For many years you have been funding your 401k or IRA. After all, they are great accumulation vehicles as you are able to defer paying taxes on the contributions and the gains.
Under the old rules, you could continue to defer taxes and didn't need to make withdrawals until the age of 70 1/2; also known as your Required Minimum Distribution (RMD). Those rules changed when the Secure Act was passed a few years ago. Among many changes associated with this, the age for RMD's was raised to age 72.
On May 5th, the Senate passed Secure Act 2.0 and sent it to Congress. Under the new proposal, the age for RMD's increases to 73 in 2022 and age 74 starting in 2029, and age 75 in 2032.
Your initial reaction is usually positive. Oh wow, I don't have to pull money out until later on. Great, I can avoid paying taxes for a longer time frame. You may start to see articles like the one I just saw," How the Secure act 2.0 will turbo charge your 401k”. Yes theoretically by deferring longer (assuming that your assets are growing) you will accumulate more in your retirement account.
However there is a HUGERedFlag associated with this that most are missing. The operable word in tax deferral is defer. The most important part that you need to always keep in mind is that defer is not free! Taxes are still owed. The question is who's going to pay it, when are they going to pay it, and at what rate (Howmuch)?
What happens when you die and still have funds in your 401k/ IRA? The rules were drastically changed with the passing of the secure act when the Government took away the lifetime payout; more commonly known as the Stretch IRA. With Secure Act 2.0 it may further impact how much your heirs get. As the old cliche goes "you don't plan to fail you fail to plan”
It is extremely important to get an exit strategy in place on your 401k's and IRA's. Reach out to us and let us help you to minimize your tax burden and maximize your legacy!