into the Roth as a conversion, and since there is no income limit on Roth conversions, you end up in the same place by doing this so-called “backdoor Roth IRA” even if your income would have been too high to contribute to a Roth IRA.

For more information, visit The Ed Slott & Company website.

Ed Slott, CPA, is the author of The New Retirement Savings Time Bomb: How to Take Financial Control, Avoid Unnecessary Taxes and Combat the Latest Threats to Your Retirement Savings, published by Penguin Books. He is the nationally recognized IRA and retirement planning distribution expert, best-selling author, professional speaker, and television personality. Ed Slott’s Elite IRA Advisor GroupSM is comprised of nearly 450 of the nation’s top financial professionals who are dedicated to the mastery of advanced retirement account and tax planning laws and strategies.
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