In a previous post, I examined how the SECURE Act potentially creates greater taxes for retirement beneficiaries. Acknowledging this, is there any strategy that minimizes the tax your family ultimately pays on pre-tax retirement accounts? While we cannot eliminate the somewhat negative side effects of the SECURE Act, we can take steps reduce it’s impact. Generally, committing to pay more tax now on your retirement will likely minimize the overall tax to your family. Let’s explore how and why this is the case.
For starters, under the new tax laws passed in early 2018, personal income tax rates are at historically low levels. It is hard to imagine tax rates going any lower than they are now. A change in the Congress or the White House could easily see tax rates rise in the future. For this reason, drawing more than required from retirement now means paying tax at the current low rates. When determining how much you want to draw, consult with an attorney or tax professional to figure an amount that will keep taxes at the lowest rate possible.
Another reason to draw down more than required is because you will be drawing taxable funds during retirement. Retired persons typically generate less income than working people. This means that retired persons land in much lower tax brackets than working people. If income is lower during retirement, this leaves more room to receive additional income without pushing earnings into a higher income tax bracket. Conversely, by continuing to defer taxes, those same dollars could be subject to much higher tax rates for future generations. Consider this, children and other heirs who inherit a retirement account will likely still be working when they inherit. Accordingly, they will be paying taxes in higher brackets.
Finally, the SECURE Act creates a structure where most retirement beneficiaries must withdraw the entire account within ten years. This compression of the distribution timeline means the beneficiaries will need to annually draw larger sums than in year’s past. Again, this ten year draw is likely to happen while the beneficiary is still working and earning a high income. Drawing more and paying tax at a lower rate now looks pleasant compared with higher tax rates the heirs will pay later.
One can rapidly draw down retirement accounts in a variety of ways. Perhaps the funds convert gradually from a Traditional IRA to a ROTH IRA. Perhaps extra retirement distributions move into a trust for asset protection purposes. Regardless, determining the right withdrawal amount is a science and it differs from family to family. If you would like to explore your options for minimizing tax on retirement accounts and preserving the most for your family, call Legacy Law Center at (504) 274-1980 in Metairie, New Orleans, and surrounding areas or call (985) 246-3020 in Mandeville, Covington, Slidell, Houma, and Thibodaux.