What’s The Money For?

IRAs and other retirement accounts have long been thought of as wealth creation vehicles. If you have other sources of income and don’t need to tap retirement assets, the conventional wisdom has been to withdraw only Required Minimum Distributions (RMDs) starting at age 72 to prolong tax deferral. Upon your demise the assets would then pass to the next generation, who were given the opportunity to “stretch” RMDs over their lifetime, further extending the deferral period.

 

In December 2019, Congress passed the SECURE Act and changed the conventional wisdom. The act eliminated the “stretch” provision for beneficiaries and replaced it with the “10-year rule.” The new rule requires that beneficiaries distribute the entire retirement account balance within ten years of the original account owner’s death. Since the distribution window has been compressed, beneficiaries are stuck with a greater tax liability when compared to the old stretch rule.

 

Instead of thinking of an IRA as your last asset to tap, consider using the money to supplement your income or enhance the quality of life of others. The money could be used for travel or a renovation that could provide you with greater enjoyment in your home. You may want to use funds to donate to charitable organizations, which avoids taxation completely. If you value the idea of wealth preservation, consider gifting money to children for them to make Roth IRA contributions, or funding an education account for relatives.

 

As a beneficiary who has inherited an IRA, rather than finding the optimal 10-year distribution strategy to minimize taxes, consider using the money to help pursue your goals. Waiting 10 years to distribute the account may make the most tax sense, but are the savings worth the student loans you could’ve paid off, a down payment you could’ve made on the house you wanted, or a degree that would lead to a more fulfilling life?

 

Often we can be so caught up in saving taxes and accumulating assets that we forget to ask ourselves what the money is for. Do not sacrifice your Return on Life in the pursuit of a return on investments. If you feel you’ve been neglecting your quality of life, we can help you achieve the best life possible with the money you have.

 

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